Published June 4th, 2020 at 6:00 AM
The city of Liberty contends it has the right to regulate businesses that engage in high-interest lending, even if those businesses claim to be in a class of lenders protected by state law.
In a recent legal filing, the Northland city defended a recently enacted ordinance as a “valid and lawful exercise,” and asked that a judge dismiss a lawsuit brought by two installment lending companies.
Liberty last year became the latest of several Missouri cities to pass an ordinance regulating high-interest lenders, who operate under one of the nation’s most permissive set of state laws. The local ordinance defines a high-interest lender as a business that loans money at an annual percentage rate of 45% or higher.
After voters passed the ordinance, which requires an annual $5,000 permit fee and enacts zoning restrictions, the city informed seven businesses that if they meet the conditions laid out in the ordinance they must apply for a permit.
Five businesses applied and paid the fee. But two businesses sued. World Acceptance Corp. and Tower Loan said they are protected from local regulations by a section of Missouri law that says local governments cannot “create disincentives” for any traditional installment lender.
Installment lenders, like payday lenders, serve customers who may not have good credit ratings or collateral. Their loans are generally larger than a payday loan, with payments spread out over longer intervals.
While installment loans can help people build credit ratings and avoid debt traps, consumer advocates have criticized the industry for high interest rates, aggressive collection tactics and deceptive marketing of add-on products, like credit insurance.
George Kapke, a lawyer representing Liberty, said the city wasn’t attempting to restrict or regulate installment lending as it is defined in state law. But some businesses offer a mix of products, including shorter-term loans that exceed the 45% annual interest rate set down in the city ordinance.
“The city of Liberty’s position is, to the extent you are traditional installment lenders, we make no effort to regulate your activities,” Kapke said. “You can do whatever the state law says you can do. But to the extent you choose to go beyond the traditional installment lender and make the same type of loans that payday lenders, title loan lenders and other predatory lenders make, we can still regulate your activity.”
Installment lending has expanded in recent years as more states have passed laws to rein in payday lending. The industry is alert to the scrutiny.
“We’re seeing a lot of ordinances pop up across the nation and a lot of them are overly broad,” said Francis Lee, CEO of Tower Loan, which is based in Mississippi and has branch offices in Missouri and other states. “We don’t want to be confused with payday. Our loans measure the customer’s ability to pay and are structured with recurring monthly payments that provide the customer with a road map out of debt.”
In a response to a previous Flatland article, Lee said his company’s loans do not run into triple-digit interest rates — a criticism leveled against his industry in general. He said the annual percentage rate on a typical loan his company makes in Missouri was about 42% to 44% — just below the 45% threshold in the Liberty ordinance. But some loans exceed that, he said.
“We’ll make a $1,000 loan, we’ll make an $800 loan,” he said. “Those loans are going to run up higher than 45%. I don’t want to be in the position of cutting off loans of a certain size.”
Although it is a party in the lawsuit against Liberty, Tower Loan has not acknowledged any practice that would cause it to be regulated by the city’s new ordinance. It has not applied for a permit or paid the fee.
World Acceptance Corp., which is based in South Carolina, has paid the $5,000 permit fee to Liberty under protest.
Besides the legal action, Liberty’s new ordinance is threatened by an amendment attached to a large financial bill recently passed by the Missouri legislature.
The amendment, proposed by Curtis Trent, a Republican legislator from Springfield who has received financial donations from the installment lending industry, sharpens the language of state law to protect installment lending, and specifically bars local governments from levying permit fees or other fees. It also says that installment lenders who prevail in lawsuits against local governments will automatically be entitled to recoup legal fees.
Consumer advocates and others have urged Gov. Mike Parson not to sign the bill containing Trent’s amendment. The governor has not indicated what he will do.
Kapke said he wasn’t sure how the possible legislation might affect Liberty’s attempt to regulate high-interest lenders. Champions of the ordinance worry that it could be interpreted as protection for any business that offers installment loans as part of its portfolio.
“If the governor signs the legislation it might make the lawsuit moot. We don’t know yet,” Kapke said.
Flatland contributor Barbara Shelly is a freelance writer based in Kansas City.