August 17, 2013

Changes to North Carolina's Consumer Finance Act

The General Assembly recently passed, and the Governor signed, legislation modifying the North Carolina Consumer Finance Act, the statute that has regulated consumer finance companies for half a century.

What is the Consumer Finance Act?

The Consumer Finance Act requires that anyone who is in the business of making small loans to consumers must obtain a license from the Commissioner of Banks.  One of the benefits of obtaining a license is that licensees may charge more than the amount allowed by Chapter 24 of the General Statutes.  Chapter 24 (captioned "Interest") is one of North Carolina's usury statutes.  It generally limits interest on loans of $25,000 or less to the rate published by the Commissioner of Banks on the fifteenth day of each month.  The rate published by the Commissioner is determined by taking the latest published rate paid on six-month U.S. Treasury bills and adding 6%.  (The rate can never exceed 16%, however.)  Obviously, in the current interest rate environment, the rate allowed by Chapter 24 is very low, and few would be willing to make personal loans at such low rates.
Photo credit: Thomas Hawk / Foter / CC BY-NC

How has the Consumer Finance Act been amended?

Amount The dollar amount allowed for consumer loans under the Act was raised from $10,000 to $15,000

Permitted Rates. The rates allowed by law have also changed.  A licensee may now make a loan (or loans) that are not secured by real estate, payable monthly, with a maturity between one and eight years, at the following interest rates:
  • For a loan exceeding $10,000, 18% (per annum) on the outstanding principal balance; or
  • For a loan up to $10,000, 30% (per annum) on the first $4,000, 24% (per annum) on the amount of principal that is between $4,000 and $8,000, and 18% (per annum) on the remainder of the unpaid principal balance. (However, the consumer finance lender must enter into an agreement with a consumer for interest at the single simple interest rate that would earn the same amount of interest as allowed by this provision.)
(Under the previous statute, rates were capped under Section 173, but alternate rates were permitted under an "optional" provision in Section 176.  In practice, most loans were actually being made under the Section 176.  The amendments to the Act removed the rate caps in Section 173 and changed the provisions of Section 176 so that all consumer finance loans will be Section 176 loans in the future.)

Application of Payments. All payments must be applied first to late charges and other charges, then to accrued interest, and then to principal.   Prepayment penalties are forbidden.

Late Fees.   Prior to the changes, the Act did not address late fees.  The amendments now expressly permit late fees, subject to the following limitations:
  • A late fee may only be charged when a payment is past due for 10 days or more after the due date.
  • No late payment fee may exceed $15.00.
  • A late payment fee may not be charged more than once with respect to a single late payment.
  • If a late payment fee has been charged for a particular late payment, no late fee may be charged with respect to any future payment which would have been timely had it not been for the previous default.
Application of Lender's Insurance A licensed lender may collect a fee to purchase a nonfiling or nonrecording insurance policy (to reimburse the lender for losses if the lender's security interest is not recorded as required by the UCC).  If the lender collects a payment from the insurer after making a claim under the policy, the lender will be required to do the following:
  • Credit the full amount of the insurance proceeds to the balance of the loan.
  • If the loan is paid in full by the application of the insurance proceeds, the lender must close the loan account and cease collection efforts.
  • Provide the borrower written notice that, among other things, the loan has been partially paid or paid in full by the insurance proceeds.
  • Cancel or credit, as appropriate, any judgments against the borrower arising from the loan.
  • Report any adjustments to the credit bureau(s) to which the lender reports.
 Other Businesses on Premises.  Consumer lenders were already prohibited from making consumer loans in a place where another kind of business is solicited or transacted.  The changes make clear that merely collecting insurance premiums or paying insurance benefits is not considered "another business."

How did this amendment come about?

For more than 50 years, the consumer finance industry in North Carolina has been regulated under the North Carolina Consumer  Finance Act.  Consumer finance companies have for many years lobbied the General Assembly to increase the legal limits on rates and fees on consumer loans, arguing that the market, through competition and consumer preferences, would adequately control the rates and fees.  In 2009, a House Committee on Unbanked and Underbanked Consumers conducted a study and issued a report on consumer finance and its regulation.  In 2010, a Joint Legislative Study Commission on the Modernization of North Carolina Banking Laws and the Consumer Finance Act also studied lending under the Consumer Finance Act and ultimately directed the NC Commissioner of Banks (then Joe Smith) to continue studying the matter and to issue a report and recommendations to the General Assembly during the 2011 session.  You can read the Commissioner's entire report here. The Commissioner acknowledged that the industry was "not thriving", but did not recommend any changes to the Consumer Finance Act.

The bill amending the Consumer Finance Act (also known as Senate Bill 489 and Session Law 2013-162) was sponsored by Daniel G. ClodfelterRick Gunn; E. S. (Buck) NewtonChad Barefoot; Tamara Barringer; Andrew C. Brock; Harry Brown; Bill Cook; Warren Daniel; Don Davis; Jim Davis; Thom Goolsby; Ralph Hise; Neal Hunt; Brent Jackson; Clark Jenkins; Earline W. Parmon; Louis Pate; Ronald J. Rabin; Shirley B. Randleman; Bob Rucho; Jeff Tarte; and  Tommy Tucker.

The amendments became effective on July 1, 2013.

For more information about lending under the Consumer Finance Act, see the website of the North Carolina Office of the Commissioner of Banks here.

[On a related note, I've previously written about the proposal to bring back "payday lending" to North Carolina with enhanced consumer protections. That bill did not move forward.] 

1 comment:

steave adson said...
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