DEL.ICIO.USBORROWER BEWARE: PART III
Small loans costs among highest in U.S.Lenders often pack small loans with insurance and other extras that spike costs for consumers.
Atlanta Journal-Constitution
Published on: 01/31/05
Insurance Commissioner John Oxendine has some advice for Georgians who come up short a few hundred bucks.
Instead of reaching for a credit card — which can run "20-something percent" — Oxendine recommends one of the state's small-loan companies. Oxendine regulates these old-timey storefront lenders, and he's a fan.
 RICH ADDICKS/AJC STAFF | |||
| Georgia and J.C. Hobby of Coweta County didn't realize their loan papers included five insurance policies and membership in a car club offering emergency road service — $263 worth of add-ons to the $700 they borrowed to pay bills. Injuries from a car wreck had left J.C. Hobby unable to work, and Georgia Hobby's hours as a cashier had been cut. | |||
 RICH ADDICKS/AJC STAFF | |||
| Consumer advocates criticize the cost of credit insurance in Georgia, but Insurance Commissioner John Oxendine defends the prices as fair.
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MOST POPULAR"I think it is the best deal in town," the insurance commissioner said.
In fact, the details of 1 million small loans made annually in Georgia show that the deals aren't nearly as great as Oxendine suggests.
With interest, fees and insurance charges factored in, the effective annual cost of borrowing a few hundred dollars from a small-loan company is often greater than 100 percent.
Many states call that loan-sharking. But Georgia has allowed that kind of lending for half a century through one of the most complicated lending laws imaginable. The law makes Georgia one of the most expensive places in the country to borrow a little bit of money.
A detailed examination by The Atlanta Journal-Constitution of Georgia's small-loan companies found:
• Georgia allows higher finance charges for loans of $1,000 or less than any other regulated state except South Carolina.
• The average small loan in Georgia was packaged with 3.4 insurance policies in 2003. Consumer advocates criticize the insurance, which typically pays off loans if borrowers die or become disabled, as excessive or unnecessary.
• Prices on insurance policies sold with small loans are higher than is fair to consumers, according to national guidelines. The result: The state's small-loan customers paid an estimated $65 million too much for insurance in 2003, statistics analyzed by the AJC show.
• Two in three small loans in Georgia were sold with an expensive type of disability insurance that 48 states do not allow.
J.C. Hobby and his wife, Georgia, went to a small-loan company two years ago when they couldn't meet their bills.
"It was either that or go to my mother," said J.C. Hobby. "I hated to go to my mother."
The Coweta County couple got $700 from McIntosh Finance in Senoia, enough to keep the telephone and the lights on.
But they got something else they didn't expect: five insurance policies and a membership in a car club that provides emergency road service.
McIntosh charged the Hobbys $263 for insurance and the car club, plus $182 for finance charges. The Hobbys' loan contract discloses an annual interest rate of 39 percent. But, if all the add-ons were considered, the effective annual rate would exceed 130 percent.
Their $700 loan ended up with a payoff of more than $1,100.
Gregory Crook, an executive with family-owned McIntosh Finance, declined to comment on the Hobbys' loan or the company's sales of insurance products.
J.C. Hobby, 55, said he knew the loan included insurance charges. But he said he thought he had purchased only a policy that would cover the debt if something happened to the car he put up as collateral. Hobby learned he had bought other policies and joined the car club only after a reporter read his loan contract and told him.
"Why would I want all that?" he asked.
Complex law
John Oxendine is best-known as the state's insurance commissioner — a position the Republican has held since 1995. But Oxendine wears several hats that all involve protecting the public. He is the state's fire safety chief and the comptroller general. He jokes that he is also the "NASCAR commissioner," since he is charged by state law with overseeing the safety of the state's racing venues.
As the official in charge of loans of $3,000 or less, Oxendine wields a lot of power over the small-loan industry — which is not so small. Nearly 1,000 storefront lenders operate across the state, and they make close to 3,000 loans a day. Unlike banks, small-loan companies do not take deposits; they simply extend loans. Players in the industry include Georgia-based chains such as 1st Franklin Financial Corp. of Toccoa and multinational giants such as CitiFinancial.
Oxendine's job is to make sure that small-loan companies play by the rules. He can fine or shut down those that break the law. He has the authority to decide how much they can charge for the insurance they sell.
He also decides who gets a license to open a business — a provision in the law designed to keep small-loan companies from flooding the market. Oxendine said licensing allows him to keep unscrupulous operators out of the business. In addition, he said, limiting the number of companies protects consumers from the temptation of taking out too many loans.
But consumers may pay a price for a licensing system that inhibits competition.
Unlike banks and credit card companies, which seek customers by competing on price, small-loan companies in Georgia charge the same, industry leaders acknowledge — the maximum allowed under law.
The average consumer might have a hard time figuring out what a loan should cost. The law that dictates what small-loan companies can charge is so complex that it takes a computer program to determine what most borrowers will pay. The finance charges for every loan have three components: the interest, a loan fee and a maintenance charge.
The finance charges range from an annual percentage rate of 78 percent for a six-month loan for $200 to a rate of 23 percent for a three-year loan for $3,000. These charges do not include the cost of the insurance policies added to most loans.
Oxendine said the charges permitted under state law offer borrowers a good value.
"I am sure we could do some comparison with other states," he said, "but I do not think you are going to find that other states are cheaper than us."
In fact, a state-to-state comparison found that almost every state is cheaper than Georgia, particularly for the smallest loans. Of the approximately 35 states that regulate small-loan finance charges, only South Carolina's maximum charges are higher for loans of $1,000 or less — a popular amount for borrowers. In 2003, three-fourths of the small loans extended in Georgia were for $1,000 or less.
In Georgia, a consumer who borrows $500 to be paid back over one year will pay $145 in finance charges. The same loan would cost $103 in Mississippi, $79 in Ohio and $67 in Vermont, according to Indiana-based Carleton Inc., which tracks state lending laws for the industry.
'Just snowballs'
While finance charges are relatively high in Georgia, it is the insurance policies that can drive the cost of borrowing into the triple digits. Almost everyone who takes out a small loan also buys insurance. Most people end up with three or four policies.
"They say it's voluntary, but they don't ask people," said John B. "Jack" Long, an Augusta lawyer. "They say, 'Sign here.' "
Small-loan companies like the insurance products for two reasons. The insurance guarantees that they will get paid if something happens to the borrower. The policies also pump up the bottom line.
Insurance policies drove up the cost of borrowing for the Hobbys. They are typical small-loan customers — people with a steady income, poor credit and no financial cushion.
A few years ago, the couple, who are raising their 10-year-old grandson, fell on hard times. Injuries resulting from a car accident left J.C. Hobby unable to work as a tow-truck driver. The Shell station where Georgia Hobby, 54, works as a cashier cut back on her hours.
The bills quickly mounted.
"It only takes a few weeks to get behind when you are stretched pretty thin. Then it all just snowballs on you," said J.C. Hobby, a burly man who worked as many as 80 hours a week towing cars, earning more than $40,000 a year. Hobby now needs a cane to get around and faces a host of new health problems, including diabetes.
After the Hobbys lost their house and declared bankruptcy, they could not get a bank loan when cash ran short again. So they offered their 1989 Ford Mustang as collateral to McIntosh Finance, along with their color television and VCR.
One of the insurance policies that came with their loan was to pay it off if the Mustang was totaled.
Another was to pay it off if one of them died.
They also bought a policy that would pay the Hobbys if one of them lost a limb or died, not of natural causes but in an accident.
Another policy would kick in if one of them got sick and couldn't work for as few as three days — a type of disability coverage no other state except South Carolina allows. The coverage is relatively expensive and viewed as unfavorable for consumers. The policy added $58 to the Hobbys' loan.
On top of it all, the Hobbys' contract included the $72 car club membership.
Borrowers are often unfamiliar with the terms of their loan contracts.
"Most of the people who come in here didn't understand what they signed," said Judge James Stripling, Coweta County's chief magistrate, who rules on small-claims cases, including those involving small-loan companies. "If they did understand, they desperately needed the $500 and they didn't care that it cost them just as much to get that short-term loan."
McIntosh has taken the Hobbys to court to try to force them to pay. With late charges and court costs, McIntosh says it is still owed $455, court records show.
Sitting in the cramped, run-down trailer they rent by the week in Sharpsburg, about 40 miles south of downtown Atlanta, J.C. Hobby tried to focus on the good things in his life — a wife he feels lucky to have landed 25 years ago and a grandson who needs him day in and day out.
But it is hard to stay upbeat with the debt from McIntosh still looming. "I hate being injured," he said. "I hate being sick."
Today, the family's financial survival rides with Georgia Hobby, a short Midwesterner as reserved as her husband is chatty. She still works at the Shell. And she's taken another job waiting tables at a nearby Waffle House.
"We can't barely get by as it is," her husband said, "and they are still dogging us."
'A service'
The sale of credit insurance with small loans has been controversial in Georgia for half a century. But one Georgia insurance commissioner after another has defended the practice. And so does John Oxendine. He calls it "a service" for poor people who are underinsured.
Oxendine says that he would probably never buy credit insurance. He has regular life insurance — sold at more favorable rates than credit insurance — that would pay his debts and support his family if he were to die suddenly.
But he said the products do make sense for people who aren't like him, mainly people living paycheck to paycheck.
When he's asked about credit insurance, Oxendine has a story he tells over and over again. It's about a young widow with children whose husband died after running his new pickup truck into a telephone pole. The bank still wanted the truck loan paid, but she had no money.
Oxendine, who practiced law in Gwinnett County at the time, said he was helping the widow with her legal affairs and found a credit insurance policy in her stack of documents.
"For that lady, it was the best news that she had ever heard," Oxendine said. "First I had to explain to her what a credit life insurance policy was. She didn't understand it. I said, 'It means you don't have to pay for the truck.' "
'Predatory lending'
Oxendine, who establishes the prices, believes the cost of credit insurance in Georgia is fair. Although he has the authority to cut the prices at any time, he hasn't touched them since taking office 10 years ago.
"We're cheaper than a lot of people around us, I think," he said. "We are not the cheapest. [But] we are definitely not in the high area."
The AJC analysis shows that Georgians spent more than $78 million in 2003 for insurance policies sold with small loans — about $65 million too much. The analysis is based on guidelines for credit insurance rate-setting included in model laws drafted by the National Association of Insurance Commissioners. Oxendine is an active member of the association. The organization's model laws are considered prudent public policy by regulators across the nation, although representatives of the credit insurance industry do not endorse the guidelines.
The model laws suggest that prices should be adjusted so insurers pay out about 60 percent of their premiums in claims. If the percentage is lower than 60, then rates may be too high.
In Georgia, insurers pay out about 10 percent of their premiums in claims against policies sold with small loans.
Policies sold on cars and household items used as collateral are the most overpriced types of insurance sold to Georgia's small-loan borrowers, the statistics show.
Lenders routinely sell the policies on garage-sale fare as modest as a used Hoover vacuum, an outdated television or a gold chain necklace.
Small-loan customers paid more than $32 million in 2003 for policies that would pay off their loans if their cars were totaled. Insurers paid out just $1.3 million in claims on these policies — about 4 percent, the AJC analysis showed.
Most of the profits from this kind of insurance go back into the pockets of the lenders.
"When you look at the large sales and the low loss ratios, it's clear that this is a graphic case of predatory lending," said Birny Birnbaum, a former insurance regulator and one of the nation's leading credit insurance experts, who heads the Center for Economic Justice, a Texas-based consumer group.
Even worse, some consumer advocates say, are the other products often sold to small-loan borrowers: the car club memberships and the "accidental death and dismemberment" policies, called AD&D, which have little value for the buyer but ratchet up the debt.
"AD&D is just a rip-off," said Long, the Augusta lawyer. "Most of the money goes to commissions."
AD&D policies rarely pay off because their terms are so restrictive. The insurance covers an accidental death or the loss of a limb or eyesight from an accident. But losing, say, one hand usually isn't enough to collect the full value of the policy. That merits payment of only half the coverage — and, even then, only if the insured loses at least four full fingers. The policies generally define loss of a foot as severance through or above the ankle joint; the loss of everything from the toes to the heel wouldn't be covered.
To collect the entire amount of coverage, a policyholder must lose an arm and a leg, or two arms, or both eyes, or some other combination.
Oxendine said current credit insurance rates were set before he took office. "These are the rates that I inherited," he said.
He said his staff reviews statistics filed by insurance companies. "They make sure there is appropriate justification" for the rates, Oxendine said. Staff members later noted that state law does not require rates to be adjusted based on loss ratios.
Oxendine said he personally is not aware of what the loss ratios are for insurance policies sold with small loans.
"I was a history major in college — I'm not sure I could really explain all the actuarial formulas," he said.
'Loan shark' panel
Today's Industrial Loan Act, which regulates small loans, was drafted in the mid-1950s by the state's "Loan Shark Commission," as it was dubbed at the time. The Legislature created the commission after several small-loan operators were sent to jail for using excessive insurance to get around the state's legal interest limit.
The chairman of the "Loan Shark Commission" was the late Zack D. Cravey, a powerful politician and then the state's chief insurance regulator.
Cravey made sure that small-loan operators didn't have to worry about going to jail: The new law he fashioned permitted the sale of credit insurance and expressly prohibited it from being considered interest. He added to his power base by placing regulation of the small-loan industry — a powerful industry in its own right — in the Insurance Department.
"The whole myth of the act was that it was consumer protection, when in fact it was company protection," said Sidney L. Moore Jr., an Atlanta lawyer who has taken on small-loan companies in court.
Jim Walters, owner of one of Georgia's largest small-loan chains, has a different interpretation of the history of the Industrial Loan Act.
He said state officials approved a small-loan law that allowed the widespread sale of insurance products. The lawmakers knew, he said, that the finance charges alone weren't enough to keep the lenders in business.
The insurance was authorized "to make the whole package work," Walters said.
Walters and his colleagues say they make loans at a fair price, given how risky their borrowers are. Poor credit histories mean that banks aren't interested in many of the consumers who borrow from small-loan companies. Most can't open bank accounts, let alone qualify for credit cards.
But small-loan companies welcome these customers into their stores. Over and over again, they say, they help desperate Georgians out of financial dilemmas. And most customers appear to be more than satisfied, lenders say, because most come back.
Small-loan lenders acknowledge that profits from insurance are an important part of their business. But they say it's not fair to equate the cost of insurance premiums with regular finance charges because their customers enjoy a potential benefit by buying the policies.
Walters is one of the representatives of that diverse industry at the state Capitol, where he networks with regulators, makes healthy campaign contributions and tracks the work of legislative committees that deal with lending issues.
"I've often made the comment that we're in partnership with the Legislature, because with the stroke of a pen, we could be out of business," he said.
That has rarely, if ever, been a realistic threat.
For decades, one of the most powerful lawmakers in Georgia was state Sen. Culver Kidd. The Milledgeville Democrat, who died in 1995, owned a chain of small-loan companies.
The political action committee of the Georgia Industrial Loan Association, an industry trade group, has been a generous giver in recent elections. During the 2002 and 2004 state election campaigns, records show, the committee donated more than $180,000 to 262 candidates for the Legislature and other offices.
Oxendine, too, has been an industry favorite. He collected about $70,000 from people in the small-loan business when he ran for re-election in 2002. He has accepted an additional $14,800 from small-loan executives since his election that year.
More big print
Oxendine says his regulatory attention turned in recent years to the payday loan industry. Now that the Legislature has enacted tough legislation against payday lenders, Oxen-dine says, he has refocused on regulating the small-loan industry.
When it comes to overseeing the industry, Oxendine likens his job to that of a supermarket produce manager. "Every once in a while, the manager goes through and he finds a rotten apple or a bad peach or something," Oxendine says. "And my job as regulator is to go through on a routine basis and turn the fruit and throw out the rotten fruit."
On Monday, Oxendine announced a $100,000 fine against First Financial Services, a small-loan chain with five branches in Georgia. He fined the company for charging its customers too much for interest and credit insurance policies.
A consent agreement also requires the company to reimburse its customers $25,563.
"I want these loan companies to know that I won't stand by while they rip off Georgia consumers," said Oxendine, announcing the fine.
In August, Oxendine issued a $400,000 fine against a South Carolina-based chain of small-loan companies for overcharging its customers.
Oxendine acknowledges that he overlooked one of the worst offenders: John Ben Stewart Jr., the former mayor of Union Point in east Georgia.
In 2002, 10 older and disabled Atlantans sued Stewart Finance Co., accusing Stewart of using his small-loan companies as a vehicle to siphon away their monthly Social Security checks. Stewart allegedly bilked poor borrowers whose loans were packed with insurance policies they could never collect on — disability insurance for people already disabled, for example, or car club memberships for borrowers who didn't have cars.
Stewart killed himself last year, on May 13 — the day a grand jury was to consider a 197-count criminal indictment alleging he also had cheated more than 800 investors out of $38 million.
"He was a bad fruit; he should have been weeded out," Oxendine said. "Had I been aware of what he was doing, I would have run him out of business."
By the time the insurance commissioner's office got up to speed with its investigation, Oxendine said, Stewart had filed for bankruptcy.
Oxendine said he has made changes to make it more difficult for abusive lenders like Stewart to take advantage of poor customers. He issued new regulations that took effect Jan. 1 requiring loan companies to spell out in big print and clear language what insurance products consumers are buying.
With the changes he instituted, Oxendine said, a borrower will "have to be blind, or not read, or just not care" to unknowingly buy a policy.
Oxendine does not, however, plan to join 48 other states in getting rid of the most expensive disability insurance policies.
Nor does he plan to lower the cost of credit insurance or stop small-loan companies from selling expensive extras — such as car club memberships and "dismemberment" policies.
Oxendine wants to preserve the system as it is, but give desperate small-loan company customers more information.
"An informed consumer is the best consumer," he said. "That is the entire approach we are going on."
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