Where you live may determine whether you get hit with sky-high interest rates and junk fees. A new report from the National Consumer Law Center (NCLC) calls out the states with the most lax consumer protections and salutes the states that have increased consumer protection.
The report says residents of North Carolina, Alabama and Oklahoma are the most vulnerable. NCLC says Alabama recently amended its consumer lending laws to allow new junk fees while North Carolina increased both the allowable interest rate and the amount of a junk fee for “processing” a loan.
In Oklahoma, borrowers taking out a two-year loan of $2,000 could now pay a maximum annual percentage rate (APR) of 54%, an increase from 34%. NCLC says the state also increased the interest rates allowed under its more general consumer loan law.
The report says residents of Colorado, Connecticut and Minnesota recently got stronger protections. All three states have “significantly” strengthened protections against lenders that violate consumer lending laws.
For example, Minnesota eliminated triple-digit rates on payday loans and Colorado reduced the allowable APR on certain small short-term loans.
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Most states are moving in the right direction
The good news is 45 states and the District of Columbia now cap interest rates and loan fees for at least some consumer installment loans, depending on the size of the loan.
“We recommend an airtight 36% APR cap for small loans and lower limits for larger loans,” said Carolyn Carter, NCLC’s deputy director and one of the authors of the report. “High-interest loans add to debt, increase families’ financial struggles, drive borrowers out of the banking system, and exacerbate existing disparities.”
Without those limits, Carter says exploitative lenders will set up shop in a state, “overwhelming the responsible lenders and pushing abusive loan products that trap low-income consumers in never-ending debt.”
Recommendations
NCLC recommends that state regulators take these steps to protect borrowers:
Cap APRs at 36% for smaller loans, such as those of $1,000 or less, with lower rates for larger loans.
Prohibit loan fees or strictly limit them, to prevent fees from being used to undermine the interest rate cap and acting as an incentive for loan flipping.
Include all payments in the APR calculation, whether or not they are deemed “voluntary.” Some lenders have tried to disguise fees as purportedly voluntary “tips,” expedited fees, or donations.
Prevent loopholes for open-end credit. Rate caps on installment loans will be ineffective if lenders can evade them through open-end lines of credit with low interest rates but high fees.
Ban the sale of credit insurance and other add-on products, which primarily benefit the lender and increase the cost of credit.
Examine consumer lending bills carefully. Predatory lenders often propose bills that obscure the true interest rate, for example, by presenting it as 24% per year plus 7/10ths of a percent per day instead of 279%. Or the bill may list the per-month rate rather than the annual rate. Get a calculation of the full APR, including all interest, all fees, and all other charges, and reject the bill if it is over 36%.
Include anti-evasion provisions to prevent lenders from laundering their loans through out-of-state banks to evade state rate caps or disguising their loans as sales, wage payments, or other devices.
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