Predatory Lending: Payday Lenders dealt another blow!!! Car Title next???

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.

Consumer Credit Reform: Payday Lending declines 84 percent in Virginia, but most shift to Car Title Lending

Reading the Dena Potter's (no relation to Harry Potter) article in the Virginian Pilot brought a big smile to my face. I worked extensively on this issue over the last several years and without a doubt, Payday Lending is one of the worst types of businesses out there. Cloaked in the veil of helping poor people out, people that are in a financial bind that don't have access to quick cash to get you over the rough spots, these guys are beating it out of town. Why?

When this business was authorized to be exempt from the state's usury laws (which have been around since Colonial Virginia) in 2002, they were able to charge Annual Interest Rates in excess of 36%. On a one week loan, lenders charged $15 for every $100 borrowed for a maximum of $500 per borrowed week. This ends up being an additional $75 on top of the $500 borrowed, if a person takes the maximum. Most people that are in this situation can't pay off a $575 loan in one week, so the Payday Lenders suggest that if this happens they can just get a new one week loan to pay off what they couldn't pay. Thus beginning the cycle of debt that is almost impossible to escape.

The average Payday Loan borrower took out between 10 to 13 loans in a year which quickly adds up to an APR of close to 400%. This is what is called "Compounding Interest." Compounding Interest is good if you are investing money. But if you are borrowing money with compounding interest, you will quickly find that the original amount, or the principle, has been rapidly exceeded by the interest rate. In the case of Payday Loans, the $15 per every $100 borrowed has been "rolled over" several times to where a borrower isn't paying back the principle any more, but the compounding interest generated from the repeat borrowing. The financial hole that has been dug is deep.

From 2002 to 2006, Payday Lending stores expanded so rapidly that there were twice as many Payday Lending storefronts in Virginia than where McDonald's. Three times more than Starbucks. That's a lot and speaks volumes to the need for small dollar short term loans. But the question became, do these loans need to be based off compounding interest so that a borrower is likely to become trapped in the loans? Payday Lenders got a foothold in Virginia and fought hard against interest rate caps or any restrictions.

From the 2006 through 2009 General Assembly session, grassroots and consumer protection groups fought for interest rate caps and restrictions to reign-in Payday Lending, and won some major reforms. A 36% interest rate cap was included in compromise legislation, along with limiting the number of loans a borrower can take out in a six month period as well as doubling the repayment period based off the borrower's pay period. The Payday Lending industry was able to get additional fees included that negated the 36% interest rate cap. The the Payday Lending industry found a loophole that allowed for open-ended lines of credit based off of credit card billing period, in order to get around the compromise legislation and started shifting to more lucrative Car Title Lending.

The Virginia General Assembly closed this last loophole for Payday Lenders, but did not address the Car Title Lending industry. Instead, they were given a warning that they were next and they needed to figure out a fair way of doing their business. Car Title Lending operates pretty much the same way, except they use a person's car as collateral. They treat the loans as open-ended lines of credit at twice the assessed value of the car. The problem with this is the car being used as collateral is actually a secured loan. The same grassroots and consumer protection groups fought to move the Car Title Lenders under the Virginia Consumer Finance Act which would address this aspect of Predatory Lending. They will have to take this up after the 2009 Virginia Statewide races and House of Delegates contests, but it is clear that the momentum is on the side of grassroots and consumer protection groups.