Another bill for Governor Cooper’s veto list

Last minute, behind-the-scenes maneuver would give windfall to predatory lenders

There were a lot of low moments during the closing days of the state legislative session that concluded on June 30. As per usual, misleading claims, closed door deal making, partisan payback and giveaways to favored special interests were among the chief work products for legislative majorities as they wrapped up the first installment of what will be a multi-act show this year.

As a result and not surprisingly, several of the more than 100 bills sitting on Gov. Roy Cooper’s desk at this moment are richly deserving of a veto during the 30 day window allotted for gubernatorial action. The governor has already acted to veto the infamous “garbage juice” bill that lawmakers sent his way on June 20 and, with any luck, several more may be following shortly.

One of those measures that ought to be on the veto list, but that you probably haven’t heard about (that was the idea, after all), is a proposal that turned up mysteriously in the session’s waning hours at the behest of some of the state’s high-cost consumer finance companies.

Here are the dirty and disheartening details about House Bill 140 – a measure that was only about dental insurance for the first four months and seven days of its existence and then, somehow, got amended to deal with small loans hours before the end of the session:

The credit insurance rip-off

It’s a remarkable fact to begin with, but finance companies (i.e. the industry that that sells high interest loans to desperate people at interest rates as high as 30% — the effective rates can approach 50% or more when you add in all the fees), are also allowed under state law to pack many of these loans with a frequently lousy and expensive product known as “credit insurance.” The idea is that you buy the insurance and if, for some reason, you’re unable to pay off the loan, the insurance company will do it for you. You can imagine how the sales pitch goes in the storefront offices in which these loans are sold.

To add to the complexity and potential for scams in this area, there are lots of different kinds of credit insurance. If you initial in the right places, your loan can include “credit life insurance,” “credit unemployment insurance,” “credit accident and health insurance ” and even “credit property insurance” (to insure the property you put up as collateral for the loan). These people think of everything, no?

To make the whole enterprise even more maddening, the premiums for these products are invariably rolled into the loan principal, which means that consumers are actually borrowing the cost of the insurance payment (i.e. the premium) up front at the same exorbitant rate that applies to the rest of the loan.

Wait – it gets worse. If, as happens with roughly two out of three of these loans, the deal gets refinanced before it gets paid off, only part of the unused credit insurance premiums gets refunded. The borrower is simply out of luck for the portions not refunded. Even so, the new, refinanced loan will include a new series of fresh credit insurance premiums that will, you guessed it, get rolled in as well to the whole deal. Is this a great country or what?

House Bill 140

For those North Carolinians lucky enough never to have had borrow money at absurdly high interest rates, the whole phenomenon of this kind of credit insurance can be a pretty shocking thing to confront and contemplate. But what’s perhaps even more startling is the fact that the folks who sell this stuff continue to look for new and creative ways to sell even more of it.

That’s where House Bill 140 comes in. Under language added to the bill in the session’s waning hours – language that was never discussed previously in a committee or even as the subject of another “stand alone” bill – the opportunities to sell credit property insurance would be expanded.

Current law says it can be sold on “household furniture, furnishings, appliances designed for household use not used by the debtor in a business trade or profession.” Under the language slipped into the House Bill 140, the definition would be expanded to include “household furniture, furnishings, appliances designed for household use, and other personal property of the debtor, exclusive of an automobile, not used by the debtor in a business trade or profession.” (Emphasis supplied.)

Though industry lobbyists claim the change is a mere “clarification,” it’s clear that it would permit the sales of insurance on an entire raft of possessions (“other personal property of the debtor, exclusive of an automobile”) on which it is not now permissible to sell it. This would, of course, be one thing if credit property insurance were actually a useful and valuable product for North Carolina consumers. The truth, as readers have probably guessed by now, however, is otherwise. You can tell this by looking at the “loss ratio” that insurers experience.

The National Association of Insurance Commissioners’ model loss ratio is 60%. This means that for every dollar the insurers take in through premium payments, they should pay out 60 cents in claims. Unfortunately, the loss ratio for credit property insurance comes nowhere close to this number. The state Department of Insurance’s 2013 Credit Property Survey found that the credit property insurance loss ratio for single interest credit property insurance in 2013 in North Carolina was just 8.81% or about one-seventh of what it ought to have been.

In other words, consumers are already being grossly overcharged for this product and expanding the scope of its sale will just make matters worse. If the bill becomes law, thousands of struggling people who already can’t afford the loans they’re taking out will be that much deeper in the hole.

A pernicious sales model

As was noted above, the credit insurance rip-off is made all the worse by the way consumer finance loans are sold. According to data collected by the North Carolina Commissioner of Banks between 2010 and 2013, 66.52% of finance company loans in North Carolina were made to “renew existing accounts.” The less polite term for this is “distressed refinancing” or, in even plainer terms, “loan flipping.”

Basically, borrowers are constantly refinancing loans that are supposed to be relatively short-term transactions – often because they find it difficult to make payments. As a result, thousands of vulnerable people find themselves (as with predatory “payday loans”) on the hook with what amounts to a revolving line of super-high interest credit for years and years. Selling wildly overpriced credit insurance on top of that at each refinancing just makes the matter that much worse. In 2014, 68% of the 528,479 consumer finance loans made in North Carolina included credit property insurance.

Of course, it’s at least theoretically conceivable that something dramatic has changed in the consumer finance and/or credit insurance businesses in recent months. Perhaps, after having exploited many of the country’s most troubled consumers for decades, these industries have had a remarkable and wholesale change of heart and are now selling credit insurance at fair prices only to those for whom it provides a genuine benefit.

Unfortunately, even if this fanciful scenario were somehow the case, there would be no way to know for sure because the industry and its lobbyists didn’t see fit to have an open, public discussion about their legislation. Instead, the proposal in question was, like so many of the crummy products sold by the high-cost loan industry, sprung at the last minute on a group of unsuspecting customers – in this case, state lawmakers – as a kind of “take it or leave it” deal. As a result, many lawmakers of both parties with strong consumer protection credentials voted for it without really knowing what they were doing.

The bottom line

During his many years as Attorney General, Governor Roy Cooper developed a well-deserved reputation as a strong advocate for consumer protection. In the days ahead, he would do well to stay true to that reputation and send House Bill 140 back to the General Assembly. With a little extra sunlight on the matter, this might even be one matter on which a gubernatorial veto would be sustained.