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Virginia trying to set spending limits

August 13, 2006 - Hampton Roads, Virginia

Del. G. Glenn Oder, R-Newport News, has submitted a bill for the 2007 General Assembly session that will put new restrictions on the payday lending industry.

The bill is similar to one Oder submitted during the 2006 session. That legislation was ultimately watered down to the point that Oder killed his own bill. The 2007 version, however, is weaker than the original 2006 bill and might draw some opposition from payday loan opponents.

Oder is one of many Virginia legislators who want to slap restrictions on the booming payday lending industry. The evolution of Oder's attempts to regulate the high-interest loans shows how the industry has used its growing political might to fend off its opponents.

"I would prefer that we didn't have payday lending in Virginia, but I don't know how we could eliminate it," said Oder. "My goal is to do what I believe is politically possible in Virginia."

People who take out the payday loans give a postdated check to borrow up to $500 at annual interest rates that can reach 782 percent. Virginia now has more than 750 lenders, which made almost $1.2 billion worth of loans to 446,000 consumers in the state in 2005.

Payday lenders, along with their supporters in the General Assembly, argue that the loans fill a short-term need for cash that banks won't provide. They say the loan interest is better for a consumer than losing utility services or bouncing checks.

One of the key compromises between industry and legislators who legalized payday lending in 2002 is that consumers can't extend a loan they can't afford to pay off. By paying more fees and interest, these so-called rollovers compound interest on the loan.

"But of course, they allow back-to-back loans, which is the same thing," said Jean Ann Fox, a York resident who is director of consumer protection at the Consumer Federation of America.

Financially troubled consumers who are broke after paying off one loan often take a second loan out to pay for the first. While avoiding the problem of compounding interest, this still locks borrowers into a cycle of taking the high-interest loans out in perpetuity to pay off the last one.

Oder's 2006 bill would have banned people from having more than one loan out at a time. It would have forced payday lenders to use a state-maintained database -- which could be monitored by state regulators -- of all of the loans.

Fox said that Florida allows only one loan at a time, but the average person still takes out eight a year. As long as someone can take out a new loan to pay the last one off, the cycle of financial damage continues, she said.

Oder's 2006 bill to impose even smaller restrictions than the 2007 bill prompted payday lenders to vigorously fight back. The industry has poured hundreds of thousands of dollars in donations to legislators and hired lobbyists over the last few years in Richmond.

Through the pressure they applied to other lawmakers, Oder was forced to water down the bill substantially. To get the bill voted on, Oder amended it in a way that would make consumers promise that they are not taking out one loan to pay off another.

But the database requirement was removed. Nothing would have prevented someone from taking out loans from multiple companies. The bill would have required a lender to offer a long-term repayment plan only if someone took out four loans from the same place.

By the time the bill reached the House of Delegates for a vote, Oder conferred with other payday opponents and pulled his own legislation.

They agreed that the watered-down bill would have made it impossible to return in 2007 and take more substantial action, said Oder.

"Without a database, it's not going to be effective," said Oder.

In the 2007 version of the bill, Oder included a provision that would allow people to have only three loans out at a time. That means consumers could perpetually take one loan out to pay off another.

"That is a recipe for a debt trap," said Fox. "That is not a consumer protection."

The Oder bill also says that after someone pays off a payday loan, they must wait at least two days before they can get another one. He hopes the inconvenience of the waiting period, coupled with being allowed to have only three at a time, will help the problem.

"Trying to prevent the spiral of debt is the most important thing we can do," said Oder.

Almost 91,000 Virginians took out at least 13 loans last year from a single lender. State regulators don't know how many people took out loans from multiple companies. Fox said there's so many lenders now, it's hard to make a trip to one inconvenient.

"They're on every corner in Newport News and outside the gate of every military base in the area," said Fox.

Del. Kenneth Alexander, D-Norfolk, said he knows Oder's heart is in the right place, but doesn't think opponents of payday lending will support a bill that allows multiple loans at once. The huge interest rates must also be addressed before anything else, said Alexander, who believes that some meaningful changes will be made in 2007.

"There are going to be more consumer protection clauses placed in bills," said Alexander.

Oder argues that since some states allow up to $1,500 per loan and Virginia allows only $500, Virginians already have some protection from incurring huge debts.

The 2007 bill retains one key new pro-consumer feature from the 2006 bill. A lender must give the customer two months after a loan is in default to enter into a repayment plan before the payday company can sue them.

Alexander said he might introduce a bill to ban payday lending, which legislators tell him privately that they oppose because of constituent complaints. He disagrees with Oder's philosophy of trying to do what is politically possible.

"You've got to do what is principally right," said Alexander.

"I don't care what is politically right."

News Source

Daily Press, Chris Flores, Staff Writer

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