Payday Parasites

Thursday, February 14, 2008

BY OPENING Virginia's doors to the payday lending industry in 2002, lawmakers in Richmond in effect declared open season on some of the state's most financially strapped and vulnerable residents. In the wake of the legislature's action, hundreds of lending stores set up shop, mostly in poorer neighborhoods, offering quickie loans at usurious interest rates to people living paycheck to paycheck -- in other words, to borrowers who could ill afford interest rates approaching 400 percent. So many Virginians have been so badly gouged that even one of the primary sponsors of the 2002 legislation has publicly recanted. "I'm embarrassed I was ever affiliated with it at all," said Del. Harvey B. Morgan (R-Gloucester).

The loans are a rip-off, luring working-class borrowers into a sinkhole of debt. Lenders offer a cash advance of a few hundred dollars backed by the borrower's next paycheck, charging fees of about $15 per $100 lent. If borrowers do not repay in full or on time, and the large majority do not, the lenders can withdraw the money from a borrower's bank account or, if that's empty, roll over the debt to the next paycheck.

It's hard to see how Virginians have benefited from such legalized parasitism. On the other hand, it's perfectly plain what compelled lawmakers to allow it. The payday lending industry has dumped cash into lawmakers' coffers for years. A pair of friendly legislators, Phillip A. Hamilton (R-Newport News) and Robert Tata (R-Virginia Beach), were even treated by industry lobbyists to a trip to the Masters golf tournament in Georgia. The industry also has a powerful ally in Sen. Richard L. Saslaw of Fairfax, the Democratic majority leader.

Shamed in part by Congress, which capped interest rates for payday loans to military families at 36 percent, Virginia lawmakers have passed bills doing the same, while at the same time allowing heavy fees to drive up the real cost to borrowers. The House-approved version is somewhat tougher than the Senate's -- it would cap the number of loans a borrower could obtain annually and extend repayment times -- but neither goes far enough. Both pieces of legislation would retain a system by which these lenders can prey on vulnerable Virginians.

Mr. Saslaw and the lending industry's other champions say that if borrowers are unable to turn to payday lenders, they'll go to the loan shark on the corner. That's a dubious argument. The fact is that payday lenders manufacture demand by dangling money before generally unsophisticated borrowers -- on terrible terms. Lawmakers should listen to the stories of borrowers trapped by payday loans and reassess their position.


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