By Mike Stetzer
Proposed regulation of predatory lenders has become a popular issue during recent legislative sessions around the country, and reform of this type shows no sign of slowing. Virginia, it seems, is the latest state to take on the challenge of regulating what are referred to as "alternative" or "fringe" lenders.
Examiner.com reports that Virginia lawmakers recently passed a law designed to minimize the debt accumulated by borrowers taking out payday loans by restricting borrowers to one payday loan per business day and lengthening the period of time during which repayments can be made.
Part of the reform reportedly requires the development of a user database to track borrowers and prevent them from taking out multiple loans on any given day. Apparently, the funds for this database will come from the borrowers themselves, in the form of a temporary $5 fee tacked on to the price of their loans.
But consumer advocates have pointed out that the average payday loan of $325 ends up costing borrowers a whopping $793 - 244% of the original price. In light of statistics like these, they believe that further protections are needed.
So what are legislators proposing?
Evidently, Councilman Justin Wilson has suggested increasing the taxes levied on certain predatory lenders, including payday lenders and auto title lenders. As the law now stands, the Commonwealth of Virginia requires that all financial services institutions (including hedge funds, stock brokers and payday lenders) pay a 35-cent tax for every $100 of gross revenue brought in.
But Wilson advocates raising that tax to 58 cents per hundred dollars for payday lenders and auto-title lenders. And city officials have evidently noted that the types of predatory lenders targeted in this proposal are predominantly located in lower-income areas, where residents tend to have access to limited educational resources on financial matters.
Supporters have apparently estimated that the Commonwealth would collect about $13,000 annually from the hiked tax. If Wilson's proposal becomes law, that money would go toward education programs for low-income Virginians, in an effort to expose borrowers to the potential costs of and alternatives to payday lending.
According to the Louisville Courier-Journal, similar measures have been proposed in Kentucky. HB 500, which recently passed the state House, would require payday lenders to adhere to similar regulations as the ones in Virginia - limit borrowers' loans to one per business day and compile a database of payday borrowers.
And the Kentucky bill, if it passes the Senate, will also call for greater enforcement of payday lending regulations that are already in place, sources indicate. Apparently, about one-fourth of current payday loans issued in Kentucky are technically illegal because they don't comply with one or more terms of the current legal code.
While lawmakers have allegedly admitted that these are small steps toward eliminating the problems caused by payday lenders, they believe the impact on struggling families will be significant.