Payday Lending Poised For A Comeback In North Carolina

Payday lending is poised for a comeback in North Carolina. The emergency loans with high-interest rates were deemed predatory and banned by the state in 2006, but a proposed new rule being hammered out in Washington D.C. would allow lenders to bypass the state's interest rate caps.

Payday loans are marketed as short-term credit — designed to last until the borrower's next paycheck arrives — and they're typically used by folks having trouble meeting basic monthly expenses. But not paying off the loan in a timely way leads to more borrowing, additional fees, and interest rates, sometimes in excess of 400%.

Rochelle Sparko directs North Carolina Policy at the Center for Responsible Lending. She says 15 years ago their research showed the vast majority of payday lending storefronts were located in communities of color.

“It's expensive predatory credit that traps people, that reduces their credit score, that leads them to make horrible choices between trying to pay back debt and paying rent or trying to pay back debt and buying food,” says Sparko. “And so really, we have not in North Carolina missed these loans while they've been gone.”

Sparko says over the past decade or more people have instead turned to family, friends, or churches for affordable loan options. The state's interest rate cap supported by state legislators is currently 30% on loans below $4,000.

Those in favor of the new proposal argue that it will increase access to credit for poor people at a time when many are facing financial hardship. Sparko says the absence of consumer protections opens the door to increased profits for banks and lenders, but she adds the impacts on borrowers is less certain.

“I would expect a few different outcomes, none of which are good,” says Sparko. “I think we will see an explosion of online high-cost lending in North Carolina very quickly after the ruling is implemented. There will be websites and marketing happening. And we also expect at some point that there will likely be storefront paydays located predominantly in communities of color, and also close to military bases.”

The new proposal by the U.S. Treasury's Office of the Comptroller of the Currency (OCC) clears the way for national banks to partner with payday and other high-cost lenders that violate the interest rate caps in North Carolina. Sparko says she anticipates lenders who are currently operating legally in the state — making loans pursuant to current rate caps — coming to the General Assembly and asking for a dramatic increase in the interest rate they can charge in order to compete with payday lenders. 

The public input period for the new ruling ends September 3.