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Payday loans general assembly, stop the usury

January 23, 2008 12:15 am

RICHMOND--Do Virginians really need payday loans? A new study from Virginia's southern neighbor proves that states that outlaw predatory payday-lending practices do not put their citizens in a credit crunch. In fact, there is no negative effect on the community.

The University of North Carolina Center for Community Capital drafted the study for the North Carolina Commissioner of Banks. It concluded that "the absence of storefront payday lending has had no significant impact on the availability of credit for households in North Carolina."

Everyone seems to agree that low-income Virginians need access to credit. But the high-interest debt that payday lenders peddle is like throwing a poor family into a pit with a spoon and telling them to start digging until they get out. The more the family digs, the more difficult it becomes to free themselves. Payday loans require a borrower to write a bad check for up to $575 for a $500 loan ($500 plus a $15 fee for every $100 borrowed, which the lender keeps for itself). The company holds the check until the customer's next payday, when he or she either pays off the $500 loan or the lender cashes the check. When a struggling family is unable to pay the $500 back they will often write another $575 check to payday lenders for another $500, thus digging deeper and deeper, at 390 percent APR interest.

For five years, the Virginia General Assembly has heard payday lenders claim that lowering their 390-percent interest rates would cause them to close shop, leaving citizens with nowhere to turn. But more than 55 credit unions refute the notion that lenders cannot make money at 36 percent, and even the bankers seem to be saying that the ingenuity of those vested in the community would fill the gaps. And the bankers are not alone.

Many states, including the District of Columbia, have either capped rates, or are trying to repeal anemic reforms that do virtually nothing to protect the working poor. In Virginia, more than 50 local governments have added their voices to nonprofit service providers, businesses, and a bipartisan gathering of elected officials in asking for a 36 percent cap on payday loans. Congregations in the commonwealth are unusually unified in asking the state to cap payday-loan interest rates through a faithful pledge campaign.

Yet, many fear the General Assembly, after a six-year failed policy of allowing payday lenders to have their way in Virginia, still might not cap interest rates in 2008. Instead, the General Assembly may yield to hollow reforms that have proven ineffective in other states. This reveals Richmond's worst-kept secret--that high-dollar special-interest lobbyists have been quietly sprinkling--or even pouring--payday dollars into political events and campaigns. According to the Virginia Public Access Project, at least one General Assembly member has received almost $40,000 from payday lenders in the last 12 months alone.

Despite their claim that they are barely able to stay in business by charging 390 percent interest, the payday-lending industry is spending millions of dollars on advertising and lobbyists to craft a public image that suggests they are above reproach. Sadly, they are refashioning the Golden Rule into new dogma--"those with the 'gold' make the 'rules.'" They hope money will create political Teflon, keeping interest-rate reform from sticking.

Last year the General Assembly attempted to cap interest rates at an absurdly high 72 percent, but the industry convinced legislators to strike the bill from the docket. Their unwavering resistance to limiting interest rates proves they are insincere about reforming themselves as long as legislators allow them to feast like locusts on Virginians in financial straits.

The General Assembly can fix its six-year payday-lending problem. Virginians must continue to insist on capping payday-loan interest rates--36 percent APR is more than enough. Virginia doesn't need excuses, compromises, or incremental reforms that do virtually nothing. We need to remember that the Golden Rule can still mean that our actions are based on what is best for businesses and consumers--and not just greed.

The Rev. C. Douglas Smith is the executive director of the Virginia Interfaith Center for Public Policy.