Fool me once … Will the Loophole Lender Lobbyists get their way again?
Column by Jay Speer
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The 2008 General Assembly enacted several changes to the Virginia payday loans law that took effect January 1, 2009. But instead of complying with the new law, the payday lenders started doing “line of credit loans” to take advantage of a loophole in Virginia law that allows unrestricted, unregulated open-end loans.
Open-end loans have no set time to be repaid. The borrower just needs to make a minimum payment each month — think “credit cards” (with a 300 percent interest rate). Virginia enacted this open-end credit loophole many years ago in order to attract lending business here but this loophole is no longer necessary.
At this year’s General Assembly, the payday lenders claim that 2009 legislative actions guaranteed them the right to do loophole loans — that is interesting revisionist history. What really happened was that nearly all the payday lenders in Virginia decided they would ignore the new payday loan restrictions that went into place on January 1, 2009. They began to quietly flip their borrowers from payday loans into “lines of credit” when those borrowers came in to renew their loans in December 2008 and January 2009. They told their borrowers that they were no longer doing payday loans or that they had a better loan or that payday loans were now too complicated.
This wholesale flipping of borrowers became public in early 2009 because borrowers started calling legal aid offices for help. It soon became obvious that payday lenders did not want their best customers (Social Security recipients) to pay only once every two months (a payday loan reform) and decided they needed to take advantage of the open-end credit loophole. When legislators found out what the payday lenders were doing, many were upset that all the time and energy spent on the 2008 payday loan fight was being circumvented and vowed to take action during the 2009 General Assembly session.
A funny thing happened on the way to taking action. Instead of closing the open-end credit loophole in Virginia law (Va. Code 6.1-330.78), the 2009 General Assembly passed legislation allowing payday lenders to use the loophole if they were doing car title loans or if they dropped their payday loan licenses. Why? As Jeff Schapiro of the Richmond Times-Dispatch said in his column on February 14, 2010: “The loophole through which some payday lenders eluded Senate Democratic chief Dick Saslaw’s kind-of crackdown on fringe credit in 2008 was written for Community Loans of America, so it could peddle payday and car title loans.”
As one legislator told me during the 2009 session — “the car title lenders have done nothing wrong.” I think he meant that they came by their loophole loans honestly — they have been using the open-end credit loophole for years. The net effect of the 2009 General Assembly amendments to the open-end credit statute: Payday lenders continue to evade the 2008 payday loan law, car title lenders continue to evade any regulation and car title lending has expanded in Virginia.
So here we are again. Is the 2010 legislature going to close the open-end credit loophole completely this time?
Are the car title lenders going to be regulated this time? The car title lenders say they want regulation. They want their “best practices” put into the law. Translation: Put into Virginia law what we are already doing and anything that isn’t consistent with what we are already doing will “put us out of business.”
By the way, this is exactly what the payday lenders asked the General Assembly to do in 2002 and the General Assembly and Governor Mark Warner complied. How has that worked out for the people of Virginia?
All of this history reminds me of that old quote, “fool me once shame on you, fool me twice shame on me.” Will the lobbyists for the payday and car title lenders be able to fool the legislators again?
Jay Speer is the executive director of the Virginia Poverty Law Center.