Gov. Northam approves law to fight predatory lending

Published: Apr. 15, 2020 at 12:49 PM EDT
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Governor Ralph Northam approved a bill this past weekend that advocates say will help protect consumers from predatory lending.

The Virginia Fairness in Lending Act, passed by the House of Delegates and Senate earlier this year, is largely centered around the parameters of short-term loans. It tightens regulation on consumer lending, financing for personal or household purposes, and to close existing loopholes for corporations.

The governor did propose an amendment to speed up the law's start date from July 1, 2021, to Jan. 1, 2021, which will have to be approved by the General Assemby when they re-convene next week.

The law passed largely with support from Democrats, but was backed by some Republicans in each chamber.

It was patroned by Del. Lamont Bagby, D-Henrico, in the House and by Sen. Mamie Locke, D-Hampton, in the Senate, and the Virginia Poverty Law Center, an advocacy group for low-income Virginians, helped draft the legislation.

It essentially closes loopholes in existing Virginia law that allow high-cost lenders to charge consumers excessive rates for payday and title loans.

For years, payday lenders charged consumers in Virginia three times higher prices than in other states. One in eight title loan borrowers had a vehicle repossessed, which was one of the highest rates in the country.

Del. Mark Levine recalled receiving a $1,000 loan offer from a company with a 299% interest rate buried deep in the fine print.

“As the company compounds daily at this interest rate, this loan would cost anyone desperate enough to accept this offer more than $20,000 in interest and fees if they were to try to pay the $1,000 loan back in full just one year after receiving it,” Levine, a Democrat from Alexandria, stated in


If the loan was left for two years untouched, the interest cost would have risen to a staggering $400,000, Levine said.

But the new law is designed to help control situations like that one. According to a poll conducted by The Wason Center for Public Policy, Virginia voters overwhelmingly supported (72 percent) the reform.

Jay Speer, executive director of the Virginia Poverty Law Center, said, “We’ve been fighting for years to reform predatory lending, and it’s a relief that we can finally put this legislative fight to rest. We’ve struck the right balance so loans are affordable for borrowers and still profitable for lenders. There is no reason other states should allow lenders to charge higher prices either.”

The law also applies to car title loans, loans in which the borrower offers their car as collateral. It sets the interest rate on title loans at no more than 25% of the federal funds rate at the time of the loan.

An estimated 12 million Americans take out payday loans each year, racking up $9 billion in loan fees,

. Borrowers may fall into the “debt trap,” a situation in which a borrower is unable to pay back a loan due to high interest rates. The

that average annual percentage rates in the state are 251% for payday loans and 217% for title loans.

Several payday loan establishments declined to comment on the legislation when Capital News Service reached out for comment earlier this year. Peter Roff, a senior fellow at Frontiers of Freedom, a Northern Virginia-based nonprofit promoting limited government and free enterprise, wrote in a recent opinion piece that while consumer lending laws need reform, the current legislation would create inequality and less availability in the consumer credit marketplace. He said the lawmakers should focus on better reform and “not just ideas that are politically popular.”

The Virginia Fairness in Lending Act states that the amount needed to regulate consumer lending will be just under $300,000 and will be accumulated by fees required for lenders to become licensed. Currently there are 15 licensed lenders with over 150 locations in the state, in addition to online lenders.

“Internet lenders use these loopholes, like open-end credit, which have no regulation at all,” Speer said. “House Bill 789 and Senate Bill 421 close all these loopholes and set up a fair system that’s fair for borrowers and lenders.”

“Getting this legislation over the finish line remains a high priority for the Virginia Legislative Black Caucus (VLBC) as we continue our efforts to protect Virginia families from predatory lending practices that have preyed over our most vulnerable for decades,” explained Chief House patron and Delegate Lamont Bagby (D-Henrico). “This legislation was critical before COVID-19 started impacting our communities. Now, even more Virginians may find themselves in financial distress and vulnerable to predatory lending practices. We need to get these strong consumer protections enacted as fast as possible so people can benefit from more affordable credit.”