THE TOUGH CUSTOMER- Payday lenders: Beating back rate caps in Richmond

Halfway through the 2008 General Assembly session, it looks like allegedly predatory interest rates on payday and car-title loans will continue to hound Virginians for the foreseeable future, notwithstanding a high-profile battle being waged by both sides.

Proposed legislation to cap interest rates at 36 percent is unlikely to even get out committee, much less pass, according to one of the legislation's supporters, State Senator Roscoe Reynolds (D-Martinsville).

In addition to supporting a rate cap, Reynolds has proposed one bill to revoke the authority of payday lenders to operate in the state.

Payday lending interest rates in the state averaged 378 percent in 2006, and have been known to reach as high as 782 percent, according to published reports.

State Senator Creigh Deeds (D-Bath), who hopes to be the Democratic Party's nominee for governor in 2009, has called these rates "unconscionable."

Reynolds explains that the General Assembly first regulated payday lenders in 2002 because the lenders were already operating, and some oversight seemed better than none. The legislative recognition, however, triggered a proliferation of the industry. As of late last year, there were 88 licensed payday lenders in the state with 800 offices, according to the Richmond Times-Dispatch.

Reynolds says he got involved in the issue several years ago when he started hearing from consumer assistance groups in his district about the unending spiral of debt high-interest payday loans impose on their clients.

Reynolds, whose Southwest Virginia district is rural, says people who think payday lending is mainly a urban problem need to think again. On a per capita basis, there are more payday lenders in Southside and Southwest Virginia than anywhere else in their state, he says, sucking money out of those already economically hurting areas.

The payday lending industry maintains it serves as a lender of last resort for many borrowers who cannot access cheaper credit, although critics and consumer advocates question that assertion. Some 434,000 Virginians took nearly $1.3 billion in payday loans last year. The average customer takes out 8.3 loans per year, often using one loan to repay another.

The industry maintains that capping rates at 36 percent would effectively drive it out of business, and having donated some $470,000 to Virginia political coffers last year, it's not going gentle into that good night. The industry has proposed an alternative bill that would include several reforms, such as establishing a state-wide database of borrowers and limiting the number of times consumers could borrow.

Reynolds says it's "interesting" that the industry itself believes it needs reform, but he ruefully adds that one needs look no further than last year's session– when an effort to cap rates gathered only eight votes in Senate– to see that the prospects for a rate cap– what he sees as the most effective solution– are dim.

Still, both groups have stepped up efforts this session, with industry opponents bringing 300 supporters in to lobby lawmakers earlier this month, and payday lenders busing hundreds of their employees to Richmond to do the same.

Governor Tim Kaine, who has said he supports a cap, has been making an effort to broker a deal among the competing sides. The Newport News Daily Press reported on a meeting two weeks ago organized by the Governor's office, but not on its results.  

Reynolds confirms that he has heard about the meeting, but he says he wasn't there. Kaine's office did not return a telephone call.

Reynolds predicts that if there's a compromise, it will be around legislation that's acceptable to the industry. As a practical matter, that would seem to mean no rate cap. Reynolds says he can live with a compromise if it is a "dramatic improvement over what exists today."

Delegate Rob Bell (R-Albemarle) echoes Reynolds' view, noting that given past futility on this issue, he will support any solution– even the industry-proposed one– around which a consensus can form.

If there's a consensus forming, however, it seems to be that doing something is better than another year of doing nothing. But as the General Assembly's first foray into this issue in 2002 suggests, the law of unintended consequences can mean that's not always the case.