Pressure Mounts on Va. Payday Lenders

Payday customers typically borrow a few hundred dollars against a future paycheck for a few weeks. Lenders hold a customer's personal check until the next payday, when borrowers pay off the loan or lenders cash the personal check, made out for the amount of the loan plus the fee. Loans are capped at $500 and are only available to those with a paycheck.

In Virginia, lenders can charge $15 for every $100 loaned. Calculated as an annual rate, the interest comes to 391 percent, according to industry officials and consumer groups. Industry supporters say the alternative -- bouncing a check -- costs far more, the equivalent of more than 1,300 percent.

In 2006, about 434,000 people in Virginia took out almost 3.6 million loans worth $1.3 billion, according to the state Bureau of Financial Institutions. That's roughly one in 18 residents.

They are people such as Bill Donaldson, a retired welder in Newport News, who took loans out every month for several years and could not keep up with payments. He died last year at 67.

His electricity was shut off five times; his phone service, 10 times. His landlord threatened to evict him a dozen times. A payday lender contacted his daughter, who paid off the loan.

"They really take advantage of elderly people who can't manage their money," said his daughter, Teressa Penland, 41, of York County.

Payday loans are supposed to be a way for borrowers to get a short-term loan for a one-time need, such as repairing a car or paying a medical bill, but many get caught in an expensive cycle of borrowing. Last year, almost 100,000 borrowers in Virginia took out 13 or more loans, according to the state bureau.

Bill Harrod, 58, of Upper Marlboro, who managed a payday store in the District, started speaking out against the industry after he noticed that some loans were five or more years old.

"That was the awakening for me. We weren't doing anyone a service," he said last week, taking a break from his job as a salesman at a Ford dealership. "I was ashamed of what I had been doing. I thought I was helping people, but I was kicking people when they were down."

Payday lenders operate in 38 states under a variety of restrictions. Some states, including Maryland and West Virginia, have never created laws allowing them. Others, such as North Carolina, once allowed them but now ban them.

Last year, Congress voted to place a 36 percent cap on payday loans for military personnel after hearing horror stories about soldiers and their families' debt.

The Virginia General Assembly passed the Payday Loan Act in 2002 to license and regulate the industry. After hearing from angry borrowers and their families, lawmakers tried to make changes this year. But negotiations fell apart when even opponents could not agree on whether to repeal the 2002 law, cap interest rates at 36 or 72 percent or limit the number of outstanding loans allowed.