Virginia regulators are plugging a loophole that allows some payday lenders to escape restrictions on loans and interest rates.
The order by the State Corporation Commission is another blow to the high-cost, instant-loan industry and may have implications for a looming fight in the 2010 General Assembly over a possible clampdown on now largely unregulated car-title lenders.
In an order Tuesday, the three-member commission made it more difficult for some lenders to offer larger, more profitable loans by, in effect, requiring borrowers to supply their motor vehicles as collateral.
Payday lenders, including the nation's largest, Advance America of Spartanburg, S.C., offered such open-ended loans for which there are virtually no limits on interest and payment terms.
Lenders required customers to provide a photocopy of the registration of their car, truck or motorcycle -- but without tagging the vehicle as security for the loan.
Now, in a step that consumer advocates said could protect customers from being swamped with debt, lenders would be banned from providing an open-ended loan if a borrower's vehicle already backs a separate loan or is under lien.
Lenders also would have to disclose a security interest in a car, truck or motorcycle to the State Department of Motor Vehicles.
"The commission believes that these additional conditions are consistent with existing law and will promote the public interest," the SCC said in its five-page order.
Jamie Fulmer, a spokesman for Advance America, did not return a telephone call or e-mail yesterday seeking comment.
Mark B. Hubbard, a lobbyist for the Center for Responsible Lending, welcomed the ruling, saying, "It sends a very clear message that [lenders] have to stop creating these loopholes."
Hubbard added, "The SCC saw through the shell game."
Virginia law limits customers to one payday loan at a time, with the maximum $500, restricts borrowers to five loans over six months and bans electronic access by lenders to a customer's checking account.
But worried the law would cut into profits, some payday lenders bypassed it by offering unregulated, open-ended loans that are typically in amounts of $750 and managed much like lines of credit available through banks.
That maneuver angered legislators, including industry allies. They pushed through a law forcing payday lenders to offer their primary product or open-ended loans -- not both.
However, that law included a provision that allows payday lenders that also offer car-title loans to continue marketing both. The language, industry critics said, freed payday lenders such as Advance America to offer virtually unrestricted loans by requiring customers to provide copies of their car titles.
W. Scott Johnson, a lawyer-lobbyist for Community Loans of America, a company that offers payday and car-title loans, helped write the disputed language. He declined to comment, saying he had not read the commission's order.
Contact Jeff E. Schapiro at (804) 649-6814 or jschapiro@timesdispatch.com.
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