Tennessee law could increase fees on loans addressed to low-income communities

Tennessee borrowers may have to pay more for installment loans as a loan bill goes through state law.

Proponents of the bill say it is a “budgetary measure” to adjust fees for inflation. Critics argue that increasing existing fees and adding new fees to these loans – which are usually marketed to low-income communities – make it worse pre-existing debt cycle.

SB344 / HB421, sponsored by GOP Majority Leaders William Lamberth, R-Portland, and Senator Jack Johnson, R-Franklin, would increase existing service fees and introduce additional fees that industrial banks and industrial credit and investment companies can bill their customers. The bill passed the House of Representatives last week 70-21 and was approved by the Senate Trade and Labor Committee on Tuesday.

State law allows lenders to charge up to 4% of the loan amount for the services they provide. They are also allowed to charge an “installment maintenance fee” which is calculated according to a tiered system based on the loan amount. The monthly fee is between $ 2.5 and $ 3.5.

The proposed bill would increase the cap on a service fee to 5% and set a standard monthly fee of $ 5 regardless of the loan amount.

In addition, lenders could also charge a transaction fee – which is designed to cover paperwork costs and “compliance checking” costs of the Federal Consumer Protection Act – if the loan is not repaid within 90 days. The fee, which would be up to 4% of the loan amount, would be capped at $ 50.

The changes proposed by the bill are expects business sales to increase by more than $ 133 million.

Lamberth said the bill increases fee rates, which after years of inflation have become antiquated by a “small increase”.

“We haven’t updated this in several years and it’s literally more of a budget issue just making sure we update this over time to keep up with inflation and increase these fees, but only marginally,” said he.

The loans are different from payday loans, and the standards in the bill act as “guard rails to ensure these fees don’t get ridiculously high,” he added. The increased interest rates would ensure small lenders continue to run profitable businesses, he said.

“What happens is if you control these in the laws and you never increase them, then the lenders that are out there have no profit at all to actually make the loan,” he said.

Raumesh Akbari, D-Memphis, the chairwoman of the Democratic Senate of the Democrats, said these changes won’t seem that small to some borrowers.

“The bankless folks who avail of these short-term loans are the least likely to afford new $ 133 million in fees and charges,” Akbari wrote in a statement Friday. “They lived from paycheck to paycheck before the pandemic broke out, and not much has improved for many of these families. If we are to lift people out of poverty and make sure families can afford food and rent, we have to break the cycle . ” short-term borrowing. ”

Lisa Stifler, state policy director for the Center for Responsible Lending, said bills like this have been common in several states over the past few years, but are particularly widespread this year. She has not seen adherence to a “closing fee” like the fee proposed in this bill in any other state.

“The total cost to the consumer of obtaining this loan will only be higher in addition to the interest already permitted,” said Stifler. “As the fees go up, it only becomes more likely that they will be unaffordable for borrowers. And then we already know that while these loans may have lower interest rates, they have different problems with them and add other fees.” on the loans for other by-products, and there may also be repeated refinancing. These are all signs that the borrower is unaffordable. “

These loans are cheaper than payday loans, which usually offer quick money at very high interest rates over a 45 day period. They are also different from flex loans, which have high interest rates over an extended period and can act as a “perpetual” line of credit, Stifler said.

Installment loans are designed to be repaid over a period of a few months to several years.

But there are similarities.

“They are marketing themselves to make it easier to get credit, so there is some bias towards lower-income individuals, much like payday loans, colored communities, and colored borrowers,” Stifler said.

Rising fees on these types of loans increase the likelihood that borrowers will have difficulty paying them back.

“You could get stuck and find yourself in this spiral of debt, which has other consequences beyond simply defaulting a loan: on credit (and the ability to make ends meet,” she said.)

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