A new bill brings higher loan fees, a heavier burden on already ailing borrowers

A bill on the desk of Tennessee Gov. Bill Lee allows certain lenders to increase service and maintenance fees and to add an additional closing fee on some term installment loans. Photo credit: Adobe Stock

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

Tennessee Industrial Loan and Thrift (TILT) Companies just over a million spent such loans in 2018, which, according to the state, totaled more than $ 4.1 billion. TILT companies are not banks or credit unions, but rather companies that provide short term loans to people who often have bad or no credit and are unlikely to be eligible for a personal loan from a bank.

The invoice Slightly increases two existing fees and adds a third closing fee to some loans. Although the increases seem small, they could have a big impact on borrowers, experts say, as those taking out short-term loans are often already short of cash. It was not yet clear on Monday what additional income the law would bring to lenders.

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

Hurt black and low-income families

In Memphis, big chain lenders like A major finance and Nice Loans! Offer installment credit.

According to the state audit 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 the service fee (totaling $ 175), an additional $ 2.50 per month for the maintenance fee (totaling $ 5 per month) plus the repayment amount at 30 % Interest payable.

Ahead of Monday’s vote, Senator Ken Yager, R-Kingston, said he supported the bill “because it will continue to enable the industry to provide the credit they need to a segment of our population who are unable to get credit through commercial credit acquire. Banking services. ”

But Senate minority leader Jeff Yarbro, D-Nashville, argued Monday that the law would hurt those who are already in a financially precarious position. “In a year with so many challenges, I worry that this will only put pressure in the wrong direction.”

Elena Delavega, associate professor of social work at the University of Memphis, said people living in poverty are much less likely to have access to credit and are therefore much more likely to rely on expensive, short-term credit. The overalls are in Memphis 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 have access to credit or the ability to accumulate wealth … This is one of the reasons why minority wealth in particular is so low or nonexistent,” said Delavega . who is also a research fellow at the Benjamin L. Hooks Institute for Social Change at the university. One recently Federal study found that the average net worth of white families, at $ 188,200, is almost eight times that of black families, whose average net worth is $ 24,100.

Bill’s sponsor, Senate Majority Leader Jack Johnson, R-Franklin, said the bill would increase the fee structure to help lenders cover the costs of doing business like credit checking, underwriting, and documenting.

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

The rising costs come from new ones Consumer Protection Office Restrictions, a Johnson spokesman said, although he didn’t answer questions about what restrictions the Senator was referring to or how restrictions increase operating costs.

Increased and new fees

Three parts of the bill add to the amount borrowers pay to TILT companies. The first allows TILT lenders to increase a 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 acquisition fee of $ 50 on top of the total amount on some loans.

The monthly maintenance fee would be used for “process payments, update account and payment information” [and] Keep records, ”said Johnson. He said these fees have not been updated in 24 years.

The bill changes the law that regulates term loans, which are different from very short-term, one-time “payday” loans, said Carolyn Carter, deputy director of the National Center for Consumer Lawcampaigning for stricter consumer laws to protect low-income people. In the past five to ten years, Carter said, high-priced lenders, concerned about state and federal regulations, began to switch to installment loans, where borrowers make regular payments over time. However, these loans can still have very high interest rates, but these are often much higher than the rates offered by banks or traditional financial institutions.

Memphis Democratic Senator Raumesh Akbari said she disagreed with the fee increases, but her bigger concern with TILT loans is their high interest rates. A NCLC Study 2020 shows that the annual percentage rate of charge (APR) – which includes both the interest rate and fees, as well as the repayment period – can be as high as 94% for installment loans in Tennessee. This is the nation’s sixth highest APR cap among the 45 states and Washington that have such caps.

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

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

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