- Last Updated on Wednesday, 21 January 2009 21:29
- Published on Wednesday, 21 January 2009 21:29
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Virginia’s culture is based on a moderate to conservative outlook combined with a certain amount of common sense. This approach is reflected in the way the state is governed. Our taxes are low and historically we have been recognized as one of the most efficient state governments in the country. We also, reflecting our conservative outlook, don’t like gambling, slots, or liquor sales outside of state control. To which I readily nod my head in agreement.
However, when it comes to payday lending, and let’s not mince words here, legalized loan sharking, we let our guard down. In 2002, in what was called the Payday Lending Act, our conservative lending laws were changed to allow storefront style lenders to charge more for loans than the previous cap of 36%. The idea, and this is how it was billed, is that those folks who need “short term” just in time cash, could take out a loan for a week or two, with their collateral being their next pay check.
It’s doubtful that even the bill’s strongest supporters in the legislature had any idea just how quickly this industry would catch on. In a matter of months pay day lenders started popping up all over the Commonwealth. Now there are hundreds. They are in strip malls, store fronts, and perhaps most ominously, on the main streets just outside military bases where there are large populations of young enlisted personnel. What can I say, these guys know their target market and aren’t afraid to exploit it.
This industry has also gotten its foot in the door when it comes to politics. They give campaign contributions to delegates and state senators, but most telling, is the amount of money they spend on lobbyists. Their outlay for lobbying was over a million dollars in 2007 and last year was probably substantially more.
The legislature, having heard complaints from religious leaders, community activists, as well as military advocacy groups, attempted to change the rules in 2008. The Assembly, who seemed more swayed by the pay day lending industry than the concerns of their constituents, only managed a few half hearted changes. They capped the interest rate and limited the number loans that a borrower can take out each year to five. While not going as far as some would have liked and banning these loan sharks entirely, it seemed like a move in the right direction. But the pay day lenders are a clever bunch, and they quickly managed to find and exploit a loophole.
Under the 2008 legislation, while capped in interest charges, the pay day lenders were still allowed to charge their fees. This rather insidious practice allows them to continue to operate under an interest rate cap, but through charging fees, allows them an opportunity to still make a lot of money. If the fees are counted as something of a “defacto” interest rate, the cost of a loan, even under the new legislation, can quickly become exorbitant.
However, where the pay day lenders really scored a coup was in the business of open ended lending. Under the old rules lenders could only operate with fixed one week, or two week loans. But under the new rules, while they are capped in the number of loans they can give each year, it’s now perfectly OK to offer extended credit. However, unlike even the most outrageous credit card rates, this new structure, with the fees and interest rates factored in, can reach the equivalent of nearly 700%.
There are those who claim that payday lending, almost like a Good Samaritan, fills a valuable niche in the market. In other words, they are giving a line of credit to those people who couldn’t find a loan any other way. There is some merit to this argument, but that’s not really what these loans are about. The reality is that they are notorious for putting people most at risk in a no win position. Once they get into this cycle of debt, particularly at these outrageous interest rates, there is almost no way out.
In the upcoming General Assembly, with so many other worries, it’s hard to see either chamber moving ahead with new legislation. Rather, they will probably to take a wait and see attitude. In the meantime, however, not everyone has pursued such a laid back approach. Our neighbors in Kilmarnock, while having no authority to limit pay day lending, rather ingeniously used their zoning ordinances to deny these guys space in their town. Under the town’s zoning rules banks are allowed, but other “small lending businesses” are not. So, in this case a pay day lender who wanted to set up shop in Kilmarnock had to find somewhere else to do business.
However, the reality is that unless Virginia, like other states, to include Ohio, New York, and North Carolina, puts an effective clamp on pay day lending, this scourge is going to continue.