BALTIMORE — Friendly Finance Corp.'s President Steven Pittler warned that successful passage of Senate Bill 257 would impair finance companies' ability to lend to subprime buyers and serve as an incentive for cash-strapped drivers to file for bankruptcy.
Under current guidelines, a buyer has an incentive to continue to make their car payments after filing for bankruptcy in order to retain their vehicle. If this bill were to pass, according to Pittler, that incentive would no longer exist.
"You can imagine the losses the lender would incur if he can't reduce the borrower's balance by selling the repossessed car," Pittler said. "This bill encourages people to file for bankruptcy; essentially, they get rewarded with a free car."
The bill, also known as the Consumer Credit Fairness Act, currently resides in the U.S. Senate Judiciary Committee. If passed, it would allow consumers who enter bankruptcy proceedings to clear any liens on debts that carry an interest rate above an established threshold — currently, about 19 percent. Under the terms of S. 257, a debtor would also be allowed to skip the "means test" required by the 2005 overhaul of the U.S. Bankruptcy Code if they have any debt with an interest rate that exceeds the threshold. That provision was designed to channel debtors who can afford to pay back their creditors toward the pay-plan framework established by a Chapter 13 filing.
"That means if you have an auto loan at zero percent interest but a credit card bill or any other debt that exceeds the threshold, you get to skip the means test completely," Pittler told Special Finance.
One of S. 257's co-sponsors, Sen. Dick Durbin (D-Ill.) has also introduced S. 500, a companion bill designed to set the usury cap at 36 percent on all transactions and punish violators with civil and criminal penalties if they exceed that cap. The catch, according to Pittler, is that the cap is a "moving target," calculated by adding such expenses as ancillary products, credit insurance and, possibly, late payments to the original amount financed to determine if the lender is in violation. Currently, these expenses are not included when calculating an annual percentage rate (APR) under the Truth In Lending Act.
"An original interest rate of 10 percent APR could quickly exceed the 36 percent cap when such expenses are added to the calculation," Pittler said. "You would find special finance lenders, who know how expensive it is to originate and collect these loans, telling people they simply can't get financing. These bills would be devastating to lenders, dealers and the public. It's entirely possible that legislation intended to protect consumers from excessive interest rates may result in their inability to obtain any financing at all."