Consumer groups have argued that both payday lenders and car title lenders prey on the vulnerable by trapping them in a cycle of debt. The Virginia General Assembly has put the payday lending industry on notice that it will not accept the industry’s policy of making high interest loans available to those least able to pay the interest rates. The interest rates on many of these short term loans can reach 400 percent on a yearly basis.
Following three years of debate on payday lenders, the Assembly last year passed new limits on the short term lenders, restrictions that fell short of an interest rate cap of 36 percent. Before the new law became effective in January, however, most of the payday lenders began offering open end loans. Under the open end credit law, lenders may charge whatever they want for interest as long as they don’t charge anything during the first 25 days. Open end loans are basically unregulated and carry excessive interest rates.
Legislation approved this time around prohibits payday lenders from offering open end loans. And payday lenders who choose to continue to offer the open end loans could lose their licenses to offer payday loans for 10 years. The legislation is intended to confine most of the lenders to payday loans.
The Assembly has considered this issue for four years, virtually ever since it approved legislation welcoming the payday loan business to Virginia back in 2002. That was the first blunder, but reforming the industry has proved to be easier said than done.
Payday lenders have spent millions on lobbying, advertising and campaign contributions to guarantee that their point of view is heard by the delegates and senators. Virginia lawmakers have nibbled around the edges in an effort to put the state back in control of the payday lending industry, but more remains to be done. It is expected that payday and car title lenders will be looked at again in the 2010 Virginia Assembly.