Payday Lenders Use SCC

"The debtor often belongs to a class which needs protection, and his needs are sometimes so urgent as to extort from him any conditions which the creditor seeks to impose . . . .The cupidity of lenders, and the willingness of borrowers to concede whatever may be demanded or to promise whatever may be extracted in order to obtain temporary relief from financial embarrassment, as would naturally be expected, have resulted in a great variety of devices to evade the usury laws."

The Virginia Supreme Court in 1941.

The financial crisis that has spread across America and the world has confirmed the wisdom of the Virginia Supreme Court in 1941, that unfettered free markets with lax oversight, inadequate regulation, and lack of legislative constraints will result in widespread abuses by lenders and jeopardize the financial system.

Against the wishes of the public and the formal requests from more than 65 local governments representing about 60 percent of the population of Virginia, the General Assembly decided against imposing a 36 percent interest-rate cap on payday lending in the 2008 session.

Instead, the legislators painstakingly balanced the payday lending industry's input, compromised, and decided to impose limited restrictions and no cap on payday loans, believing that the payday industry's assertions that it would operate under the reforms the legislators had prescribed.

Unfortunately, what has proven true nationally and internationally has proven true in Virginia as well: Failure to impose restrictions and enforce and regulate the financial industry can result in catastrophe from Wall Street to Main Street. The fact that the payday lending industry is the least reputable of financial actors provides ample warning that clear and concise limits and strict oversight are the only ways to avoid disaster for those who use their products.

Despite the admonitions of the General Assembly, the payday lenders have not only failed to reform in any way, but have brazenly seized upon the regulatory leeway it granted. They have become even more predatory and added more weapons to their arsenal against their customers, the most financially vulnerable of our fellow citizens. This is more than a slap in the face of the legislators who protected them in 2008; it is an insult and declaration that they will take every action conceivable to continue their aggressive and reprehensible lending practices.

For example, in September payday lenders received permission from the State Corporation Commission to offer open-end loans at their payday loan locations. Open-end loans are loans with no set time of repayment. The borrower is required only to make a periodic minimum payment and the loan can continue in perpetuity.

The biggest payday lender in Virginia started doing open-end loans on Dec. 1, charging an interest rate of 365 percent if the borrower allows the lender to automatically deduct payments from his account -- and 456 percent if he doesn't.

The payday lenders are making open-end loans under Va Code 6.1-330.78, which exempts such loans from the 12 percent Virginia usury cap and the 36 percent Small Loan Act cap.

Even worse, open-end loans are subject to no regulation at all. These lenders do not have to be licensed or bonded, and no state agency will have authority to review their business practices. None of the negotiated restrictions on payday lenders that are now in the Payday Loan Act or that will go into effect Jan. 1 will apply to these loans:

Credit unions, churches, and employers are now providing short-term small loans at 36 percent or lower, and many have demonstrated that they can do so at a profit. The predatory practices of payday lenders make it clear that no loan at all is better than a loan from a payday lender.

The General Assembly can easily rectify the injustice of predatory payday lending without the millions or billions -- or now trillions -- of dollars required in the national bailout. It can be done without a single cent of taxpayer money. It only requires that the legislators impose an imminently reasonable 36 percent cap on payday loans and repeal or amend the open-end loan statute to prevent its use by payday lenders in an egregious end-run around the legislature's intent.
Michael H. Lane and Ward R. Scull III are cofounders of Virginians Against Payday Loans (VAPL). Lane lives in Gloucester and is a retired deputy commissioner of U.S. Customs. Scull lives in Newport News and is the owner of Virginia Transfer and Storage Co. Contact them at (757) 880-7926 and http://www.stoppaydayloans.org.