Journal of the Senate
of the First Session of the 111th General Assembly
of the State of South Carolina
being the Regular Session Beginning Tuesday, January 10, 1995

Page Finder Index
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Printed Page 750 . . . . . Friday, March 3, 1995
After reviewing the various issues outlined in the December 15th memorandum, the group first focused on issues surrounding renewals and what steps might be taken to determine if a consumer would receive a potential benefit from the purchase of credit insurance products in connection with a consumer loan.

During the previous meeting of this group, the representatives for the Independent Consumer Finance Association (I.C.F.A.) presented a proposal to limit renewals where there is a cash advance of less than 10% of the net outstanding balance. That proposal would require that a consumer lender could not renew a loan more than one time during a 15 month period where the cash advance was less than 10% of the net outstanding balance of the loan being refinanced. The representative for Legal Aid continued to express some concern with the 10% proposal on renewals. Industry representatives noted that they continue to be evaluated by outside rating organizations. Those organizations generally deem a loan to be not performing if a renewal did not involve a new cash advance of at least 10% of the net outstanding loan balance. Industry representatives stated that it was not good business practice to regularly engage in lending activity where the consumer's financial situation could not support a cash advance of greater than 10% of the net outstanding balance. Industry representatives reiterated their position that they were prepared to support a 15 month limitation during which only one renewal could involve a cash advance of less than 10% of the net outstanding balance. The parties agreed to continue to review their positions on this matter. The 15 month proposal offered by ICFA reflects a middle ground between the industry's earlier proposal of 12 months and the counter proposal by Fair Share and Legal Aid to extend that period to a term of 18 months. There were indications that an agreement on this issue might be more easily attainable should the ongoing question involving fees charged on a loan renewal be resolved.

The discussion next turned to fees charged in connection with a renewal of a loan. The representative for Fair Share expressed concern that certain fees associated with the renewal of a restricted loan were currently nonrefundable. There was an extensive discussion regarding the revenues associated with various fees permitted in Title 34 and the potential impact on the bottom line on a consumer finance organization if those fees were changed by the General Assembly. The representatives for Legal Aid and Fair Share proposed to change current law and make the 7% initial fee refundable at the time of a loan renewal. After some discussion, the

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parties agreed to move onto other issues and return to the issue of the treatment [sic] initial fees and maintenance fees at the time of a loan renewal later in the meeting.

The next issue addressed was credit insurance products and the mutual desire to ensure that a consumer had a potential benefit before the cost associated with a credit insurance product could be included in a loan. The parties had previously reached a general agreement that credit insurance sold in connection with a consumer loan must have the potential to provide a benefit to consumers in order to qualify as a lawful charge. There was general agreement that any insurance sold in connection with the consumer loan that could not potentially benefit the consumer could be used as a basis to claim that the loan transaction could be voided.

The discussion then returned to the issue of providing consumers with information that might assist them at a time they had a complaint or concern about their consumer loan transaction. The discussion moved away from the concept of requiring State agency names, addresses and telephone numbers on the loan contract itself and moved toward the concept of requiring that a pamphlet prepared or at least approved by the Department of Consumer Affairs containing all relevant telephone numbers, addresses and other information that would be made available at each lending office and given to the consumer at the time a consumer signed a loan contract. A separate pamphlet would avoid the need to reprint hundreds of thousands of consumer loan finance contracts in South Carolina and would allow the distribution of uniform information to all consumer borrowers at the time they visited a consumer finance location. The parties reached a general agreement that such a pamphlet would be acceptable as a device to ensure that citizens knew what their consumer rights and obligations were and where to turn when they had a problem with their loan or during collection efforts associated with such a loan.

There was a short conversation about enacting language that spelled out the requirements for pre-existing conditions in credit insurance contracts in order to clarify when accident and health insurance could be reasonably sold in a consumer credit transaction. The representatives for Fair Share and Legal Aid expressed general opposition to dealing with the issue of credit insurance products in that fashion and did not accept this proposal as the only solution to this problem.

The conversation then returned to fees charged to consumers at the time of a loan renewal. There was a detailed discussion about the impact of making all fees associated with the renewal of a loan under Title 34, which applies only to restricted lenders, subject to refund upon a renewal. The representatives of the Consumer Finance Industry were uncertain as

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to what impact such a proposal would have on their financial stability. Several proposals where [sic] placed on the table for discussion. Those proposals included making the initial charge subject to refund at the time of renewal but not if the loan was paid in full prior to maturity by the consumer. The representative for Fair Share acknowledged the need to adjust fees in other areas if a change in the charges associated with the renewal of a consumer loan were to be made in order to maintain a neutral overall revenue impact.

At this point, the parties agreed to take a break in order to allow the ICFA representatives and Fair Share and Legal Aid to meet privately to discuss their current thinking on the many proposals discussed during the course of the meeting. The representatives for the Consumer Finance Industry agreed to try to come to some understanding regarding their reaction to the proposals placed on the table for discussion dealing with changes in authorized charges currently applied in a restricted loan renewal.

Upon returning to the meeting, the representatives for the Consumer Finance Industry urged support for their proposal to limit a renewal where the cash advance was less than 10% of the net outstanding balance to one time during any 15 month period. It was again pointed out that the Consumer Finance Industry is regularly evaluated by outside rating organizations. Those rating organizations deem a loan to be non-performing if the new cash advance is less than 10% of the net outstanding balance. The industry stated that it needed to maintain that current standard in an effort to demonstrate financial soundness and proper business procedures to outside rating agencies that might impact on their ability to secure funds for their lending operations.

There was a discussion about the possibility of making the finance charge and the monthly maintenance fee authorized by Title 34 refundable under the Rule of 78ths at the time of a loan renewal. In addition, in order to make the proposal as revenue neutral as possible, there was suggestion that the maintenance fee might be increased from the current $1 per month to $2 per month and the bracketed rates established by statute be increased by an appropriate amount to maintain revenue neutrality. Those proposals were presented as a possible method to deal with multiple renewals without eliminating revenues to a consumer loan organization.

The discussion then returned to the issue of making all charges associated with the renewal of a restricted loan be [sic] refundable at the time of renewal. Those charges would include the initial charge, the finance charge authorized by statute and the monthly maintenance fee. The representatives from the Consumer Finance Industry stated that they were

Printed Page 753 . . . . . Friday, March 3, 1995
unable to reach a general agreement on this important issue during the break since it represented such a major change in a lending statute that has existed in South Carolina for approximately 40 years. The representative for Fair Share expressed a willingness to increase the bracketed rates authorized by statute as a way of making up for revenues lost by making all charges refundable at the time of renewal rather than increasing monthly maintenance fees. After extensive discussion, the parties agreed to continue to explore this major issue. The consumer finance representatives agreed to meet with their financial people to complete some calculations to determine what impact such a major change would have on their ongoing business operations as well as to provide both the consumer and the lender flexibility in managing the loan transaction.

The conversation next turned to how the parties might implement their agreement to make sure that credit insurance products would have a potential benefit for consumers and how a violation of that general concept would be handled. The group reviewed S.C. Code Section 375-108 [sic] which is the Unconscionability section in the S.C. Consumer Protection Code. There was a general discussion regarding the possibility of amending Section 4(b) to include specific reference to consumer loans. As currently drafted, Section 37-5-108(4)(b) makes reference to the inability of a consumer to receive substantial benefits from the property or services sold or leased in connection with a consumer credit transaction. The discussion on that section centered on whether there could be an amendment to include reference to consumer loans or credit insurance. Such an amendment would provide a consumer with the opportunity to claim unconscionable conduct if a consumer credit insurance product was sold to a consumer that could never provide any potential benefits.

It was noted out that Section 37-4-106 is the Unconscionability section in the insurance chapter of the South Carolina Consumer Protection Code. As currently drafted, Section 37-4106 [sic] includes three standards that a court would review to determine if unconscionable conduct had taken place in connection with the sale of credit insurance. They include:

(1) potential benefit to the debtor including satisfaction of his obligations,

(2) the creditors need for the protection provided by the insurance, and

(3) the relationship between the amount and terms of credit granted and the insurance benefits provided.

It was pointed out that Section 37-4-106 already provides the standard of "potential benefit" to the debtor which would eliminate the need to make any changes in Section 37-5-108(4)(b). The representatives for Fair

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Share and Legal Aid continued to want a reference to the term "consumer loan" in Section 37-5-108(4)(b).

The discussion then turned to what remedy the parties might agree to in connection with a proposal to include the standards contained in the Federal Fair Debt Collection Practices Act in the Consumer Protection Code. The representatives for the Consumer Finance Industry stated that they were prepared to urge support for a proposal that required a consumer to seek an administrative remedy from the Department of Consumer Affairs and/or the Board of Financial Institutions. The representatives for Legal Aid and Fair Share continued to state that they could only support a remedy that provided for direct access to the judicial system without a precondition of seeking administrative relief.

Since representatives of all parties realized there was a need to perform extensive research and have consultations with their members and clients concerning potential solutions to the issues discussed, the meeting was adjourned until Monday, January 16, 1995 at 9:30 a.m. at Mr. Hamm's office.

EXHIBIT 4

World Acceptance Corporation

December 6, 1994
The Honorable Linda H. Short
Chairperson
Consumer Finance Law Study Committee
Post Office Box 142
Columbia, South Carolina 29202

RE: Recent Public Hearing on the Small Loan Industry Of South Carolina

Dear Senator Short:

On behalf of the Independent Consumer Finance Association of South Carolina, I would like to thank you for giving us an opportunity to make a detailed presentation to your Committee. We believe our industry serves a vital need for citizens in, South Carolina who need small cash loans to meet unexpected emergencies in their lives. We believe that our record of making over 885,000 small loans in South Carolina during 1993 clearly demonstrates the need for small loans and the need for the General Assembly to take steps to protect both the citizens who need small loans and the industry that has responded to that need.

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The Independent Consumer Finance Association was created by the restricted lenders in South Carolina to establish professional business standards of conduct in order to assure that citizens in South Carolina are treated fairly and with respect. We make more small loans available to our citizens than many surrounding states and charge actual dollars and cents to our customers that are highly competitive with the rates and charges imposed by nearby states, notwithstanding differences in disclosed annual percentage rates. We are very proud of the fact that South Carolina citizens were able to obtain over 885,000 small loans in South Carolina under $600 compared to only approximately 78,000 in the State of North Carolina.

The restricted lenders in South Carolina fully support reasonable proposals that will respond to the legitimate concerns of your Committee as well as insuring that small loans continue to be available to our fellow citizens. We believe the record before your Committee demonstrates the rates charged for restricted loans are reasonable in relation to the size of the loan, business risk, and service rendered to small borrowers. I am sure that you and your Committee understand that we would be unable to support any legislative proposal that would upset the existing statutory [sic] balance between rates, risk, and service to the public. We believe that any efforts to mandate changes in rates charged to the public will simply eliminate the availability of small loans to certain of our citizens in South Carolina. Such action would not be good public policy nor fair to your constituents.

The Committee heard testimony expressing concern on a number of issues associated with making small loans in South Carolina. Some of the issues of concern included debt collection practices, loan renewals, collateral for loans, and informing citizens about organizations that they can contact for assistance in time of need. The Independent Consumer Finance Association fully supports the concept that citizens should be treated responsibly and fairly when they obtain small loans.

Given the short period of time that has elapsed since the Public Hearing on November 30 and December 1, 1994, the Independent Consumer Finance Association would like to offer some general observations to some of the concerns raised during the course of the Public Hearing.

Renewal/Flipping

1. The Independent Consumer Finance Association would urge your Committee to proceed cautiously as it examines the renewal/flipping issue raised at the hearing. Loan renewals are one important way that a consumer can deal with financial difficulties that may arise after the

Printed Page 756 . . . . . Friday, March 3, 1995
consumer has obtained a small loan. It also gives the customer the opportunity to obtain additional cash in times of need. Any effort to artificially limit the ability of a citizen to renew a loan beyond current existing law has the potential to have a negative impact on many citizens in our State. There are times when a loan renewal provides a major benefit to a borrower and protects their credit rating and their ability to get small loans in the future. In an effort to be of assistance to your Committee, the Independent Consumer Finance Association suggests that references or changes in the law dealing with renewals embody the general concept that a small lender can make only one renewal during any 12-month period where there is a cash advance of less than 10% of the net balance owed at the time of renewal. This concept would greatly eliminate the concern that citizens are routinely put in a situation of renewing a loan without any additional cash being placed at their disposal. This proposal would also recognize that there may be times when a customer is best served by making a renewal with less than a 10% cash advance during a time of financial emergency. The 12-month limitation would eliminate repeated subsequent renewals with little or no cash advance. It should be noted that the lndependent Consumer Finance Association does not believe that this is a problem in South Carolina, since it does not make good business sense to constantly renew loans where the customer is unable to make payments. Restricted lenders in South Carolina are already the only lenders in our State that currently have restrictions on their ability to renew loans for their satisfied customers. We look forward to working with you and your committee to develop language that would properly address this issue.

Debt Collection Practices

2. As we stated repeatedly during the Public Hearing, the lndependent Consumer Finance Association is strongly opposed to the use of abusive debt collection practices in South Carolina. Such action is already illegal under the South Carolina Consumer Protection Code. A consumer has a legal obligation to pay according to the terms of the loan contract and the lender has an obligation to treat borrowers in such a way that promotes respect for the individual and compliance with the law. Such action makes good business sense because it will encourage a continuing business relationship in the future.

There were repeated references to the Fair Debt Collection Practices Act during the course of the Public Hearing. The Independent Consumer Finance Association is prepared to consider changes ln the South Carolina Consumer Protection Code that might embody some portions of the

Printed Page 757 . . . . . Friday, March 3, 1995
Federal Fair Debt Collection Practices Act. As you are aware, it would be inappropriate to place that entire act within our State law since there are a number of aspects to the federal legislation that would not apply to lending activity in South Carolina. The Independent Consumer Finance Association could not support a proposal that would simply create new opportunities for law suits [sic] in South Carolina. Given the current backlog of court cases on our civil dockets, we believe that a better solution is to provide either the Department of Consumer Affairs or the South Carolina Board of Financial Institutions with the tools to penalize documented cases of collection abuse. We believe such an administrative remedy would have an immediate and positive impact on the entire industry and would provide relief to affected consumers in a much more timely fashion. We will await some guidance from your Committee before we endeavor to draft language that we would find acceptable in this area.

Reporting Complaints

3. The consumer finance industry is proud of its record of few complaints filed with State regulatory agencies. We are prepared to support a proposal that insures that citizens know where to complain when they encounter a problem with their small loan, by placing the name, address, and telephone numbers of regulatory agencies on the credit contract itself. We believe that disclosing the name, address, and telephone number of a regulatory agency that a consumer can turn to would be a positive benefit for consumers in South Carolina.

Collateral

4. There were a number of references to collateral in connection with small loans made in South Carolina. The Independent Consumer Finance Association urges your Committee to recognize that collateral constitutes an important part of any loan transaction regardless of the dollar amount. The Federal Trade Commission has already issued its Credit Practices Rule and has proscribed the collateral that may not be taken in connection with a consumer finance transaction. We do not believe that the Committee received any significant evidence on the record that supports a claim of abuses in this area. The General Assembly can monitor this issue by directing the Board of Financial Institutions and the Department of Consumer Affairs to keep records of all telephone and written complaints by category available for public inspection and review.

We believe that your Committee can provide a positive benefit to citizens in South Carolina and maintain the integrity of the small loan industry in South Carolina by following our general suggestions dealing

Printed Page 758 . . . . . Friday, March 3, 1995
with renewals, Fair Debt Collection Practices Act, collateral and consumer notification of agency to Contact in time of need. We stand ready to respond to any request for assistance that you might make to us. We are prepared to meet with Sue Berkowitz, John Roeuf, and others in order to maintain an open and positive line of communication. We look forward to working with you and trust that you will take steps necessary to maintain the availability of small loans in South Carolina.

Sincerely,
/s/Charles D. Walters
Chairperson, Legislative Committee
Independent Consumer Finance Association
of South Carolina

EXHIBIT 5

South Carolina Legal Services Association

P.O. Box 7187 Columbia, S.C. 29202 (803) 252-0034

S.C. Residents 1 (800) 922-2730

December 5, 1994
Jay Johnson, Esq.
Senate Banking & Insurance Committee
203 Gressette Bldg.
Columbia, South Carolina 29201

Dear Jay:

I have enclosed a copy of the written proposals by South Carolina Fair Share and the South Carolina Legal Services Association for the Committee to Study the Consumer Finance Laws. The documents include:

1. Proposals by South Carolina Fair Share and South Carolina Legal Services Association.

2. Copy of written analysis by Dr. John Ruoff of Financial Reports produced by the SC Board of Financial Institutions [deleted].

3. Copy of the Maine "37 month rule" an excerpt of a report that discusses the consumer reaction to unavailability of credit [deleted].

4. Copy of the Fair Debt Collection Practices Act and the Federal Practice Rule [deleted].

5. Statistics on the number of cases closed by the Legal Services programs South Carolina in 1992 and 1993 [deleted].

Printed Page 759 . . . . . Friday, March 3, 1995
6. A written explanation of Ms. P's payment record as explained by S. Berkowitz during the hearing.

Please let me know if you need any additional information.

Sincerely yours,
/s/Susan B. Berkowitz
Co-Director

EXHIBIT 5A

Legislative changes proposed to the Consumer Finance Law Study Committee by South Carolina Legal Services Association and South Carolina Fair Share:

1. Collection Practices

Put relevant portions of the federal Fair Debt Collections Practices Act into the South Carolina Code. Place actual language and not simply reference to the federal code or regulations since most magistrates won't have those documents available to them.

These changes should maintain the private right of actions set forth in the federal law, rather than merely giving administrative authority to fine to either Consumer Affairs or the Board of Financial Institutions.

The prohibitions on practices should also be made to apply equally to first and third party collectors.

Attached to this document is a copy of the Federal Fair Debt Collection Practices Act. The sections that should be adopted and incorporated into state law are highlighted.

2. Flipping

A. Prohibit renewing any loan where the borrower will receive less in new cash proceeds than at least one payment. This does not prohibit renewals except in those cases where borrowers are receiving small dollar amounts on the new loan.

B. Prohibit the lender from charging an initial fee on that portion of the loan used to pay off the prior loan amount. The initial fee would only be charged on the new money that the borrower walked out with. This will stop the practice of charging initial fees on the same monies over and over.

C. Restrict any loan from being renewed for a total period of more than three years, except that the maximum finance charge on the loan reduces to 8 percent after 3 years. A copy of the Maine statute is attached.

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