With new Va. reforms, payday loans plummet

New restrictions that cut down on the number of payday loans that borrowers can get have drastically reduced the number of the short-term, high-interest loans issued in Virginia.

Last year, Virginia's payday lenders made nearly 3.4 million payday loans, or about 281,000 each month. Through the end of May, lenders had issued 226,807 loans, an average of 45,000 per month -- an 84 percent decline, according to the Bureau of Financial Institutions.

That puts Virginia on pace to issue fewer than 600,000 payday loans for the first time since the lenders were authorized to do business in the state in 2002.

The bureau derived the information from a database that was required as part of reforms the General Assembly passed in 2008. The reforms came after years of infighting among legislators, who argued that payday lenders prey on the vulnerable, and those who didn't want to take away the fast-cash option for people who don't qualify for traditional credit.

Legislators limited borrowers to one payday loan at a time and doubled the amount of time borrowers had to repay the loans, among other changes.

Before then, payday lenders charged $15 per $100 loaned, and it was due on the borrower's next payday. The short term of the loan pushed interest rates into the triple digits, and borrowers often took out several loans at one time or consistently rolled over their original loan, sinking deeper into debt.

The changes drove many lenders out of the state, including Mason, Ohio-based Check'n Go, which closed its 68 Virginia stores this year.

As of Tuesday, there were 526 payday-loan stores in Virginia, down from a high of 832 in 2007.

"It's definitely good news and bad news," said James W. Speer, executive director of the Virginia Poverty Law Center. "The good news is that there are less payday loans. The bad news is that they just shifted to cartitle lending."

Before the law took effect in January, the majority of the state's payday lenders began offering other high-interest loans, like lines of credit or car title loans, in which borrowers hand over the title to their vehicle to secure a loan for up to half the car's value. If they fall behind, the lender can take the car.

Those types of loans fall under Virginia's open-end credit law, which allows lenders to charge whatever they want as long as they don't charge anything for the first 25 days. Open-end loans allow for a revolving line of credit similar to a credit card.

Upset that payday lenders sidestepped the new law, this winter legislators passed a law banning those with payday-lending licenses from offering unsecured open-end loans. They can offer car-title loans.

Speer and others who fought for tougher regulations for payday loans asked legislators to cap the interest rate on open-end loans at 36 percent, but a bill to do so died this winter. A group of lawmakers is scheduled to meet this month to study the issue.

"I think the threat of us doing more in 2010 is very real," said Del. Glenn G. Oder, R-Newport News, who has fought against payday lenders.