New year, same legislative agenda. At least that’s the story when it comes to payday lending regulations. New laws targeting payday lenders went into effect January 1, extending repayment periods and limiting the amount of sequential loans a borrower can obtain. Lenders, however, have quickly discovered ways to get around the new law, putting frustrated Virginia state legislators back at square one.
Advance America, a payday lending company with three Charlottesville stores including this one at Rio Hill Shopping Center, roused the General Assembly to take action by offering open-ended loans after new restrictions went into place.
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On January 22, Senator Mark Herring (D-Loudoun) introduced Senate Bill 1490, which would place car title lenders under the Consumer Finance Act, subjecting them to a 36 percent annual interest rate cap, as well as a 25-day interest-free grace period.
Car title lenders have thus far been operating under Virginia’s open-end credit law, which allows companies to charge any amount of interest as long they don’t require payment for the first 25 days. Recently, at least one payday loan company, Advance America, also began offering open-end lines of credit.
According to Herring, some car title lenders have charged “an unconscionable rate” of 30 percent interest per month, which annualized is 360 percent.
“People don’t understand the terms,” he explains. “Many think it’s 30 percent a year and some don’t understand the magnitude. …It’s usurious and unconscionable by anyone’s standards.”
When last year’s payday legislation was passed, Alex Gulotta, executive director of the Legal Aid Justice Center, said, “To even call it payday lending reform does an injustice to the word ‘reform.’”
According to Herring, legislators neglected to subject payday lenders to the 36 percent cap earlier partially because they did not anticipate lenders choosing to offer open-end credit.
“It’s a breach of trust,” he said. “We never expected that to happen if they were licensed under the payday lending statute.”
As of press time, Herring’s bill was awaiting a vote in the Commerce and Labor Committee. A similar bill died in House committee last week.
A second bill, SB 1470, would forbid any company licensed under the Payday Loan Act from offering open-end lines of credit. The bill, which doesn’t address car title lenders, already passed the Senate.
Surprisingly, the bill is sponsored by Senator Richard Saslaw (D-Fairfax), who has been one of the payday lending industry’s biggest defenders. Between 2007 and 2008, Saslaw received donations worth a total of $5,750 from Advance America, the largest amount they donated to an individual candidate in Virginia.
If the company was expecting Saslaw to continue promoting the lax regulations he had supported in the past, however, it appears they were mistaken. By finding a loophole in the compromise Saslaw supported last year, payday lenders may have finally pushed the envelope too far.
Though the Senator told The Washington Post he does not “believe in sending messages,” he did say rather ominously, “I corrected a problem, and we’re not finished yet.”
Advance America spokesperson Jamie Fulmer says that in offering open-end lines of credit, his company is not attempting to dodge regulations.
“We understand the concerns legislators have,” he says, “but surely we’re not evading any payday loan law, because we continue to offer the [traditional] payday product.” Regardless of the bills that are currently on the table, Fulmer says his company has no plans to surrender their payday loan licenses in favor of open-end credit.
“There’s a marketplace for both products,” he says.
“Unfortunately, compromise solutions…often result in the game of whack-a-mole,” says Ed Mierzwinski, consumer program director of U.S. Public Interest Research Group, by e-mail. “The payday lenders have proven successful at writing loophole-ridden compromises that treat them as if they are special. They are not.”
There are no bills left alive that would cap payday lenders at 36 percent annual interest rates, but if the Assembly did pass such a law, most payday lenders would likely leave the state: When Oregon legislators imposed a 36 percent annual interest rate cap on payday lenders in 2007, Advance America closed all 53 stores in the state.
Though Mierzwinski says U.S. PIRG does not necessarily believe payday lenders must be banned entirely, the organization does believe payday lenders must comply with the same laws and regulations that other small lenders are subject to.
“If they want to continue to use unfair practices, then they should be thrown out,” he says. “We support legislation that would give them the choice of complying with the same laws…but they usually whine and leave the state when other states have done that.”
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