New bill leads to higher loan fees, greater burden for borrowers already in difficulty


An invoice addressed to Tennessee Gov. Bill Lee’s office allows some lenders to increase service and maintenance fees and add additional closing costs on some fixed installment loans. Credit: Adobe Stock

Low-income borrowers will be disproportionately burdened by a bill passed by the Tennessee Senate on Monday, critics said, that will increase the fees lenders can charge on some high-cost short-term loans.

Tennessee’s Industrial Loans and Savings Companies (TILTs) issued just over one million of these loans in 2018, for a total of more than $ 4.1 billion, according to the state. TILT companies are not banks or credit unions, but businesses that provide short-term loans to people who often have bad or no credit and who would likely not be eligible for a personal loan from a bank.

The bill slightly increases two existing fees and adds a third closing fee to certain loans. While the increases appear small, they could have a huge effect on borrowers, experts say, as those who turn to short-term loans are often already cash-strapped. It was not clear what additional revenue the law would generate for lenders on Monday.

The bill passed 27-6, mostly along party lines, with all six Senate Democrats and Republican Senator Joey Hensley de Hohenwald voting against. On March 8, the House passed Bill 70-21. When asked if Republican Gov. Bill Lee would sign the bill, a spokesperson said Lee would “likely defer to the decision of the legislature.”

Hurt black and low-income families

In Memphis, the big loan chains like One Main Financial and NiceLoans! offer installment loans.

According to the state’s Budget Review Committee, the average TILT loan in Tennessee is just over $ 3,500. At that amount, a borrower can now expect to pay an additional $ 35 for service charges (for a total of $ 175), an additional $ 2.50 per month for maintenance fees ($ 5 total per month) , plus the repayment amount with interest at 30%.

Ahead of Monday’s vote, Sen. Ken Yager, R-Kingston, said he supported the bill “because it will continue to enable industry to provide needed credit to a segment of our population that does not. would not be able to acquire credit through commercial loans, banking services. ”

But Senate Minority Leader Jeff Yarbro, D-Nashville, argued on Monday that the bill would hurt those already in dire financial straits. “In a year with so many challenges, I’m afraid this may put pressure in the wrong direction.”

Elena Delavega, associate professor of social work at the University of Memphis, said people in poverty are much less likely to have access to credit and therefore are much more likely to use short-term loans and high cost. In Memphis, the overall poverty rate is 21.7%, while just over 26% of black residents live below the poverty line.

“The reality is that we make it very, very difficult for people in poverty to access credit or the possibility of creating wealth… This is one of the reasons why the wealth of minorities is so low. , if not nonexistent, ”said Delavega, who is also a research associate at the university’s Benjamin L. Hooks Institute for Social Change. A recent federal study found that the median wealth of white families of $ 188,200 is almost eight times that of black families, whose median wealth is $ 24,100.

The bill’s sponsor, Senate Majority Leader Jack Johnson, R-Franklin, said the legislation increases the fee structure to help lenders cover business-related costs, such as credit checks , subscription and preparation of documents.

“Servicing these loans (is) very time consuming and a lot of information has to be provided and documented… The regulatory aspects of these loans have become much more expensive,” Johnson said on Monday.

The rising costs come from new restrictions from the Consumer Financial Protection Bureau, a spokesperson for Johnson said, although he did not answer questions about the restrictions the senator was referring to or how the restrictions increase the restrictions. operating costs.

Increased and new fees

Three parts of the bill increase the amount borrowers pay TILT companies. The first allows TILT lenders to increase the one-time service fee from 4% of principal to 5%. The second replaces a tiered structure for monthly maintenance fees with a flat fee of $ 5, an increase of between $ 1.50 and $ 2.50 per month. A third change allows lenders to charge a one-time closing costs of $ 50 in addition to the total amount of certain loans.

Monthly maintenance fees would be allocated to “processing payments, updating account and payment information. [and] maintain records, ”Johnson said. He said these fees had not been updated for 24 years.

The bill amends the law that regulates fixed installment loans, which are different from very short-term single payment “payday” loans, said Carolyn Carter, deputy director of the National Consumer Law Center, which advocates for laws stricter on consumer protection. low income people. Over the past five to ten years, Carter said, high-cost lenders concerned about state and federal regulation have begun to turn to installment loans, in which borrowers make regular payments over time. time. These loans can still have very high interest rates, however, often much higher than the rates offered by banks or traditional financial institutions.

Democratic Senator Raumesh Akbari of Memphis has said she does not approve of the fee increases, but her biggest concern with TILT loans is their high interest rates. CLB 2020 study shows that the annual percentage rate (APR) – which includes both the interest rate and fees, as well as the repayment period – on installment loans in Tennessee can reach 94% . It is the sixth highest APR cap in the country among the 45 states and Washington that have such caps.

“Over a million people have filed for unemployment in the state of Tennessee during this COVID crisis,” Akbari said. “Is this the direction in which we need to go? “

Hannah Grabenstein is a reporter for MLK50: Justice Through Journalism. Email him at [email protected]


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