Bill to Close Payday Loan Loophole Dies in Richmond, Virginia
Inside Subprime: Jan 10, 2018
By Lindsay Frankel
Members of the House of Delegates’ Commerce and Labor Committee killed a bill aimed at addressing the open end lines of credit loophole that allows lenders to charge exorbitantly high interest rates in Virginia. The legislation won’t make it to the House. Del. David Yancey has tried for years to advance the bill without success, all while lenders have given more than $2 million in campaign contributions to Virginia politicians. Yancey’s bill comes after a long history of attempts by consumer advocates to curb predatory lending, a battle that started with his predecessor, former Del. Glenn Oder.
Payday loans emerged as an option for Virginian borrowers in the 1990s. In 2002, an industry-supported bill passed that would allow lenders to charge a $15 fee for every $100 borrowed. Oder voted for the bill, but later regretted it because he thought it “opened up the floodgates.” And indeed, payday lending boomed in Virginia in the following years, since lenders were allowed to charge annualized interest rates of up to 780 percent.
In 2006, Newport News businessman Ward Scull became aware of the payday lending debt trap when one of his employees asked to borrow money. She had six outstanding payday loans for $1,700, and the lender was charging an effective interest rate of 390 percent. When Scull tried to wipe the slate clean for his employee, he was shocked that the lenders would not accept his payment. Scull suspects the lenders’ intention was to make more money from his employee. The payday lending business model relies on repeat loan borrowers, with 91 percent of revenue coming from borrowers who take out five or more loans.
In December of that year, Scull and a diverse coalition of consumer advocates and faith-based organizations spoke at a meeting of the House Commerce and Labor Committee, encouraging the committee to repeal the 2002 Payday Lending Act that put so many predatory lenders on the map. But a payday lending industry lobbyist also spoke, and even though the sponsor of the 2002 bill voted to repeal it, the law remained in tact.
In 2007, more than a dozen bills died that would have regulated the payday lending industry. But in 2008, after Scull and his colleagues hired a lobbyist, a law passed that established a borrower database, preventing borrowers from taking out more than one loan at a time. The bill also extended the terms of payday loans. But it also raised the maximum fee and allowed payday lenders to charge 36 percent interest in addition to the fee.
Still, many payday lenders closed down shop. But others found a loophole that would allow them to charge 360 percent annual interest. Payday lending businesses began offering open-end credit plans, the result of an old law intended to allow retailers to offer charge cards. Like payday loans, these credit plans pose significant financial risks to borrowers.
Yancey said his constituents have regularly expressed concern about high-interest loans, and he will continue to attempt to reign in high-cost lenders.“It’s a very serious problem … people need to have a quick, sensible way to pay off their debt,” he said.