Senator Ron Wyden (D, OR) asked representatives from the Consumer Financial Protection Bureau (CFPB) what could be done to stop installment loan practices that he says are no better than the payday loans that have been banned in many states. The story was picked up by Herb Greenberg of CNBC who tweeted, “Whoa, in hearings today Senate Cmte on Aging mentions World Acceptance Corp. (NASDAQ:WRLD) specifically, demands answers.”
Senator Wyden’s question was prompted by Paul Kiel’s investigation into installment lending published on Pro Publica in May. He found that installment loans often had effective interest rates of more than 200 percent, and that the use of add-on products and customer manipulation were used to reduce the nominal interest rate while keeping low-income customers in a cycle of paying against interest and refinancing that drove them deeper into debt.
Pro Publica looked at more than 100 loans across 10 states and found a disturbing trend.
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“In states that allowed high rates, World simply charged high interest and other finance fees but did not bother to include insurance products,” writes Kiel. “In states with more stringent caps, World slapped on the insurance products. The stated annual rate was lower, but when the insurance premiums were accounted for, the loans were often even more expensive than those in the high-rate states.”
Senator Wyden demands answers
Senator Wyden cited this report when he asked CFPG associate director David Silberman, “What can be done about World Acceptance?”
“Consumers, particularly seniors, are being ripped off by some of these unregulated installment loan companies that in effect are targeting seniors and those in the military,” said Wyden. “World Acceptance sets up shop outside of military bases and low income areas to provide loans that have interest rates attached to them that are in effect over 150 percent.”
Wyden said that states like Oregon have their own pro-consumer policies that make such high interest loans illegal, and that companies like World Acceptance are using a business model to skirt the law. “This looks like a way to get around… limits on payday lenders,” he said.
When asked for specific actions the CFPB could take to rein these companies in, Silberman said that “consumer protection laws are product agnostic… we’re attempting to take a holistic approach to the small dollar credit market.” He pointed out that the CFPB had taken action on other examples of add-on products that effectively increased interest rates but did not mention any plans to take on the installment loan industry.