Several years ago, lawmakers created strict new rules on payday lenders. Last year, lawmakers cut a deal that prevented car-title lenders from skirting the law. But one kind of loan has escaped the attention of lawmakers. 88.9 WCVE’s Michael Pope takes a look at these unregulated loan products in the second installment of his series, Quick Cash, Toxic Debt.
Here at the Virginia Poverty Law Center, director Jay Speer sits down with a client and digs into his paperwork.
Jay Speer: “We’re very familiar with Allied.”
That would be Allied Cash Advance. It’s not a payday lender. And it’s not a car-title lenders. It offers an almost completely unregulated product known as an open-end line of credit, a kind of loan originally created to help people buy appliances from department stores. State regulators don’t track them. Lenders don’t need a license to offer them. There’s no limit on the interest rates they can charge, and there’s no limit to how many loans borrowers can take at a time. In other words, it’s the Wild West. Oh, except one rule that Speer sets his sights on.
Speer: “But where they’ve tripped up is they charged you a $100 fee in the first 25 days and they’re not allowed to do that. And so by doing that, they don’t meet the exemption. They are limited to 12 percent interest. They’re charging 273 percent interest. Therefore these loans are void.”
At the other end of the desk is a man named Waverly. We’re withholding his last name because he’s embarrassed that he took the loan and he’s still working his way out of it.
Waverly: “Had I qualified for a loan at my local bank that I know I can pay with an interest rate that’s reasonable … I don’t like the credit things but sometimes when you are in a bind and you have nothing else you are going to who is going to give you a loan.”
Waverly tells Speer he took the loans because he hit rock bottom and needed money right away.
Waverly: “I was in a lot of financial distress, you know, for quite some time, just trying to get out from under pay cycle to pay cycle. It’s just robbing Peter to pay Paul sorta kinda.”
Like many people caught in a cycle of debt, Waverly came to the conclusion that he couldn’t dig his way out of the hold by himself. So he called a predatory lending hotline run by the Virginia Poverty Law Center. Dana Wiggins answers the hotline, and she says many people who take these kinds of loans assume they’re payday loans.
Dana Wiggins: “We even get some people who say well I thought they weren’t able to do this thing or that thing or something else. That would be under a regulated product like payday loans, and we have to tell them that just isn’t the case. They are not regulated by the state.”
Payday lenders have all kinds of rules they have to follow in Virginia. But open-end line of credit lenders don’t. That’s why many of the payday lenders actually stopped offering payday loans several years ago and started offering line-of-credit loans instead. Wiggins says they’re exploiting a loophole in the law, one she says lawmakers will close.
Wiggins: “It’s not necessarily fair to the lenders who are actually following the rules under the Payday Loan Act to have all these other lenders who don’t have to follow any rules.”
Businesses that offer these kinds of loans say they are providing an important service, offering money to people who would have a hard time getting loans from a traditional bank. George Mason University professor Todd Zywicki says cracking down on the industry would be a bad idea.
Todd Zywicki: “These products serve an important function in the American system of providing a buffer between mainstream lenders and the black market.”
That’s Zywicki testifying before the Senate Banking Committee last year. That’s when Congress was considering a new rule from the Consumer Financial Protection Bureau that would force lenders to prove borrowers can pay back loans before any money changes hands.
Zywicki: “The CFPB stands poised to shoot holes in the life rants to which consumers are increasingly clinging to try to make ends meet, these alternative financial products.”
Democratic Senator Elizabeth Warren had a different metaphor.
Senator Elizabeth Warren: “When emergencies arise, people need access to credit. But payday lenders that build business models around trapping people in a never ending cycle of debt are throwing bricks to a drowning man.”
The status of the Consumer Financial Protection Bureau’s rule is up in the air now that a new administration is taking control in Washington. On the campaign trail, Trump promised to cut regulation. But the same voters who put Trump over the top in South Dakota also approved a new 36 percent interest rate cap for payday lenders. Consumer Financial Protection Bureau director Richard Cordray says delaying the rule would be a mistake.
Warren: “And that anybody should feel like that’s no big deal means that they simply disagree with the findings around the country of what this does for people and for families.”
Back in Richmond, Waverly is still trying to figure out how to get himself out from a mountain of debt created by the loan from Allied.
Waverly: “I’m still not in the profession that I want to be in. Debt-wise, I’m up to here in loans and student loans. I’m just trying to keep afloat and be able to manage. I thought I would be in a different place by now.”
Jay Speer, the director of the Virginia Poverty Law Center, says lawmakers in Richmond could take action even before any new federal rules are implemented. He says lawmakers should turn their attention to businesses that offer these unregulated open-end line of credit loans that operate in many ways like payday loans before the General Assembly cracked down on them.
Speer: “They should not be able to debit people’s bank accounts. You should only be able to get one loan at a time. They should not be able to harass you if you get behind in your payments. Those are the sort of restrictions that are already on the payday lenders and car-title lenders.”
One potential stumbling block, though, is the influence of the industry. Businesses that offer these unregulated loans are also major campaign contributors.
For WCVE, I’m Michael Pope.