Alexandria Tax Plan Targets Payday Loans
Monday, April 21, 2008
Alexandria is proposing to impose a steep new tax on payday lenders operating within the city, but the industry is vowing to fight the measure.
Under a plan proposed by City Council member Justin Wilson, the city would use the money to offer consumer education services to low-income people who are taking out the high-interest, short-term loans.
"Here you have a business that preys on low-income folks and their weaknesses," Wilson (D) said. "These lenders have a very detrimental effect on our community in perpetuating the cycle of poverty."
Officials representing the payday lending industry said the city is unfairly targeting them. Attorney Lewis Wiener recently told the council that Advance America, the nation's largest payday advance lender, would sue the city if it enacts the higher tax.
Wiener said many lenders charge high interest rates. He said that although payday lenders are permitted to charge fees for a $100 loan equal to an annual interest rate of 391 percent, overdraft fees at ordinary banks for the same amount can run as high as 913 percent or 1,329 percent for a bounced check, he said.
"If you want to call us predatory, who's next?" Wiener said.
Payday loan customers typically borrow a few hundred dollars at a time to cover a shortfall, paying it off with a future paycheck. Payday lenders take personal checks from the customers but agree to hold them until the customer's next payday, making the check out for the amount of the loan plus a fee. Many customers then fall short on the next month's bills and return for another loan. Industry supporters say customers use these loans to avoid paying even higher bounced-check or utility-disconnection fees.
On Wednesday, the Virginia General Assembly will consider amendments by Gov. Timothy M. Kaine (D) to legislation approved this year tightening regulation of payday loans. The bill would limit the number of loans a customer could receive in specific time periods.
The original bill called for a 36 percent cap on interest rates on payday loans.
"The governor would have liked to have seen a straight 36 percent cap, but his primary concern was that we get something done to protect vulnerable people," said Delacey Skinner, a spokeswoman for the governor.
Under the Alexandria proposal, payday and car-title lenders would face a business license tax of 58 cents for each $100 in gross receipts, up from 35 cents for each $100 of gross receipts, which is the general rate for financial services firms. The tax would generate an estimated $13,000 annually, which the city wants to devote to consumer financial education.
"I think it is a good symbolic gesture," said Alexandria council member Rob Krupicka (D), but he said he is worried about the potential cost of litigation by payday lenders. "I don't want to go down the path where we are paying more in legal fees than we are generating in revenue," he said.
The city would be taking on a formidable enemy. Advance America, based in Spartansburg, S.C., reported $709.6 million in revenue in 2007 and had $54.4 million in profits.
Payday loans were illegal in Virginia until about six years ago. In 2002, the General Assembly permitted the industry to enter the state when it began allowing lenders to make loans at annual percentage rates reaching as high as 391 percent, or $15 for every $100 loaned. By 2006, about 434,000 people in Virginia had taken out loans worth $1.3 billion, according to the state Bureau of Financial Institutions.
The federal government banned payday lenders from charging military personnel more than 36 percent interest for payday loans after media reports profiled service members who had taken out payday loans and fallen deeply into debt.
Wilson said he believes Alexandria will persist in its plan to impose the higher tax on payday loans. He said officials want to underscore their distaste for loans they say impose hardships on city residents, although he said they do not want to expose the city to legal liability.
"We don't have anything to be worried about from a legal perspective," Wilson said. "It's pretty clear we are on safe ground here."