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Virginia delegates push payday loan reforms

October 7, 2006 - Fredericksburg, Virginia

When a Marine at Quantico Marine Corps Base couldn't pay off his $500 payday loan by the next payday, he kept extending it for a year and a half.

By the end, he owed $14,000 due to astronomical interest rates, according to Presha Merritt, the director of the Navy-Marine Corps Relief Society at Quantico.

Situations like this one are a reason consumer advocates are urging legislators to limit high-interest, short-term payday loans to the same 36 percent annual interest-rate cap that applies to other lenders in Virginia.

Representatives of the payday loan industry said such action would force them out of business, denying cash-strapped borrowers a convenient source of credit that can be less expensive than fees for bounced checks or late credit card payments.

"A 36 percent cap is a de facto ban on the storefront lenders," said Carol Stewart, vice president of government affairs for Advance America, the nation's largest payday lender.

Critics argued that borrowers often get trapped in a cycle of debt as they repeatedly renew their loans, which have average annual interest rates pushing 390 percent, or borrow from one payday lender to pay off another.

"People end up simply servicing their debt while never being able to retire the principal," Neil Walsh, a lobbyist for AARP Virginia, told the House Commerce and Labor Committee. "This is not financial assistance--this is financial disaster."

Here's how a payday loan works:

A borrower writes the lender a check for the principal, plus a fee of $15 per $100 borrowed up to the maximum loan of $500 allowed under Virginia's 2002 payday lending law. The lender holds the check until the customer's next payday, when the borrower comes in and pays off the loan. If the borrower doesn't show up, the check is deposited.

Del. John O'Bannon III, R-Henrico, is sponsoring legislation for the 2007 session to repeal the 2002 law that exempts payday lenders from the 36 percent cap. Del. Glenn Oder, R-Newport News, has filed a bill prohibiting making a payday loan to anyone who already has three such loans outstanding and creating a database to ensure compliance.

"We left the gate open, we let the horse get out and we've got to find a way to get it back under control," Oder said.

Payday lenders promote the product as a way to deal with a short-term cash crunch, such as an unexpected car repair or medical bill, but do not prohibit reborrowing.

O'Bannon said only 1 percent of Virginia payday loan customers use the service just once a year. According to state banking regulators, the average customer borrows from the same store 7.5 times in one year.

"Repeat borrowing is the lifeblood of the payday loan industry," said Jean Ann Fox, consumer protection director for the Consumer Federation of America.

Reggie N. Jones, a lobbyist for the industry, said his clients also are concerned about the approximately 20 percent of customers who take out a dozen or more loans per year, and are open to discussing ways to strengthen consumer protection.

However, he also said that not all the repeat loans can be viewed as evidence of a "cycle of debt." For example, he said some borrowers might start with a $300 loan, then renew the loan at lesser amounts until they work their way out of debt. "I think that's a reasonable and responsible way to use a payday loan," Jones said.

He said the demise of payday lending stores in Virginia would force borrowers into "a frightening alternative"--unregulated and even more expensive Internet lending.

North Carolina, Maryland and West Virginia do not allow payday lending, and a defense authorization bill that has passed the U.S. House of Representatives and is pending in the Senate would set a 36 percent cap on payday loans to military members and their dependents.

According to a Defense Department report, financial problems exacerbated by payday loan debts are hurting the nation's military readiness.

Merritt's office at Quantico sees many of these payday loan nightmares, and the online loans are worse, she said.

One Marine at Quantico took out a loan online. She borrowed $800, but before the next payday rolled around, she already owed $3,000 because of the interest rate, which started at 300 percent and increased weekly, Merritt said.

Tracking down the company was very difficult, but Merritt's office eventually found the Ireland-based operation.

Capping the interest rates will be a big help, Merritt said, but educating people about the pitfalls of the loans also is needed.

"If we educate them about the amount of mess people can get themselves into with this," she said, "most of the time, it's for things that they want and not what they need."

Capping the rates for the military isn't enough for some lawmakers.

"If we're going to have a 36 percent cap for the military, why isn't that fair for all Virginians?" said Del. Johnny Joannou, D-Portsmouth, who called the triple-digit interest rates "unconscionable."

Staff reporter Jenn Rowell contributed to this story.

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