Would regulations on installment lenders do more good or more harm?
It’s the root question members of the State Senate Labor, Commerce, and Industry Subcommittee (LCI) are asking about a proposed Senate bill dubbed S-910. The bill, authored by State Sen. Tom Davis (R-Beaufort), sets certain limits on what types of loan products could be offered by nonbank lenders and how those products could be marketed.
“I want to stop companies from identifying vulnerable people and then using sophisticated marketing techniques to lure them in,” Davis said at a recent LCI hearing. “Are there unintended consequences to that? Are we driving out a supply of credit for individuals or is that a false premise.”
The installment lending industry got its first chance to testify before the LCI on Jan. 17; on their jackets, representatives of the industry wore round white stickers with a red line slashing through “SB 910.” And these lenders make the case that without their stores, borrowers who’ve been shut out of traditional lending opportunities at banks and credit unions will have nowhere to turn in emergencies.
But does that argument hold water?
Not according to Kerri Smith, South Carolina Regional President of Self-Help Credit Union, based in Greenville; a member of the South Carolina Fair Lending Alliance – which worked with Sen. Davis to draft S-910; and a declared candidate for a seat representing the Upstate in the South Carolina House in 2024.
“What other states have seen, even through rate cap legislation,” Smith said before the LCI, “is that credit does not dry up for consumers.”
Smith cited the State of Illinois, which in 2021 imposed a rate cap of 36 percent on all consumer loans. Nonbank lenders – also called supervised lenders or unregulated lenders because they do not fall under the kinds of federal regulations as banks, credit unions, and mortgagers – fled the state almost immediately – and opened the field to new, lower-cost lenders that set up shop in Illinois.
It’s important to distinguish that the effects of Illinois’ rate cap on lenders was most strongly felt among payday and auto title lenders, which do differ from installment lenders. It’s also important to state that S-910 in the South Carolina Senate is not seeking a rate cap on lenders. That multi-year fight ended last state legislative session after a bill aiming to set a rate cap died (again) in subcommittee.
But Smith’s point was that legislation, the kind she sees as important for saving consumers from predatory loans, works.
Earlier this month, the nonprofit Woodstock Institute reported that Illinois’ rate cap drastically reduced cumulative small-dollar loan fees and improved racial and income disparities in borrowers of certain short-term loan products – something Smith hopes will occur under S-910, should it do what no lending reform bill has done since the Deferred Presentment Act of 2009 capped all payday loans at $550 in South Carolina, and that is to get to a vote on the Statehouse floor.
While S-910 does not seek to impose a rate cap, it does seek to set limits on exactly what loan products installment lenders could offer and how those lenders can market them. There is a particular emphasis on convenience checks, or live checks.
These are checks that initiate loans once deposited in a bank account (and often carry high interest rates). They typically are mailed to residents meeting certain pre-screened conditions, such as credit score or proximity to a lender’s storefront, and they frequently are the first contact a lender makes with a prospective customer.
“The primary source for selecting preapproved convenience checks are the three major credit reporting agencies,” said Dan Walters, president and CEO of Credit Central, an installment lender with 31 stores in South Carolina.
Walters is his industry’s most forward-facing spokesman at the LCI hearings; he said the credit bureaus “provide a sophisticated credit score, commonly known as FICO, referencing multiple attributes that create a very predictable profile of the applicant’s history of managing debt, and flags any indication of possible distress.”
Walters has made the case that installment lenders do not want to lend to anyone who cannot pay back a loan, partly because doing so makes no business sense.
“It does not behoove us to originate loans that are unable to pay,” Walters told lawmakers. “We are only as successful as our customers are.”
It is worth noting that the criteria by which installment lenders that market to South Carolinians – i.e., what credit score ranges, or other attributes, lenders might plug into a FICO report – are unknown.
In a phone call, Kerri Smith said that customers who come to her credit union seeking a way out from under onerous short-term loans usually have credit scores between 575 and 640 – which she says is in the middle space, where borrowers are just able to get a loan, but who also are not doing well enough financially to get one with favorable interest.
Smith’s customers are often those who began their nonbank loan history via live check. But Walters says that few recipients – between 1 and 3 percent – actually cash them and begin a loan. He says that this is evidence that live checks are not the boogeyman they’re often presented to be, and that citizens are savvy enough to understand what depositing such a check means – especially because ”the live checks are very visible. On the front of the live check, it clearly states, ‘This is a loan.’”
However, not all lawmakers are convinced that bold print is enough to protect especially vulnerable citizens.
“I know this for a fact – a lot of people get these and think, ‘Ooh, I’ve won some kind of lottery,’” said State Sen. Katrina Shealy (R-Lexington). “My husband has Alzheimer’s. Every time he gets a check in the mail, he thinks Publisher’s Clearing House has finally paid off on all those things that he’s been sending in the mail, that now I have to take out of the mailbox and hide. I’ve had to take the car keys away, too, so he doesn’t go to the bank and cash it.”
Shealy questioned Walters about whether installment lenders really know who they’re sending live checks to.
“When you look at these FICO scores, you don’t have any idea how old these people are,” she said. “They could be a college student or they could be in a nursing home.”
Walters answered: “That’s correct.”
“So, they could be really smart or they could have dementia or they could be a college student that thinks, ‘Well, mom and daddy’s going to pay this back,’” she said.
“Yes, that would be possible,” Walters answered.
Walters told lawmakers that removing live checks from a lender’s arsenal would be more of an inconvenience to potential customers than a hurt upon his industry, given how few checks are actually activated.
One line of questioning in the Jan. 17 hearing revolved around what happens after a customer deposits the check. Walters said that his company, Credit Central, calls customers soon after a deposit to introduce the company and ask if there are any questions regarding the new loan.
Sen. Davis grilled Walters over whether customers have an option to undo the loan once they are told they need to pay it back with interest. Customers cannot, and there is no state law which requires lenders to follow such a practice.
Walters said, however, that he would be open to a 15-day grace period, should lawmakers decide to enact such a law.
One lawmaker who did not grill Walters was State Sen. Wes Climer (R-Rock Hill). Climer, who asked whether a grace period to get out of a live check loan would be amenable to the lending industry, said that he has “a very real problem discriminating against which type of business can and can’t advertise to their desired customer base.”
“Where do you think Viking Yachts sends most of their brochures when they’re trying to sell boats,” he asked of Walters – who replied, “Probably to the wealthy and the 1 percent.”
Sen. Shealy, in response, said “I don’t think that Viking Yachts should take a yacht and … put it in somebody’s yard and then send them a bill for it.”
Sen. Davis got more pointed about what Walters and representatives of the installment lending industry specifically do not like about S-910. Walters answered that the bill excludes banks and credit unions from marketing and lending regulations that would affect installment lenders.
“If [S-910] is truly a good bill,” Walters asked, “why does it provide exclusions for banks and credit unions?”
“Because they have other regulations already,” Davis said.
LCI hearings will continue on Jan. 24 with further testimony from the lending industry.
