No matter if you are working in the private sector or working for the government (local, state, or federal), the economy, or lack of one, is hitting everyone. According to an Associated Press story in posted to the Virginian Pilot Online, Governor Kaine announce today that the Commonwealth of Virginia will " offer state employees short-term loans up to $500 in an effort to prevent them from turning to payday or car title lenders during tough economic times." The loans will be available through the Virginia Credit Union, which you must be a member of and have at least $5 in a savings account.In the spirit and purpose of Off K Street to provide commentary and analysis on how politics and issues DIRECTLY AFFECT PEOPLE, this exemplifies how grassroots pressure in a non-partisan way can affect real change. During my time working in the non-partisan world on this issue, we (myself and many other social and economic justice minded people, groups, and organization) pressed Democrats and Republicans alike to take action on this issue of economic injustice. Two things have happened this year that I can say, have moved this issue in the direction of positive change that makes a CONCRETE IMPROVEMENT in the lives of thousands of Virginians.
The first is the closing of the open-ended credit loophole that Payday Lenders were exploiting (tied very closely to the one Car Title Lenders have utilized) after the compromise legislation passed the 2008 General Assembly. This was legislation that they (the Consumer Credit Industry) had a seat a the table and were full part of shaping the legislation. After it was passed and signed into law, they arrogantly chose to exploit the loophole and offer open-ended lines of credit on loans less than $1,000. While that might seem like a positive option, the problem was they were still charging interest rates comparable to the 396% they charged with their original products.
The second is today's announcement that the Commonwealth of Virginia will at least help out their state employees that are members of the Virginia Credit Union to weather these tough economic times. The 25% interest rate is still high, but it is less than the 36% cap that was sought by grassroots groups and it is structured to benefit paying off the loan early, thus paying a lower interest rate the sooner the loan is paid in full. Just imagine if car loans and mortgages were structure this same way? There would be virtually no consumer debt or national debt for that matter. Financing that rewards early pay-off. What a novel idea!!!
At any rate, this is another blow to the Payday Lending Industry. Next up, are Car Title Lenders who charge similar interest rates against the assessed value of a vehicle. Here's what most borrowers don't understand. They are using their vehicle as collateral, which means it's a secured loan. Secured loans can only be assessed a maximum 36% interest rate under Virginia's Consumer Finance Act. For some reason, Car Title Lenders are not obligated to the regulator parameters of the Act. State Senator Richard "Dick" Saslaw has put the Car Title Lenders on notice that they will be getting a thorough examination during the 2010 General Assembly Session.
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Good stuff. This was an excellent idea by Kaine. As much as I hate predatory lending, it is important to realize that these miscreants are allowed to ply their trade, in large measure, by catering to a clientele that is invisible to the personal credit industry. The state and, where possible, non-profits need to fill that void so people are forced to resort to these bloodsuckers.
ReplyDeleteThis was a very important move by Governor Kaine and State Government. There is no question that there is a market for short term loans under $1,000. They don't have to have the extremely high interest rates that characterize them.
ReplyDeleteWhile on an individual, person by person, level we can manage our money and credit wisely, it is painfully clear that as a whole we are very bad with using credit responsibly. That is why these Predators exist.
The governor is responding to a need that some people have for a loan in an emergency instead of throwing up his hands and saying we can't take away these 350% loans or these people will have no where to go. However the need for these loans is no where near as much as the payday lenders would have you believe. See a report from the Center for Responsible lending entitled "Phantom Demand: Short-term due date generates need for repeat payday loans, accounting for 76% of total volume." http://www.responsiblelending.org/payday-lending/research-analysis/phantom-demand-short-term-due-date-generates-need-for-repeat-payday-loans-accounting-for-76-of-total-volume.html
ReplyDeleteIt proves what we already knew about this industry. They are not here to help when you get in a tight spot. They will squeeze you for everything that they can. They create artifical demand with the way the PDL product is structured. Thanks for the post, Truth in Lending!
ReplyDeleteVirginia's plan to stray customers away from payday lenders is irresponsible. It makes a bad name for a good industry that many consumers find to be their best option in times of financial need. Hurting the business of payday lenders also hurts the state of Virginia from an economic standpoint since payday lenders add over $350 million to the GSP and contribute over $95 million in state taxes.
ReplyDeleteActions by the short-term loan industry that are well within the limits of the law are always considered as "loopholes" by the opposition. It's absolutely cynical to believe that payday lenders are distraught over individuals receiving low interest loans from other institutions. Credit Unions have the ability to offer such products because they are non-profit entities and they also offer other products and services to sustain them. If short-term lending to a high risk population is as lucrative as the media and opposition would lead you to believe then more traditional institutions would not hesitate to offer similar products at far lower costs. Instead, traditional financial institutions focus much of their resources on providing "overdraft protection" services and receive the majority of their fee income from overdraft fees. Indeed it is a person's own responsibility to balance their checkbooks just as it would be their responsibility to use short-term loans with descretion, but banks have definitely created procedures that encourage maximum profitability from fee based services.
ReplyDeleteThis is a pretty well know fact about Banks. If they underwrite too many bad loans, they loose the ability to lend money to anybody. That's why Banks don't offer this type of product. Banks have been encouraged to do more lending to higher risk customers through a program set up within the FDIC, which would totally protect them from customers who default on the types of products that Payday and Car Title Lenders offer.
ReplyDeleteIn 2002, the law was changed in Virginia to allow these types of loans to be exempt from the Usury Laws that capped Annual Percentage Rates at 36%. Also, under Virginia's Consumer Finance Act, the maximum that traditional fiancial institutions can charge is 36%. For some reason, these types of products are not regulated under the CFA. Not disagreeing that people need to take responsibility for themselves, but businesses that develop products that don't give a person a reasonable chance to pay them off in a reasonable amount of time and charge high interest rates are to maximize their profit are not ethical. Keeping someone trapped in a bad finacial situation just because the laws and rule allow it doesn't mean it legitimizes that type of business.
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