THE TOUGH CUSTOMER- Half a loaf? Does lending reform go far enough?
Wags say a good compromise is one that leaves both sides unhappy.
By that standard, the compromise on payday lending reform the Virginia General Assembly reached in the waning days of its 2008 session last week approaches perfection.
But what it really means is the controversial practice– "predatory lending" in the parlance of consumer advocates and other opponents– will continue to be a bane, or depending on your perspective, a boon, for Virginia consumers for the foreseeable future.
When I first wrote about Estelle Williams' car title loan and its 240 percent annual interest rate last year ("Predatory practices? Car title lender back-pedals," December 13), I was amazed to discover that such high-interest loans were legal in Virginia. According to Williams, she paid installments on her $200 loan for a year and a half, allegedly amounting to about $1,000 in payments, but made hardly any headway in paying off the principal. So she finally stopped paying, and her car was repossessed.
After I began asking questions, however, the lender cancelled her loan and returned her car.
Because there were questions over the legality of this specific loan, I asked Bob McDonnell, the Virginia Attorney General, to take a look. So far, his office has not announced any action.
As I delved deeper into car-title lending and its much more ubiquitous cousin, payday lending, I found out that becoming trapped in an unending cycle of high-interest debt is common, and that despite years of trying to enact reform, the General Assembly has been unable to get a handle on the problem.
This year, politicos from the Governor on down seemed determined to do something on payday lending, even if only for the sake of finally doing something. ["Payday lenders: Beating back rate caps in Richmond," January 31].
If you think this $1.5 billion business doesn't affect our bucolic university community, think again. There are nine payday lenders in the Charlottesville area listed in the Yellow Pages, and at least two car title lenders in the city that I'm aware of.
The consumer lending industry contends that it fills a need for people who have no place else to turn for help in a financial emergency.
Jay Speer, executive director of the Virginia Poverty Law Center in Richmond– one of the consumer groups leading the fight for payday lending reform– calls that argument "sheer unmitigated nonsense."
But even alleged "sheer unmitigated nonsense" gets a respectful hearing in legislative halls when it's backed by $552K in political contributions.
Speer says that although there are some good parts to the proposed reform, it fails to go far enough. For example, the new law would create a database to track loans and would limit a borrower to one outstanding payday loan at a time. After a borrower's fifth loan in a year, other restrictions would kick in, but Speer contends these will probably do little good.
The industry is "so devious, so underhanded," he says, they have probably already figured out a way around the restrictions.
Speer said he hoped Governor Kaine would amend the bill to make it tougher and send it back down to the General Assembly for a re-vote.
Kaine has scheduled a trio of "town halls" around the Commonwealth this week to discuss the General Assembly session, including one in Staunton. "A lot of people will be there telling him he needs to do something with this bill," Speer says.
The ultimate question of whether this compromise is better than no reform at all is one Speer is unwilling to answer at this point.
If this bill becomes law, he does note, it will put further reform on the sidelines for at least the next several years.
"We'll have the almighty database," Speer says, and there will be two or three years of collecting and analyzing data before anything further can be done.
Last, but not least, the bill does nothing to address car-title loans– the kind of loan that vexed Williams– that are gaining in popularity. For many people struggling to make ends meet, Speer says, the loss of their automobile, which they need to get to work or to a doctor's office, can be devastating.
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