payday loan cap resolution

Brent Finnegan -- September 25th, 2007

During the last session, efforts in General Assembly to put a 36 percent interest rate cap on payday loans failed. This time, the push for an interest rate cap is coming from Virginia’s municipalities.

The Staunton City Council, at the behest of council member Bruce Elder, recently passed a resolution that will ask the General Assembly to cap rates at 36 percent for all consumer loans in Virginia.

Now, WSVA is reporting that Staunton City Council is looking to Harrisonburg City Council for support of the resolution.

Tonight Harrisonburg City Council will consider a request from the City of Staunton to support a recent resolution regarding payday loans. Staunton’s Council wants the General Assembly to cap interest rates at 36-percent for consumer loans like payday and auto title loans.

Harrisonburg is one of several localities that Staunton is asking to back the resolution.

Staunton council member Bruce Elder ran against Chris Saxman last election cycle. Both Saxman and our delegate, Matt Lohr, voted against payday lending reform, and both delegates had received campaign money from the payday loan industry. This cycle, Harrisonburg council member Carolyn Frank is running against Matt Lohr. It will be interesting to see what Frank has to say about the resolution, and if she uses it against Lohr.

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26 Responses to “payday loan cap resolution”

  1. Gxeremio says:

    It’s too bad that election politics are entering into this so much; from the simple perspective of good governance there’s a lot to be said for supporting a resolution (and hopefully a future law) that would help stop people from sliding into economic slavery.

  2. Lowell Fulk says:

    Careful Gxeremio,

    Someone will accuse you of being a Democrat.

  3. Dave Briggman says:

    Come on, guys.

    No one puts a gun to the collective heads of borrowers from the businesses.

    Both of you know businesses could not operate at 36% apr.

    Are you going to call for a mandate that traditional lending sources offer those with poor credit loans at 36% so we can have a banking meltdown similar in nature to the subprime mortgage problems we going to pay for collectively because of Democrat calls for mortgage lenders to provide more subprime lending?

  4. Kyle says:

    “Both of you know businesses could not operate at 36% apr.”

    Please explain this for clarity. I could not run a business if my loans were at 36%…that is true…

    But I’d love it if my stocks and CDs had a 36% return! I’d retire!
    ——————————————————————
    ….”because of Democrat calls for mortgage lenders ….”

    nice try but I’m not convinced that the Dems are any more complicit then the Repubs when it comes to the lending industry.

  5. finnegan says:

    Dave, you’re essentially quoting the lending lobbyists verbatim.

    To quote Bruce Elder in the News Leader,

    Elder said he thinks about a friend who is a stockbroker and charges a 4 percent rate. He said he thinks about a friend who is a Realtor and charges 6 percent. “I think about myself, a broker who works for 10 percent,” he said.

    “I’m in the wrong business,” he said to Drummond, slapping his hands against the dais for emphasis. “If you can’t make a living at 36, you’re in the wrong business too.”

    I don’t feel the least bit sorry for these companies. Newsweek ran a piece back in May about Loan Max in Harrisonburg lending to two guys in Broadway that can’t even read.

    No matter how you slice it, it’s predatory. It’s companies profiting (whatever the profit margins) off of the backs of the people who can least afford it.

    Stephen Winslow — a staunch conservative who used to manage that Loan Max in H’burg — has written a lot about the industry on his blog, Conservative Viewpoints.

  6. Deb SF says:

    According to a 2001 survey, the annual percentage rate (APR) on fees charged by payday lenders ranged from 390% to 7300%, averaging close to 500%. If someone can draw a bright line between payday loans and Mafia backed loan lenders, I would appreciate it. Vegas loan sharks connected with organized crime have traditionally charged 5% a week, for an APR of 260%.

    While I’m not it favor of a nanny state, whatever “nanny” means, I am in favor of government regulation in the case of market failure.

    500% interest and no one is stepping into to offer these people a better deal? Nothing secures these loans. The problem with payday loans has exactly zero to do with lack of market competition. There is plenty of that.

    There is, though a significant problem with incentives: this kind of debt will not be enforceable unless it is large. (In a perfect world, the debt could be enforced by the cost of, say, small-claims court.).

    The problem with these usury vendors is that as of now, the government will enforce the debt, but not until the obligation has grown astronomically (and that’s by the usury vendor’s design). And according to a WP article from sometime last week, less than 1 percent of borrowers are able to pay it back in two weeks. These lenders don’t provide short-term loans. They create long-term debt –large long term debt- and that’s the whole point. Given that there is a serious financial incentive to the company to make the debt larger, there’s room for some government regulation in the market to cap rates.

  7. Dave Briggman says:

    Well, these companies must not be too litigious, there are no records of any current cases in either District or Circuit Court with LoanMax as a plaintiff (i.e. enforcing their contract).

    I will concede, however, that LoanMax has a number of lawsuits in U.S. District Courts throughout Virginia charging them with violations of the federal Truth in Lending Act, the Virginia Consumer Finance Act.

    In one of the lawsuits I’ve just reviewed, the Complaint alleges that companies, like LoanMax are subject to the Consumer Finance Act of Virginia which limits loans under $2500 to a maximum annual interest rate of 36%.

    The suit further charges that their “Cash Advance Fee” of $200 on an $800 loan runs afoul of the Consumer Finance Act which prohibits the collection of interest before it’s due.

    I’ve emailed finnegan, a copy of a lawsuit filed in U.S. District Court in the Western District of Virginia.

    I’ve got no great admiration for these companies, they have no excuse making loans to people who can’t read and I think that if they need to exist, they need to follow laws that apply to them.

  8. Dave Briggman says:

    I would point out that we broke the story of how much LoanMax was “giving” to Matt Lohr and Chris Saxman on republitarian.com a long time ago.

    I think that company spent over $400,000 last year making campaign contributions to members of BOTH PARTIES in the General Assembly.

  9. John says:

    This data is not accurate, nor is it current. You are quoting a 2001 survey. It is 2007. This industry IS regulated. The Virginia State Corp Commission regulates the activity of payday lenders. Additionally, I believe they post a YEARLY state report on the website that gives much more accurate, timely and relevant info.

    I can speak with some authority on this — I used to own one. Don’t just look at the numbers and assume the borrower is being ripped off. It is a HUGE risk lending to these people. Why do you think they are willing to pay those huge APRs? Could it possibly be that they have screwed just about everyone that they could have borrowed from in the past?

    I would personally dare any one of you to go into this business — right or wrong — when you weigh the risks and look at it impartially. Trust me — if the state caps the APR at 36% they are essentially doing away with the industry. The default ratio is astronomical. The loudest (and most ignorant) protesters often know little to nothing about the industry.

    The mistake people make is that they think this business is LENDING related. It is not. It is COLLECTION related.

  10. Kyle says:

    Still don’t feel sorry for you John. You picked your business, if its so risky, don’t do it.

  11. Gxeremio says:

    John, I’m not sure there should be this kind of business at all based on moral grounds, but I’m not saying it should be absolutely illegal just because it is morally reprehensible.

    However, when I read what you wrote above I have to wonder, why indeed would you want to start or run a business that 1) doesn’t help people (rather, it gives already money-strapped people another extra expenditure), 2) supposedly has a high default rate (though since they have to leave you a “live” check to get the loan it’s hard to imagine payday lenders are really so bad off), and 3) can’t work without soaking the customers who do actually pay? I mean, what’s the economic justification for owning a payday loan business in light of claims that it can’t be successful without exorbitant interest rates? If the business model stinks as badly as payday lenders claim it does, then get out of the business!

    Here’s a little information about the current payday lending rules in Virginia. I found the Consumer Guide to Payday Lending published by the state government to be particularly interesting.

  12. David Troyer says:

    This isn’t specific to the topic of payday loans, but a fairly sobering read on debt in America:

    The Empire of Debt

  13. Emmy says:

    It speaks to the same thing though David. I listen to Dave Ramsey almost every day and I’m amazed at the number of people who are drowning and payday loans have pushed them further down. We just have a culture that believes debt is a necessity.

  14. Kyle says:

    Emmy,
    Debt drives our economic machine, which is not necessarily a good thing.. Couple that with the mass attack by corporate america (and a complicit Government )to brainwash us to consume and “keep up with the Jones,” and you have a recipe for abuse and personal economic failure. Especially for those who may not have the capacity to resist the urge of easy credit. Or those whose downward economic spiral leads them to desperation.

  15. Kyle says:

    Ever seen the movie “Afluenza” or “Maxed out?” Rent it some time, but not if want to have an upbeat evening……..it will open your eyes.

  16. Emmy says:

    Maxed Out is next in my cue from Netflix :)

    I think what really scares me is the lack of knowledge that people have about money. I’ve learned a lot of things by listening to that radio show that no one ever told me. I’m also amazed at the things that people are told by those who are supposed to be “professionals”; things that cause them even more problems. It’s very disheartening.

  17. Gxeremio says:

    Emmy, I don’t listen to Dave Ramsey but I’ve read some of his books, and applying the principles he explains has helped me to get (and stay) out of unsecured (i.e. credit card) debt. You are absolutely right that people have bought into the lie that unsecured debt is a necessity, and they’re just not running the numbers to see how much those “gotta have” items are really costing them. As Ramsey says, it’s no coincidence that banks and credit card companies own most of the skyscrapers you see!

  18. Emmy says:

    Isn’t he awesome Gxeremio? I learned a lot from his book and listening to him. I’m amazed at how many people he has talked out of filing for bankruptcy and actually shown them a different way out. I was really amazed at what I learned about getting loans without credit. To think millionaires are out there that have no FICO score! :)

    And again, I’ve spiraled this off topic!

  19. David Miller says:

    Quoting The US Chamber of Commerce “Fed Reduces Funds Rate
    September 25–For the first time in four years the FOMC cut the funds rate, reducing it to 4.75%. On the inflation front, the consumer price index fell 0.1% in August while the producer price index posted a 1.4% decline. Concurrently, the housing market remains weak, as housing starts fell 2.6% to 1.331 million units. Last, the index of leading economic indicators fell 0.6%.”

    Consumer/Taxpayer pays government, Government lends money to banks at 4.75%, consumer pays bank 36% for their money back. Lovely. (satire illustrates best).

  20. Kyle says:

    “Maxed out” id next on my queue too! Right after I return “Enron: The smartest guys in the room.” I’ve got to stop with these depressing movies….

    One of the best though is “Who killed the electric car?” you need to see this one…add it to your queue.

  21. Emmy says:

    I hear ya! I have Fast Food Nation right now!

  22. Kyle says:

    Try “corporation” next!

  23. Dave Briggman says:

    BTW, looking at the federal lawsuits it would seem that if you have money in Suntrust Bank, they appear to be bankrolling the operations of LoanMax.

  24. Deb SF says:

    David’s comment from above doesn’t quite work, in refering to the Fed lowering the Federal Funds rate to 4.75%.:

    “Consumer/Taxpayer pays government, Government lends money to banks at 4.75%, consumer pays bank 36% for their money back. Lovely. (satire illustrates best)”

    The Federal Funds rate is the rate that banks charge each other for loans, usual short term, with excess reserves they have on hand. The Fed affects this pretty precisely through the usual ways, but the Fed doesn’t get this interest rate. Wachovia pays it to Planters, or BT&T, etc. whomever they borrow the extra reserves from.

  25. finnegan says:

    Last night council voted to support Staunton in this. From TV3:

    Tuesday night, the Harrisonburg City Council also went on board with the idea. At the meeting, the council didn’t implement anything locally, it just supported what Staunton did, by passing a resolution of its own.

  26. Deb SF says:

    John argues in part that rates so high for payday lenders because they are engaging in a high-risk activity, and profits they do recover must cover not only their day-to-day operating expenses, but also their default rate for bad loans.

    But good data on default rates on payday loans is hard to come by. Some published reports indicate that the incidence of default on these loans is in the 20-25% range. But the majority of payday loans–77.2%–are rollovers. When a customer defaults on the 10th rollover, both the industry and industry critics–for their own reasons–can claim a default rate of 10%. In fact, while only the final rollover was defaulted, all 10 loans represented a final loss of principal.

    http://www.responsiblelending.org/issues/payday/briefs/page.jsp?itemID=29557872#five sez:

    With these renewals (or loan flips), they are never paying down the principal owed. In North Carolina, for example, only 6% of payday checks were returned for insufficient funds (NSF) and lenders recovered about 69% of the value on these. They also collected $2 million in NSF fees.

    In comparison, the credit card default rate, like the payday default rate, is also approximately 6% — but the interest rate on a credit card rarely exceeds 29% (as opposed to payday loans that routinely charge 400% APR or more). Personal loans and car loans have default rates of around 2%, with APRs between 5 and 15%. Compared to other forms of credit, the exorbitantly high APR charged on payday loans is drastically out of proportion with the relatively normal risk involved in making those loans.
    Moreover, if a borrower defaults after repeatedly renewing a payday loan, a lender can actually make money, because accumulating fees quickly surpass the amount lent. In most states, a payday lender loses only 10-12¢ for every dollar loaned out in the few cases when a loan goes unpaid.

    “[Payday lenders] understate profits and overstate default rates to dissuade potential new competitors from entering the industry.”

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