Bill Would Put Limits On High-Cost Borrowing

By Anita Kumar
Washington Post Staff Writer
Friday, March 7, 2008

RICHMOND, March 6 -- State legislators agreed Thursday to the nation's most stringent reforms of the payday loan industry in hopes of reducing the cycle of debt for financially strapped customers who repeatedly take out high-interest, short-term loans.

The overwhelming vote by the House and Senate followed years of contentious debate in the General Assembly and a fervent lobbying blitz by payday loan supporters and opponents.

"We are looking at a bill that's the toughest, most restrictive in the country,'' said Del. Terry G. Kilgore (R-Scott), chairman of the House Commerce and Labor Committee.

The bill limits borrowers to one loan at a time, restricts how many they can get in a year and provides them more time to repay the money. Borrowers who take out cash advances against their paychecks would not pay annual interest rates of more than 36 percent, although other fees would increase.

The bill passed the Senate by a vote of 37 to 2 and, later, the House by 91 to 9. Negotiations continued minutes before the votes.

The bills will be sent to Gov. Timothy M. Kaine (D), who has made regulating the payday loan industry a priority. He has 30 days to review the proposal.

"It was very important that a bill got to my desk,'' Kaine said. "The last few years we have missed opportunities because of people digging in their heels."

The payday loan industry has exploded in Virginia since the stores first opened in 2002. About 800 stores disbursed about $1.5 billion last year.

Three states that border Virginia, including Maryland, do not allow payday stores. The District passed stiff revisions last year that have forced some businesses to close.

Jamie Fulmer, a spokesman for Advance America, the nation's largest payday loan company, agreed that the law, if signed by Kaine, would be the most restrictive reforms placed on the industry. He said the changes would translate into at least a 20 percent decrease in revenue for Virginia stores, which could force some to shut down.

"We just don't know how our customers are going to respond,'' he said. "It's too early to tell."

On Thursday, supporters and opponents were unhappy with the compromise bill, but legislators said it was the best deal they could come up with after failing to agree to anything in previous legislative sessions.

"This is not a perfect bill," said Sen. Kenneth W. Stolle (R-Virginia Beach). But it preserves "the right of citizens to take advantage of payday loans if they do it in a responsible manner, and at the same time protects those individuals that seem to get into an endless cycle of debt," he said.

Several amendments were added Thursday to require lenders to tell borrowers about extended payment options and lengthen the time customers would have to wait to take out a new loan after taking out five loans in six months.

Ward Scull, a Newport News businessman who formed Virginians Against Payday Loans last year after one of his employees was unable to pay off her loans, said the bill will help but does not go far enough.

"It appears the debt cycle has not been broken. The debt trap hasn't been broken,'' Scull said. "Is it better? Is it a step in the right direction? Yes."

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 a fee. Loans are capped at $500 and are available only to those with a paycheck.

Stores can currently charge $15 for every $100 loaned. Calculated as an annual rate, the interest comes to 391 percent, according to industry officials and consumer groups. Without the loans, industry supporters say, many customers would bounce checks, which costs far more, the equivalent of more than 1,300 percent.

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

"For many, a payday loan is . . . compared to crack cocaine because it simply reaches out and grabs a person,'' said Del. Harvey B. Morgan (R-Gloucester), one of the chief sponsors of the 2002 law that opened Virginia to payday lending. Morgan said he now regrets it.

The House and Senate had previously passed their own proposals but did not strike a compromise until this week, with Saturday's end of the session looming. Legislators expect to try for further reforms in future years.

"We would rather have something than nothing,'' said Del. Dwight Clinton Jones (D-Richmond), chairman of the Legislative Black Caucus, which made payday lending reform a priority this year. "We're not satisfied with the deal. [But] it's a step in the right direction."

Staff writers Tim Craig and Sandhya Somashekhar contributed to this report.