Reforms Take a Toll on State Payday Firms

When a group of state legislators gets together later this month to study the thorny issue of payday loans, it should take the final step necessary to rein in the outrageous loan industry. That step would be to return Virginia to a cap of 36 percent on open-end loans.

Even that is usurious, but it would be a vast improvement over the triple-digit interest rates that some borrowers are paying today. Unfortunately, many of those borrowers are the least able to pay sky-high interest rates.

The General Assembly has nibbled away at the payday loans in recent years, but has failed to take the step that would put them on the same playing field with other financial institutions that loan money on a short-term basis to those who need it. That step, of course, is the 36 percent interest rate cap on an annual basis — the same cap that applies to other lending institutions.

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Steps the lawmakers have taken, nonetheless, are beginning to show some positive results. As The Associated Press reported last week, a new law that cut down the number of payday loans borrowers can get has drastically reduced the number of short-term, high-interest loans issued in Virginia.

Last year, Virginia’s payday lenders, who are well represented in storefronts in the Lynchburg region, made about 281,000 loans per month. Through the end of May, lenders had issued an average of 45,000 loans a month — an 84 percent decline, according to the Bureau of Financial Institutions.

That puts the state on pace to issue fewer than 600,000 payday loans for the first time since the lenders were authorized to do business in the Old Dominion in 2002.

The reforms that have taken place came after years of legislative struggles among those who argued that payday lenders prey on the vulnerable and those who didn’t want to take away the fast-cash option for individuals who didn’t qualify for traditional credit.

Perhaps the most significant reforms, which became effective in January, are ones that limit borrowers to one payday loan at a time and double the amount of time borrowers have to repay the loans. Before those reforms, payday lenders charged $15 per $100 loaned and it was due on the borrowers next payday, rarely more than 30 days away. Calculated on an annual basis, that interest rate approached 400 percent.

The legislative reforms have pushed some payday lenders out of the state, including Check ‘n Go, which closed its 68 stores in Virginia earlier this year. As of the middle of June, 526 payday loan stores were still open in the state, down from a high of 832 in 2007.

The decrease in number of stores is good news, said Jay Speer, executive director of the Virginia Poverty Law Center. But there’s also some bad news, which is that some of the lenders have shifted to car-title lending.

Many of the payday lenders began offering other high-interest loans to skirt the reforms that were taking place. One of those is a car-title loan, where borrowers hand over the title to their vehicle to secure a loan for up to half the vehicle’s value. If the borrower falls behind, the lender can take the car — and along with it the only form of transportation for that family.

The solution to the problem created by payday lenders and car-title loan lenders is to cap interest rates on all those loans at 36 percent. A bill to accomplish that died in the 2009 Assembly for reasons that remain unclear.

Proponents of the measure say they will bring it back for consideration at the 2010 session. “I think the threat of us doing more in 2010 is very real,” said Del. Glen Oder, R-Newport News, who has battled the payday lenders.

For the sake of those who are least able to pay interest rates in the neighborhood of 360 percent annually, let’s hope he is right.