North Carolina Enacts Modifications to its Consumer Finance Act
by: Louis Danastorg
North Carolina’s Consumer Finance Act allows banks and non-banking institutions to make consumer loans under $10,000; now $15,000-reminiscent of predatory “payday” loans and cash advances, which are currently banned in the state. Consumer finance lenders typically offer scaled interest rate schemes and shorter loan terms, collecting various additional fees that drive up borrower costs, but do not attach the borrower’s personal or real property. Recently North Carolina’s General Assembly passed amendments to its Consumer Finance Act, which regulates and sets the standards for consumer finance lending in the state.
Prior to the recent amendments, consumers in North Carolina were charged 30% interest for amounts up to $1000 with 18% for any amount up to $7500. Now consumer finance lenders may charge 30% on the first $5000, 24% for the amount up to $10,000, and 18% on the remaining balance up to the $15,000 maximum. Under the proposed rates, consumers will see a 12% interest rate increase on consumer finance loans between $1000 and $5000, and a 6% increase for loans between $5000 and $10000. Only by applying for a loan over the previous maximum of $10,000 would a consumer be able to borrow at interest rates proportionate to the prior law.
The amendments have been criticized in North Carolina by levels of government officials and consumer protection groups for allowing consumer finance lenders to charge more interest and higher fees to those consumers that already cannot afford the heavy financial burden. Further, the proposed amendments allow for late fees, which were previously barred in North Carolina to alleviate financial stress on the borrowing public produced by the higher interest rates offered by these lenders.
The increase in chargeable interest and allowable fees will prevent many borrowers from breaking out of their revolving debt cycles and promotes the practice of loan flipping-where the borrower takes out another loan in order to pay off the debt on the first in an ongoing cycle. While the provisions provide safeguards for military personnel ranking below corporal, the amendments are silent as to any protections for that serviceman’s family, who are usually the individuals taking out these high-cost consumer finance loans. Despite committed opposition the amendments became effective in North Carolina on July 1, 2013.
An Act to modify the maximum interest rate allowed and various amendments to the North Carolina Consumer Finance Act to ensure continued access to credit-Senate Bill 489
Section 1: Scope
Any person in the business of lending consumers $15,000 or less shall not collect or, in any manner, receive any charges in connection with any such loan, which in the aggregate are greater than permitted by Chapter 24 of the General Statutes (8% per annum).
Section 2:
Licensees shall not conduct loan origination services in the same place of business where any other business is solicited or transacted.
Section 3:
Computation of Interest
Licensees must compute and pay interest as a percentage of the unpaid principal, or compute interest on the basis of days actually elapsed. The principal payable under a loan contract may contain unpaid interest from a prior loan, having accrued within 90 days of consummation of the newest loan. Interest shall not be paid or received in advance or compounded.
Application of Payments
Part or all of principal may be prepaid anytime without penalty. Licensees shall apply all other payments first to late and other permissible charges, second to accrued interest, and finally to unpaid principal.
Section 4: Rates
Installment loans may not exceed $15,000, must be repayable in less than 96 months but more than 12, repayment must occur in substantially equal consecutive monthly payments, and shall not be secured by deeds of trusts or mortgages.
Licensees must follow these statutory requirements when applying the scaled interest rate charges:
- 30% per year on unpaid principal up to $5,000.
- 24% per year on amounts over $5000 but not exceeding $10,000.
- 18% per year on any remainder up to the maximum $15,000.
Licensees may charge processing fees, but not more than $25 for loans up to $2,500; 1% of the cash advance, not to exceed $40, for loans above $2,500. Processing fees are considered valid so long as the licensee may not charge the borrower more than twice in any 12 month period.
Within 45 days of funds disbursement the first monthly payment shall be due; however, a borrower may prepay any or all of his or her loan obligations without penalty. A borrower may also cancel a loan, no more than twice in a 12 month period, with the same licensee within 3 business days of disbursement without accruing interest, so long as all funds, minus fees and charges, are returned.
Section 5:
Recording Fees
Licensees may collect from borrowers any fees associated with filing or recording its security interest with the appropriate public official or registry. After disclosing the applied fees, licensees may pay or apply fees to non-filing insurance, provided that the amount collected equals the insurance premium. The premium must be at least $1 less than cost of recording, and the licensee is barred from collecting notary fees or costs of releasing a security interest, except those actually paid to a public official.
Late Fees
Licensees may charge a late fee for any payment over 10 days past due, but no more than $15 or more than once with respect to any single late payment.
Deferral Charges
Licensees may collect a deferral charge to defer the due date of all or part of one or more installments.
Insurance Policy
Any fee purposed to purchase a non-filing insurance policy shall be valid if any claims are used to compensate the licensee only from damages arising out of not recording its security interest. Following payment, the licensee must:
- properly credit the full claim amount to balance of the loan;
- close loan account and cease collection efforts on any loan that was paid by claim;
- provide borrower written notice;
- cancel of record or properly credit any judgments against the borrower;
- accurately report any account adjustments to the credit bureaus.
Section 6:
Time and Payment Limitation
Every loan contract shall provide for repayment in substantially equal installments at approximately equal time periods.
Limitation on Default Provisions and Attorney’s Fees
Agreements with respect to default are only enforceable to the extent that the borrower fails to make a required payment or fails to maintain contractually required insurance coverage, or the prospect of is significantly impaired, which is the licensee’s burden of establishing. Also, agreements may not provide for the borrower to pay attorney’s fees.
Section 7:
Military Service Members Limitations
Military service member refers to any member of the armed forces that is either on active duty for longer than 30 days or on active Guard and Reserve duty.
Verification
Licensees must confirm military status of borrower before making any loans, and may not make loans for service members ranking E4-corporal-and below, unless:
- The licensee notifies the borrower’s company-level commander, recording the date and name of the commander in writing to be included in the borrower’s loan file.
- Within 5 business day of consummation, licensee sends copies of the federal Truth in Lending Act disclosures and complete loan contract to the company-level commander.
- Within 30 days service member may rescind the loan contract by returning all funds to the licensee. Service member borrower may still be liable for other penalties under state or federal law.
- Licensee provides separate disclosures required under G.S. 53-181(a), including the names and addresses of NC Commissioner of Banks, NC DOJ Consumer Protection Dept., and Consumer Protection Bureau.
- Mandatory arbitration clauses shall not be enforceable against any military service member or their dependents.
- Should a licensee fail to exercise reasonable precautions with respect to loans originated for a military service member, the interest rate on such loans will be adjusted to 8% per year.
Penalties and Remedies
The remedies and rights provided do not preclude any other remedies available under State or federal law for incidental, consequential, or punitive damages. Any contract or note securing a financial obligation prohibited under this section is null and void. Licensees will not contact military service members that have been deployed to a theater of combat.
About the Author
Louis Danastorg, J.D., M.B.A. is Associate Counsel and Compliance Specialist at Bankers Advisory, Inc. He is a graduate of Vanderbilt University and earned his Juris Doctor and Masters of Business Administration from Suffolk University. He can be reached at Louis@bankersadvisory.com
Anna DeSimone founded Bankers Advisory in 1986 and is a nationally recognized authority in residential mortgage lending. She has received numerous industry awards and has authored more than 40 best practices guides and hundreds of articles.
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