South Carolina lawmakers are considering whether nonbank lenders are violating fair trade laws
South Carolina lawmakers have tried it before – reigning in what they see as predatory lending practices by installment lenders that keep the least resilient borrowers in a cycle of perpetual debt from installment loans that those borrowers cannot be reasonably expected to repay.
South Carolina lawmakers in previous sessions of the State Legislature followed the lead of several other states that set a cap on the interest rates lenders could charge – specifically to 36 percent interest on all loans.
It’s a popular idea, modeled after the Military Lending Act of 2006, which limits interest rates to 36 percent on all loans made to active-duty servicemembers. U.S. senators have tried to extend this same rate cap to all borrowers – once in 2021, and again in December.
As has been the fate of federal attempts to curb sometimes triple-digit interest rates, South Carolina’s efforts to set a rate cap have failed. For the past three legislative sessions, state lawmakers have never been able to get rate cap legislation out of committee.
On Tuesday, State Sen. Tom Davis (R-Beaufort) formally tried something different. On the first day of the state’s 2024 legislative session, Davis filed a bill, S-910, that seeks to establish that nonbank lenders are violating the state’s fair-trade laws by intentionally targeting, misleading, and entrapping vulnerable borrowers in cycles of debt.
It’s the first time such an approach has been tried in the U.S.
The bill specifically seeks to outlaw failing to conduct analysis of a borrower's ability to fully repay a loan – an analysis that would have to be included in and documented with the borrower's loan application, and which would have to consider the borrower's, and any coborrower's, employment, monthly income, and monthly expenses.
That includes other consumer installment loans, revolving credit, or deferred presentment loans (transactions for which a customer borrows money for a service fee), compared to the loan's repayment obligation for the original term and permitted renewals.
And this aspect of the bill dovetails specifically with the practice of mailing what are called convenience checks – a.k.a. live checks – to residents who are not necessarily customers of a lender. Live checks are checks that, once endorsed and deposited, trigger a loan – often with high interest rates payable over several years.
Proponents of S-910 – chiefly, members of the South Carolina Fair Lending Alliance, which is championing lending reform – say that these checks are misleading and predatory because they are presented without context.
On Wednesday, at the first of what is expected to be at least three hearings by the Senate Labor, Commerce, and Industry Committee – for which Davis is chair this legislative session – Fair Lending Alliance organizer Susan Stall said that because these checks are mailed unsolicited, and because high-interest loans are activated so simply, that there is no counseling for borrowers to understand what they’re getting into.
Lenders often argue that recipients of convenience checks are pre-approved; Stall argues that recipients of these checks are among the riskiest borrowers, which she says shows that vulnerable borrowers who can’t pay loans back are being targeted.
Bill S-910 seeks to ban the mailing of live checks, and seeks to rein in marketing specifically to low-income communities.
Wednesday’s hearing was dedicated to proponents of S-910. A second meeting to hear from the nonbank lending industry is slated for Jan. 17.