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Virginia Considers Measure Aimed At Payday Lenders

Lawmakers vote to close loophole enabling high-cost loans

February 26, 2009

Lawmakers Wednesday voted to close a loophole, outlawing payday lenders from offering open-ended loans, which can have astronomical interest rates and are currently unregulated. Payday lenders began offering these open-ended loans last year after the legislature placed restrictions on traditional payday loans, which are usually for a term of two to four weeks.

In the Virginia Senate, Republicans joined Democrats to unanimously pass the measure. It would also prevent these lenders from making payday loans for 10 years if they abandon their licenses so that they could offer open-ended loans.

Leaders in the House say they also expect the measure to pass their chamber. Gov. Timothy Kaine is expected to sign it, though a spokesman declined to definitively say he would.

Under the open-ended credit law, payday lenders were able to charge any rate they want as long as they charge nothing for the first 25 days.

Very few payday lenders are expected to give up their licenses for the chance to continue making open-ended loans. Even with the restrictions, most find business to be highly profitable.

A payday loan is a short-term loan obtained when a borrower writes a check dated in the future. To get a loan, a borrower must show the payday lender a pay stub and then write the lender a check for the cash loan. The check is usually made out for a later date — often one month and one day after the date of the loan. The lender gives the borrower cash in return, but for an amount less than the value of the check.

The difference between the amount for which the consumer writes the check and the amount the consumer is paid in cash is the lender's profit, or finance charge. Payday lenders often charge between $15 and $50 for every $90 borrowed, which only covers the few short weeks of the loan term. After that, the consumer must pay the lender back or pay the lender even more in finance charges.

Most of the time, a consumer doesn't have the funds in his or her checking account to cover the post-dated check when it is written, and may not have the funds when it comes time for the check to be cashed. When payment comes due, if consumers can’t cover the check, they are often encouraged to roll the overdue loan into a new loan, incurring new fees and increasing the amount of the loan. This loan "flipping" easily can lead to the consumer using most or all of the money borrowed to pay the lender's costly fees.

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