Virginia Bill Would Authorize Payday Lending

In a move that took consumer groups by surprise, the Virginia House of Delegates passed a bill in mid-February that significantly lowers the barriers to payday lending in Virginia. The bill now moves to the state Senate.

Virginia currently permits payday lending but the state's 36 percent cap on the annual percentage rate for loans under $2,500 has limited the expansion of payday loan operations. Some lenders have circumvented the cap by forging distribution partnerships with national banks. National banks are exempt from such rate ceilings. The new bill would reduce the need to partner with a national bank by exempting payday lenders from the rate cap. Payday lenders would come under the regulation of the state's commissioner of financial institutions and would limit the charge on payday loans to 15 percent of the total loan balance for a 7 to 30 day loan term.

William Webster, president of the Community Financial Services Association (a trade association for the payday loan industry) told the American Banker that his organization helped shape the Virginia bill because it made more sense to regulate all payday lending than to have some operate under different rules according to whether they had partnered with a national bank. Webster said, "The Virginia bill strikes a pretty good balance between consumer protections and allowing the industry to operate in a reasonable way. . . All of the existing companies charging $25 and $30 (per $100 loaned) are going to find themselves under considerable pressure to lower their rates."

Consumer groups had been backing an alternative bill in Virginia that would effectively have banned payday lending. The alternative bill would have made it illegal for a bank or lending partner to hold consumer checks as security on a loan. Of course, post-dated checks are the commonly used "collateral" which payday lenders accept in exchange for making loans. The bill was tabled in the House of Delegates, with some members arguing that it would have been overturned by the courts.