Legislative Panel Weighs Payday Advance Options in Virigina
By J.J. CameronPayday Loan Writer
On Tuesday, consumer advocates urged legislators to limit high-interest, short-term cash loans to the same 36 percent annual interest rate cap that applies to other lenders in Virginia.
Representatives of the payday loan industry, however, said such action would force them out of business, denying cash-strapped borrowers a convenient source of credit that can be less expensive than fees for bounced checks or late credit card payments.
"A 36 percent cap is a de facto ban on the storefront lenders," said Carol Stewart, vice president of government affairs for Advance America, the nation's largest payday lender.
Critics argued that borrowers often get trapped in a cycle of debt as they repeatedly renew their loans, which have average annual interest rates pushing 390 percent, or borrow from one payday lender to pay off another.
"People end up simply servicing their debt while never being able to retire the principal," Neil Walsh, a lobbyist for AARP Virginia, told the House Commerce and Labor Committee. "This is not financial assistance - this is financial disaster."
Payday advance legislation: Del. John O'Bannon III, R-Henrico, is sponsoring legislation for the 2007 session to repeal the 2002 law that exempts no faxing payday loan lenders from the 36 percent cap.
Moreover, Del. Glenn Oder, R-Newport News, has filed a bill prohibiting making a payday loan to anyone who already has three such loans outstanding and creating a database to ensure compliance.
"We left the gate open, we let the horse get out and we've got to find a way to get it back under control," Oder said.
Payday cash loan providers promote the product as a way to deal with a short-term cash crunch, such as an unexpected car repair or medical bill, but don't prohibit reborrowing. O'Bannon said only one percent of Virginia payday loan customers use the service just once a year.
According to state banking regulators, the average customer borrows from the same store 7.5 times in one year.
"Repeat borrowing is the lifeblood of the payday loan industry," said Jean Ann Fox, consumer protection director for the Consumer Federation of America.
Reggie N. Jones, a lobbyist for the industry, said his clients also are concerned about the approximately 20 percent of customers who take out a dozen or more regular or no fax needed payday loans per year and are open to discussing ways to strengthen consumer protection.
However, he also said that not all the repeat loans can be viewed as evidence of a "cycle of debt." For example, he said some borrowers might start with a $300 loan, then renew the loan at lesser amounts until they work their way out of debt.
"I think that's a reasonable and responsible way to use a payday loan," he said.
He said the demise of payday cash advance lending stores in Virginia would force borrowers into "a frightening alternative" - unregulated and even more expensive Internet lending.
North Carolina, Maryland and West Virginia do not allow payday lending and a defense authorization bill that has passed the U.S. House of Representatives and is pending in the Senate would set a 36 percent cap on payday loans to military members and their dependents.
According to a Defense Department report, financial problems exacerbated by payday loan debts are hurting the nation's military readiness.
"If we're going to have a 36 percent cap for the military, why isn't that fair for all Virginians?" said Del. Johnny Joannou, D-Portsmouth, who called the triple-digit interest rates "unconscionable."
