KERR: Putting some controls on payday lending

DAVID S. KERR / Stafford County Sun
Published: February 20, 2008

However, today it's a lot easier to get a loan on their terms, and what's more, because it's legal, the lenders can even do business out in the open. They have shed the title of "loan shark," which wasn't all that enticing from a marketing perspective, and are now called "payday lenders." That has a much more comforting sound to it.

You've seen the ads. Bring in a personal check that the payday lender can cash once your paycheck is deposited, usually the week to follow, and they'll advance you anywhere from $100 to $500. However, there is that little matter of the interest rate. This is something none of the payday lenders mention in their ads by the way, but at the moment, the annual percentage rate on many of these loans, with fees and interest, can be as high as 390 percent. Most loan sharks would be pleased to do so well. Payday lending, or legalized loan sharking, is relatively new to Virginia.

In an unfortunate 2002 law, Virginia opened the way for what has turned out to be a wildly successful new branch of the financial services industry. There are now 800 payday stores in Virginia that in 2007 issued 3 million loans. The law that created payday lending doesn't offer much in the way of controls on this industry, and sadly as the result, payday lenders, focusing on the most vulnerable potential borrowers, have been making a killing. However, things may be starting to change.

It was a combination of factors, the state of the economy, concern by religious groups, and advocates for the poor, which prompted the General Assembly to develop legislation that puts some controls on payday lending. But some of the credit has to go to the Congress, which made it illegal to knowingly charge a member of the armed forces an annual percentage rate on a loan or line of credit higher than 36 percent. Sadly, payday lenders, not just in Virginia, but nationwide, considered military personnel and their families' prime targets for this kind of lending.

Congress decided to put a stop to it, and the president readily agreed. Now, Virginia's General Assembly, a bit shamed that it took national legislation to protect our service personnel, has decided it's time to act. Both the House of Delegates and the Senate have passed legislation. The House capped the percentage rate at 36 percent and limited the number of loans to five each year. However, in a nod to the industry, they did allow a $5 fee, and on top of that, a 10 percent loan origination fee. Those charges significantly increase the cost of the loan, but at least it is an improvement over the terrible terms that are offered by most payday lenders. The Senate, on the other hand, has a much weaker bill, capping the percentage rate, but putting no limit on the number of loans a borrower can have each year.

The two bills may not sound that different, but the cap on the number of loans a borrower can take out, in the House bill, is a big deal to the industry. Most payday borrowers take out between seven and 13 loans each year. In a sense, it's just a cycle of super high-priced credit. The borrowers stay in debt and the lenders make a lot of money.

The challenge, if this legislation is to make it into law, is getting some agreement between the House and Senate. That may or may not happen. While payday lending reform may be popular, the payday loan industry has been fighting back. They have run TV ads, given out tens of thousands in campaign contributions, and have even argued that they perform a public service. They would be happy if no reform bill gets passed.

While the best bill would be one that closes down payday lending for good, that's not going to happen. Hopefully the legislature can craft a compromise that puts a cap on the interest rate and most importantly the number of loans an individual can take out each year. While not a perfect solution it does provide at least some degree of protection to the most vulnerable borrowers.

David S. Kerr is an Aquia resident and a former member of the Stafford County School Board. Contact him at info@stafford countysun.com.

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