The Commonwealth of Virginia temporarily ended legislative hearings Tuesday (December 5) that dealt with the issue of payday loans. The House of Delegates panel, with a vote of 10 to 8, rejected a bill presented by Delegate John O’Bannon (Henrico) that would have repealed the law that opened the way for this type of notorious consumer practice. The Virginia General Assembly passed the law in 2002 in an effort to regulate payday lenders who had moved into the state while partnering with out-of-state banks. However, instead the law paved the way for these new businesses to charge higher interest rates than had previously been allowed.
According to state figures, more than 445,000 people took out more than 3.3 million payday loans in 2005. The dollar amount topped $1.2 billion. It was estimated that the average customer applied for about seven such loans per year.
A group of concerned citizens that include former consumers, business owners, attorneys, and ministers have been lobbying heavily against this popular practice. Many claimed that payday lending is a well thought out scheme aimed at trapping customers in a never-ending cycle of debt. Business owners spoke on behalf of employees who had gotten involved in the loan process not thoroughly understanding that the high interest rates would make repayment almost impossible. Consumers who had previously taken advantage of payday loans echoed similar sentiments. Some reported that these so-called loan sharks use bullying tactics and intimidation of immanent arrest to terrify consumers.
On the flip side, a lobbyist for the lending industry reported that payday lenders fill a need in the marketplace for small dollar loans that can be repaid within a short period of time. Reginald Johnson, testifying for the Community Financial Services Association of America, provided a video that showed several payday-lending customers who professed satisfaction with the loan process.
Although many lawmakers were hesitant to repeal the law that led to payday loans, a large majority of them agreed that the process likely needed tighter controls to prevent consumers from falling into debt traps. Delegate G. Glenn Oder (Newport News) has already filed legislation that would forbid payday lenders from issuing loans to people who already have three or more outstanding loans or who have paid off a loan in the previous 48 hour period. Delegate Lee Ware (Powhatan) plans to recommend the creation of a database that would allow lenders to track customers’ loan activity. Additionally, O’Bannon plans to reintroduce his bill for the 2007 legislative session. He noted that many committee members could not attend the recent meeting where the bill was defeated. He has high hopes, due to the already close vote of the committee, that additional legislative votes could sway passage of the bill.
Virginia is not alone in its attempt to deal with this growing trend in lending. The federal government has already clamped down on partnering with out-of-state banks.