Predatory Lenders Overcome the Military to Roll Back Restrictions

It costs a fortune to be poor in America, as Rebecca Vallas detailed last week. Those with low incomes or bad credit — people who can’t access ordinary loans — often pay a fortune in the subprime market. Auto dealers charge them as much as twice the interest that more affluent customers pay. Those who are really desperate turn to payday loans, which can come with interest rates as high as 460 percent. High-pressure sales tactics are the norm in many of these subprime operations. These schemes are profitable for lenders, but they often trap poor people in a crushing cycle of debt.

Subprime lending is significantly under-regulated. But Michael Corkery reports for The New York Times’s DealBook blog that some subprime lenders have successfully pushed to ease interest rate restrictions in a number of states. And they did so by overcoming resistance from military commanders concerned about their troops’ financial stability, among others.

Corkery writes:

Lenders have come under fire in Washington in recent years. Yet one corner of the financial industry — lending to people with poor credit scores — has found sympathetic audiences in many state capitals.

Over the last two years, lawmakers in at least eight states have voted to increase the fees or the interest rates that lenders can charge on certain personal loans used by millions of borrowers with subpar credit.

The overhaul of the state lending laws comes after a lobbying push by the consumer loan industry and a wave of campaign donations to state lawmakers. In North Carolina, for example, lenders and their lobbyists overcame unusually dogged opposition from military commanders, who two years earlier had warned that raising rates on loans could harm their troops.

The lenders argued that interest rate caps had not kept pace with the increased costs of doing business, including running branches and hiring employees. Unless they can make an acceptable profit, the industry says, lenders will not be able to offer loans allowing people with damaged credit to pay for car repairs or medical bills.

But a recent regulatory filing by one of the nation’s largest subprime consumer lenders, Citigroup’s OneMain Financial unit, shows that making personal loans to people on the financial margins can be a highly profitable business — even before state lending laws were changed. Last year, OneMain’s profit increased 31 percent from 2012.

“There was simply no need to change the law,” said Rick Glazier, a North Carolina lawmaker, who opposed the industry’s effort to change the rate structure in his state. “It was one of the most brazen efforts by a special interest group to increase its own profits that I have ever seen.”

The legislative victories in states including Kentucky, Arizona, Missouri, Indiana and Florida have come at a particularly opportune time for Citigroup, as the bank prepares to sell or spin off OneMain into a separate, publicly traded company.

Another large subprime consumer lender, Springleaf Financial, went public last October, and its shares have increased 78 percent since then.

OneMain is housed in Citi Holdings, where Citigroup keeps troubled assets and business lines that it has been trying to wind down. Subprime consumer lending no longer fits with the bank’s broad strategy focusing on more affluent consumers in big cities.

Still, even as OneMain may be part of the bad bank, it has been a good business in recent years.

OneMain, which has 1.3 million customer accounts, offers its borrowers unsecured, installment loans with interest rates of up to 36 percent. Borrowers pay both interest and principal in monthly installments until the loan is paid off, usually within a few years. But many of its borrowers refinance their outstanding balance.

About 60 percent of OneMain’s loans are so-called renewals — a trend one analyst called “default masking” because borrowers may be able to refinance before they run into trouble paying back their current balance.

There’s much more to the story — read the whole thing at The New York Times.