The Vulnerable
States Ease Laws That Protected Poor Borrowers

NEW YORK—Lenders have come under fire in Washington in recent years. Yet, one corner of the financial industry—lending to people with poor credit scores—has found sympathetic audiences in many state capitals.

Over the last two years, lawmakers in at least eight states have voted to increase the fees or the interest rates that lenders can charge on certain personal loans used by millions of poor or financially struggling borrowers.

The overhaul of the state lending laws comes after a lobbying push by the consumer loan industry and a wave of campaign donations to state lawmakers. In North Carolina, for example, lenders and their lobbyists overcame unusually dogged opposition from military commanders, who two years earlier had warned that raising rates on loans could harm their troopss.

The lenders argued that interest rate caps had not kept pace with the increased costs of doing business, including running branches and hiring employees. Unless they can make an acceptable profit, the industry says, lenders will not be able to offer loans allowing people with damaged credit to pay for car repairs or medical bills. But a recent regulatory filing by one of the nation’s largest subprime consumer lenders, Citigroup’s OneMain Financial unit, shows that making personal loans to people on the financial margins can be a highly profitable business--even before state lending laws were changed. Last year, OneMain’s profit increased 31 percent from 2012.

“There was simply no need to change the law,” said Rick Glazier, a North Carolina lawmaker, who opposed the industry’s effort to change the rate structure in his state. “It was one of the most brazen efforts by a special interest group to increase its own profits that I have ever seen.” The legislative victories in states including Kentucky, Arizona, Missouri, Indiana and Florida have come at a particularly opportune time for Citigroup, as the bank prepares to sell or spin off OneMain into a separate, publicly traded company.

Another large subprime consumer lender, Springleaf Holdings, went public last October, and its shares have increased 78 percent since then. OneMain is housed in Citi Holdings, where Citigroup keeps troubled assets and business lines that it has been trying to wind down. Subprime consumer lending no longer fits with the bank’s broad strategy focusing on more affluent consumers in big cities.

Still, even as OneMain may be part of the bad bank, it has been a good business in recent years. OneMain offers its borrowers unsecured, installment loans with interest rates of up to 36 percent. Borrowers pay both interest and principal in monthly installments until the loan is paid off, usually within a few years. But many of its 1.3 million borrowers refinance their outstanding balance.

About 60 percent of OneMain’s loans are so-called renewals--a trend one analyst called “default masking” because borrowers may be able to refinance before they run into trouble paying back their current balance.

In the regulatory filing, OneMain said it re-evaluates the creditworthiness of existing customers before it renews their loans. “Importantly, our branch employees typically live in the communities they serve,” Mark Costiglio, a Citigroup spokesman, said in a statement. “This face-to-face interaction significantly enhances our value to customers as we work together to assess their household budgets and ability to repay their loans.”

The high rate of renewals by installment lenders was one issue that worried North Carolina’s military officials when the industry lobbied to raise the state’s interest rate structure in 2011. Commanders from Fort Bragg, home of the Army’s Special Operations Forces, and Camp Lejeune, the Marine base, rarely come out so publicly to denounce a bill, some lawmakers said. But they made an exception for installment loans. One commander worried that “out-of-control debt” could jeopardize soldiers’ security clearances. The bill, which would allow lenders to make larger installment loans at the highest permissible interest rate, “not only puts our soldiers at risk,” Major General Rodney O. Anderson, an acting senior commander at Fort Bragg, wrote to the North Carolina Senate in June 2011, “it puts our nation’s security at risk.”

In pushing for higher rates on larger loans, the North Carolina Financial Services Association, which represented OneMain and Springleaf, as well as lobbyists for dozens of smaller, locally based lenders, argued that lending caps had not been updated in years. “Rents are higher, electricity costs more, gasoline costs more,” the group’s lobbyist, Richard H. Carlton, said in an interview. “But the rates hadn’t kept pace.”

Faced with strong opposition from the military commanders, the bill died in the legislature. Nationwide, however, the industry’s lobbying efforts were just getting started, particularly in states with large populations of military service members and borrowers with damaged credit and low incomes. In Missouri, lawmakers passed a law last year that doubled the allowable origination fees to 10 percent of the loan’s outstanding balance, to a maximum of $75. Indiana and Arizona allowed lenders to extend larger loans at higher rates.

In Maine, a lobbyist for OneMain argued that subprime borrowers in need of loans were better off borrowing from regulated installment lenders than turning to payday firms, which are often outside the reach of most regulators. A Maine lawmaker, who co-sponsored a bill that would allow installment lenders to charge the maximum 30 percent rate on the first $4,000 of a loan, up from $2,000, was impressed by the lender’s low defaults.

“I urge you to visit a OneMain Financial office,” Alan Casavant, who is now the mayor of Biddeford, Me., said in written testimony. The bill eventually failed. When the installment lenders made another lobbying push in North Carolina last year, their fortunes turned. Newly appointed commanders at the state military institutions seemed more willing to entertain an increase in the interest rate structure.

One general agreed to drop his opposition to the bill if company commanders were required to sign off before their soldiers could obtain a loan. But other generals said their officers lacked the time or expertise to provide financial advice. Brig. Gen. Thomas A. Gorry of the Marine Corps called that requirement “a potentially dangerous” distraction. In the end, the generals, some of whom were relatively new to their commands at the state’s military bases last year, took “no position” on the bill. Some commanders simply did not want to keep resisting, while others did not feel as strongly opposed as their predecessors, according to people briefed on their thinking.

Another longtime opponent, the Center for Responsible Lending, also dropped its opposition to the bill, after the industry agreed to slightly lower the proposed rate increases at the last minute, said Chris Kukla, the group’s senior vice president. “It was a question of whether we stand on principle or try to alleviate some of the harm,” he said. Under the previous law, lenders could charge 30 percent interest on loans up to $1,000 and 18 percent on a remaining balance of $6,500. The new law allows for rates of up to 30 percent on the first $4,000 of a loan and 24 percent on the next $4,000.

North Carolina lawmakers, meanwhile, collected hundreds of thousands of dollars in campaign donations from the consumer finance industry. Speaker Thom Tillis, who supported the bill in the House, was one of the biggest beneficiaries. Mr. Tillis, a Republican who is running for United States Senate, has received more money from the American Financial Services Association than any other Senate candidate, according to OpenSecrets.org.

Mr. Tillis’s campaign manager, Jordan Shaw, said the donations did not sway his voting record. “He wanted to make sure that people still have these loans as an option,” Mr. Shaw said. “He also recognized that the risks can drive up the rates.”

>>>>>