Virginia used to have workable small-dollar lending laws. But over the past four decades, piecemeal changes slowly eroded state consumer protections and introduced loopholes that allowed lenders to charge much higher prices. And it is Virginians who have paid the price. Every year, hundreds of thousands of Virginia households use payday and other forms of high-cost credit, paying fees that can exceed the amount they originally borrowed.
Although many Americans use small-dollar loans, regulations vary widely from state to state — meaning that borrowers in some states have access to affordable credit while others enjoy few protections from lender overreaching. Proposed federal regulations could have established protections for payday borrowers nationwide, but the Consumer Financial Protection Bureau retracted the rules before they came into effect. As a result, cash-strapped households still depend on state legislatures to protect them from harmful credit terms. That’s what the latest reform bill aims to do.
Virginia first confronted the problem of high-cost, small-dollar lending more than a century ago. By the early 1900s, various “salary loan” and “chattel loan” companies had sprung up across the country to lend to working-class households. As one Virginia newspaper account described the situation, these lenders served those “whom dire necessity has driven to them for small sums of money.” Unable to obtain credit from banks, industrial workers instead sought quick cash from salary and chattel lenders, who operated under the radar and charged high prices. Although Virginia capped interest rates at 6 percent under its general usury law, the law failed to stop the spread of high-rate, small-sum lending. Even if the state shut down one lender, another would appear in its place.
Rather than allow unregulated lending to grow quietly in the shadows, Virginia social welfare groups concerned about the plight of the poor — such as the Legal Aid Society of Richmond and the Associated Charities — urged legislators to place the business under state oversight. In 1918, Virginia was among the first states to adopt comprehensive rules to govern small-dollar loans, based on a bill drafted by a national coalition of small-sum lenders and philanthropists from the Russell Sage Foundation. The drafters designed the bill, known as the Uniform Small Loan Law, to serve as a blueprint for states such as Virginia seeking to legalize and regulate small-dollar lending.
The 1918 law aimed to help working-class families by enabling reputable companies to lend legally, “upon fair and lawful terms.” It granted licensed companies an exemption from the general usury law, allowing them to make loans up to $300 and to charge up to 3.5 percent per month on unpaid balances. The legal rate was high enough to permit lenders to make a profit, while protecting borrowers from sky-high prices.
And the law was a success, increasing the supply of affordable small-dollar credit to meet borrower demand. Within 20 years, licensed small-dollar lending in Virginia surpassed $5 million a year.
Virginia updated and expanded its laws over the ensuing decades as new forms of credit developed, to protect borrowers against unaffordable prices while ensuring that lenders could still operate profitably. For example, in the 1950s, stores began offering “open-ended” credit plans that permitted customers to pay for goods in irregular amounts rather than according to a set payment schedule. So, in the 1970s, Virginia established maximum rates for store charge accounts and other forms of “open-ended” credit.
From time to time, Virginia also adjusted the maximum loan amount and interest rates that small-sum lenders could legally charge, as the cost of living rose and consumers demanded larger loans.
But cracks in this regime emerged in the 1980s and ’90s. In 1982, when interest rates were rising rapidly nationwide, Virginia repealed its rate caps for department stores and other lenders that made “open-ended” loans, permitting them to charge whatever the customer would agree to pay. In 1995, the state also removed rate caps on loans made by finance companies and other licensed lenders for more than $2,500 and set a flat rate cap of 36 percent per year on loans below that amount.
The bill’s sponsor, a banker, aimed to eliminate rate caps entirely, based on his belief “in the free-enterprise, competitive system.” In effect, these changes removed all rate protections for borrowers who took out open-ended loans or installment loans larger than $2,500. The flat 36 percent rate also made it difficult for licensed small-sum lenders, such as finance companies, to turn a profit on the smallest loans. As a result, consumers had to look elsewhere for loans of a few hundred dollars or less.
Check-cashing stores filled this void, charging much higher rates than licensed small-sum lenders. In the mid-1990s, some check-cashing stores in the Hampton Roads region began offering “check-advancement” services — better known today as payday loans. A customer would provide the store with a postdated check for a few hundred dollars and would receive, in exchange, the cash value of the check minus a service fee. One group of check-cashers charged more than 20 percent of the check value — amounting to a $60 fee for a $200 loan that had to be repaid in just a couple of weeks.
The Virginia Attorney General’s Office sued the check-cashers for violating state lending laws and scored a string of court victories that temporarily shut down the scheme. But some payday lenders found a loophole. They partnered with out-of-state, federally chartered banks, which are exempt from compliance with Virginia lending laws.
Rather than allow lenders to operate without oversight through these “rent-a-bank” arrangements, Virginia decided to legalize payday loans in 2002 by setting limits on the rates charged for them. But lenders continued to find loopholes.
As a result of this piecemeal process of amendment and repeal, payday and other high-cost lenders in Virginia today charge far more than they do in other states. For example, borrowing $500 for four months from a payday lender in Virginia costs $480, while the same credit costs $160 in Ohio after that state successfully overhauled its lending laws in 2018.
In the past, Virginia was a national leader in consumer credit regulation, thanks in part to the efforts of the alliance of reformers that championed passage of the Uniform Small Loan Law in 1918. Today, over a century later, a new coalition of leaders from business, community groups and government has urged Virginia to reform and update its lending laws once more to restore affordability for consumers. After decades of falling behind, this fight will determine whether Virginia reclaims its national standing on fair lending by enacting tried-and-true reforms that are projected to save borrowers more than $100 million annually while expanding access to lower-cost credit for those who need it, or whether special interests will win out.