Lenders Find Loopholes Around Virginia Law Limiting Payday Loans

RICHMOND, Va. -- Some of the nation's most sweeping reforms on payday lenders will take effect in Virginia Thursday, but some short-term, high-interest lenders are getting around the new law by offering different types of loans.

Legislators ended three years of debate over the industry last winter when they passed a law that limited borrowers to one payday loan at a time and extended the length of time they have to repay it, effectively limiting how many loans they can get each year.

Lawmakers put off the effective date until Jan. 1 to allow time to set up a database to track the loans.

In the meantime, the State Corporation Commission gave 11 payday lending companies permission to offer open-end credit products. Another seven applications are pending.

In Virginia, lenders offering open-end credit -- similar to a credit card -- are unregulated. They can set whatever interest and terms they wish as long as they don't charge anything for the first 25 days.

Until now, payday lenders were allowed to charge $15 for each $100 loaned, with payment due on the borrower's next payday. The short term of the loan pushes interest rates into the triple digits.

Advocates had called for a 36 percent interest rate cap, but legislators didn't go that far for fear of jeopardizing a source of credit for those who can't qualify for traditional loans.

Consumer advocates and some lawmakers say the lenders have been trying to circumvent the law, and say it shows that more should have been done.

"I think it's outrageous that after all that we went through in the General Assembly last year that they would then just go right out and try to avoid the new law," said Jay Speer, executive director of the Virginia Poverty Law Center.

Del. G. Glenn Oder, R-Newport News, who sponsored the new law, said he will file legislation to prohibit payday lenders from operating under the open-end statute.

"Too much work went into reforming payday loans in Virginia to allow the open-end statute to be used to circumvent those laws," Oder said.

The lenders say they are just trying to remain competitive.

"I think we're looking at what products are out there that may be appealing to consumers in order to better serve our customers in addition to the payday product," said Jamie Fulmer, spokesman for Advance America, Cash Advance Centers Inc., the nation's largest payday lender. The company has about 150 stores in Virginia.

Fulmer said the new laws changed the traditional payday loan so much that lenders aren't sure if it borrowers still will want it.

Advance America recently began offering an open line of credit up to $750, for which customers are billed once each month at about 400 percent annual interest.

QC Financial Services, based in Overland Park, Kan., also will offer an open-end credit product in Virginia, company spokesman Tom Linafelt said.

Some companies, like Advance America and Check 'n Go, also have started offering Internet payday loans. During negotiations, lobbyists for the industry argued that online loans were more dangerous for customers and should be the focus of legislators' ire.

Most of Virginia's neighbors -- including North Carolina, West Virginia, Maryland and the District of Columbia -- have joined 12 other states in capping the interest rate payday lenders can charge. Lenders have tried to introduce new products in several of those states, including Ohio, where voters last month upheld a 28 percent rate cap and limits on the numbers of loans borrowers can get.

"There's going to continue to be a demand for credit products," said Jeff Kursman, spokesman for Cincinnati-based Check 'n Go. "They may change their face and they may look a little bit different in the short term, but in the long term there's always going to be a demand."

In Virginia, licensed payday lenders must get SEC approval to offer other kinds of loans in their stores.

Advocates worry that more lenders will begin offering car title loans, where a person's car is held as collateral and nonpayment could result in loss of the vehicle. Virginia is unique in that car title lenders operate under open-end credit laws.

Earlier this month, volunteers across Virginia stood outside dozens of car title lenders handing out fliers urging customers to get their money from another source.

They hope to persuade legislators to cap the rates car title lenders can charge.

Del. Kenneth Melvin, D-Portsmouth who fought to restrict payday lenders, said he thought legislators would have a "measured response" to capping the interest of car title lenders because they haven't proven to be as much as a problem as payday lenders.

Melvin was upset that payday lenders were trying to get around the new law.

"It seems as though it is almost like plugging a dike, dealing with these people," Melvin said.

With all 100 House of Delegate seats up for election this year, advocates say they will continue to push for rate caps.

"I know the legislators feel like they need a break after the payday lending fight, but the reality is that ordinary people are not getting a break," said LaTonya Reed, an analyst for the Virginia Interfaith Center for Public Policy. "They're struggling every day trying to pay these loans off."