Low-income borrowers will be disproportionately burdened by a bill passed Monday by the Tennessee Senate, critics say, that will boost the fees lenders can charge on some high-cost, short-term loans.
Tennessee industrial loan and thrift (TILT) companies issued just over one million such loans in 2018, which totaled more than $4.1 billion, according to the state. TILT companies are not banks or credit unions, but businesses that offer short-term loans to people who often have bad or no credit and 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 some loans. Although the increases seem small, they could have a huge effect on borrowers, experts say, since those who turn to short-term loans are often already low on cash. The additional revenue the law would generate for lenders was not clear on Monday.
The bill was passed 27-6, mostly along party lines, with all six Senate Democrats and Republican Sen. Joey Hensley of Hohenwald voting against it. On March 8, the House passed the bill 70-21. Asked if Republican Gov. Bill Lee would sign the bill into law, a spokesperson said Lee would “likely defer to the legislature’s decision.”
Hurting Black and low-income families
According to the state fiscal 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 the service fee (for a total of $175), an additional $2.50 monthly for the maintenance fee ($5 total monthly), plus the repayment amount with interest at 30%.
Before Monday’s vote, Sen. Ken Yager, R-Kingston, said he supported the bill “because it will continue to allow the industry to provide needed credit to a segment of our population that would not be able to acquire credit through the commercial lending, banking services.”
But Senate Minority Leader Jeff Yarbro, D-Nashville, argued Monday that the bill would hurt those who are already in a financially precarious situation. “In a year with this many challenges, I worry that this is only going to put pressure in the wrong direction.”
Elena Delavega, an associate professor of social work at the University of Memphis, said that people in poverty are much less likely to have access to credit and are therefore much more likely to rely on high-cost, short-term loans. 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 hard for people who are in poverty to have access to any credit or the opportunity to build wealth… This is one of the reasons particularly minority wealth is so low to nonexistent,” said Delavega, who is also a research associate at The Benjamin L. Hooks Institute for Social Change at the university. A recent federal study found white families’ median wealth of $188,200 is almost eight times as high as 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 costs of doing business, such as credit investigation, underwriting and document preparation.
“The servicing of these loans (is) time-consuming and there are a lot of disclosures that have to be provided and documented… The regulatory aspects of these loans have become far more expensive,” Johnson said Monday.
The growing costs come from new Consumer Financial Protection Bureau restrictions, a spokesman for Johnson said, although he did not answer questions about which restrictions the senator was referring to, or how any restrictions increase operating costs.
Increased and new fees
Three parts of the bill hike the amount borrowers pay to TILT companies. The first allows TILT lenders to raise a one-time service charge from 4% of the principal to 5%. The second replaces a tiered structure for monthly maintenance fees with a flat, $5 fee – an increase of between $1.50 and $2.50 per month. A third change allows lenders to charge a one-time $50 closing fee on top of the full amount for some loans.
The monthly maintenance fee would go to “processing payments, updating account and payment information [and] maintaining records,” Johnson said. He said those fees have not been updated in 24 years.
The bill changes the law that regulates fixed-term installment loans, which are different from very short-term, single payment “payday” loans, said Carolyn Carter, deputy director for the National Consumer Law Center, which advocates for stronger consumer laws to protect low-income people. In the past five to 10 years, Carter said, high-cost lenders concerned about state and federal government regulation started shifting to installment loans, in which borrowers make regular payments over time. These loans can still have very high interest rates, however, often much higher than rates offered by banks or traditional financial institutions.
Democratic Sen. Raumesh Akbari of Memphis said she doesn’t approve of the fee increases, but her larger concern with TILT loans are their high interest rates. A 2020 NCLC 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 be as high as 94%. That’s the sixth highest APR cap in the nation 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 this the direction we need to be moving in?”
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