November 6, 2006 — Payday lending has become a big business and the subject of much controversy in Virginia, pitting industry supporters against consumer advocates who object to the practice’s short-term, high-interest loans, and leaving state legislators with a decision to make regarding regulation.
Jay Speer, executive director of the Virginia Poverty Law Center, defended consumers while Michele Satterlund, an attorney from Macaulay & Burtch, P.C., represented the payday lending industry at a panel Nov. 1 at the University of Virginia School of Law. State Sen. Creigh Deeds also spoke about the role of legislators in regulating the industry at the event, which was sponsored by Family Resource Clinic, the American Constitution Society for Law and Policy, and the Federalist Society.
Payday loans are generally governed by the states, explained moderator Prof. Daniel Nagin, director of the Law School’s Family Resource Clinic. But the federal government recently got involved when Congress passed legislation placing a 36-percent cap on the annual interest rate of loans taken out by active-duty military personnel.
Obtaining a payday loan in Virginia is as simple as writing a check, Nagin said. Anyone who has a checking account is qualified to take out a loan. The payday lender will charge the borrower $15 for every $100 that is loaned. At the end of the loan period, which can be as short as seven or up to 30 days, the borrower must return to the store to repay the loan, or the company can cash the check that was written at the beginning of the transaction. The maximum a borrower can take out under Virginia law is $500. In 2005, 90,000 Virginians took out more than 13 loans from the same lender. This figure does not include how many people took out loans from multiple lenders.
The payday loan industry in Virginia has grown from a $165 million business in 2002 to more than $1 billion worth of transactions in 2005, Nagin explained. There are approximately 750 authorized payday loan outlets throughout the state.
The Virginia General Assembly is currently reviewing two bills that would affect the Payday Loan Act of 2002, which authorized payday lending companies to set up shop in Virginia and exempted the industry from the prior 36-percent interest rate cap. The first bill repeals the Act; the second bill introduces an amendment calling for a real-time database that would force payday lenders to report the identity of the borrower and the terms of the loan to the state. Lenders would be able to search the database when a prospective borrower wants to take out a loan. The lender would be prohibited from lending money to patrons who had three or more outstanding loans. Finally, lenders could not loan money to anyone who had terminated a loan contract within the previous 48 hours.
Before the Payday Loan Act, there was a payday lending industry in Virginia, Speer explained, primarily situated around military bases, which payday lenders tend to target, as well as low-income and minority groups. These lenders were national and out-of-state banks that partnered with local businesses and could not be regulated. Once the Payday Loan Act was passed, payday loan outlets cropped up on every street corner, he said. “For every McDonald’s, there’s at least two payday lenders in Virginia,” Speer said.
Not only is payday lending easily accessible, it is an incredibly profitable business and competitive interest rates are nonexistent. Virginia caps the interest rate on a one-week loan at 780 percent and 390 percent for two-week loans. “As bad as the interest rate is, that is not the worst part about payday lending. The worst part about payday lending is what we refer to as the ‘debt trap.’ Payday loans are specifically designed to trap the borrower into repeat loans and this is why reforms of this industry will never work” he said.
The obligation to pay back the loan in two weeks often means that the borrower cannot pay their bills for the following week and will need to take out a loan every two weeks, leading to a cycle of debt. Patrons often borrow from more than one payday lending agency. “The truth is they are using the product exactly as it is intended and everybody is doing it,” he said. “By far, the statistics show everyone gets loan after loan after loan.”
Financial emergencies, Satterlund maintained, are a personal matter and borrowers come to payday lenders because they do not want their families or employers, for example, to know about their cash-flow problem. “This is 2006. I am not going to go to my employer; that would be a really bad career move. Getting a cash advance [from your employer] is just something you don’t do.”
Satterlund commented on the fact that Speer did not offer alternatives to payday loans for people who need cash immediately. “There are no viable alternatives being presented and there is a market need. We are a product that serves that market.”
Furthermore, the industry is not targeting military personnel, low-income and minorities, Satterlund added. “To say we’re going after low-income people and choosing the military—no, we’re placing stores where we anticipate market need. It’s smart business decisions,” she noted. “People are paying for the convenience to keep it personal.”
Countering Speer’s point, Satterlund argued that consumer advocates who are against payday lending are taking on a big-brother role. “When I hear Jay talk, it’s as if he’s saying people who find themselves in financial hardship are not very smart, that’s the message I get. They’re not very smart, they can’t control their money, let’s control their money for them.”
If the Payday Loan Act were to be repealed, people who staff the payday loan companies would lose their jobs, leases would be ended and the people who rely on the service would all be affected, she charged. It would have a huge impact on Virginia’s economy and “no one’s talking about those issues,” she said.
In response to Speer’s concern about payday loans being used inappropriately, Satterlund argued that even if payday loans are outlawed, irresponsible people will still get loans on the Internet, abuse credit cards, and bounce checks.
When wading through the pros and cons “what is clear is there is a market for short-term loans,” said Deeds. Something has gone awry when the federal government has to step in and restrict payday lenders from charging high-interest rates on short-term loans to military personnel and their families, he noted. However, Deeds said, there must be a series of questions answered before payday lending is banished from the state. For example, what would happen if it was eradicated? Or who will fill this need for payday loans if the industry is taken out?
“If we are going to continue to allow this industry to exist in Virginia, we’re going to have to make sure that it is profitable so that it can exist but that it doesn’t take advantage of people.”