A Wealth of Evidence Backs High-Cost Loan Reform

A Wealth of Evidence Backs High-Cost Loan Reform

There’s a popular saying that it’s expensive to be poor. But the reasons for that at times aren’t grounded in the laws of economics, but in the laws enacted by our elected representatives. High-cost loans are a perfect example. How much does it cost to borrow $1,000 for a year for a person with a low credit score living paycheck to paycheck? It depends on what state they live in. The same companies dominate the payday loan market throughout the country and charge whatever interest rate a state allows. A review of the biggest lenders’ websites shows that a $1,000 loan costs $320 in Colorado, $536 in Ohio, and more than $1,400 in Virginia. In other words, the same credit—from the same payday lender—is available to similarly situated people in all three states. The difference is how much the loan costs. As an industry spokesman noted, when faith leaders protested the average 251 percent rate charged in Virginia, it was the commonwealth, not the companies, that determined the price.

In Virginia, high-cost lenders have tried to convince the Legislature that unless they charge rates over 200 percent, they’re unable to make loans to people with low credit scores. But they made the same claims during legislative debates in Ohio in 2018 and Colorado in 2010 and were proved wrong. For example, after Colorado reformed its lending laws, the state regulator’s reports showed that there was somewhat more payday loan credit issued than under the previous law, but with lower prices, affordable payments, and reasonable time to repay. As Colorado’s former Democratic House speaker and Republican Senate majority leader wrote after reform, that “solution strikes a balance, providing consumers with greater protections and ensuring that credit remains widely available. … Lenders maintain a restructured and successful business model.” A finance professor who examined Colorado’s payday lending reform found that consumers experienced large savings “with no evidence of a reduced access to funds.”

Even payday lenders in Colorado now acknowledge that credit is widely available—with prices in that state three to four times lower than Virginia. Colorado’s payday lenders association went so far as to write, “The State of Colorado has been at the forefront of responsible regulation for the payday/installment lending industry since 2010. Colorado has been successful in establishing a balance between consumer protection and maintaining access to short-term credit.”

It might seem surprising that high-cost lenders would make the same claims during the legislative debate in Ohio that were already proved wrong in Colorado. But they did—once again arguing, incorrectly, that reform would eliminate access to credit. Today, these same chains operate more than 200 locations in Ohio, offering small loans at prices three times lower than Virginia. And several lower-cost lenders—because of the newly level playing field—have entered the Ohio market, too.

Following reform, the Republican bill sponsor noted, “One of the biggest arguments against payday lending reform was that if we imposed actual fairness constraints on lenders, they would shut down and leave Ohio. Instead, what we see is the first license being issued in the 11 long years since the Legislature first tried to address payday lending.” The Columbus Dispatch explained after reform took effect that licensees under the new law “represent more than 200 storefronts as well as online lending. That should put to rest the claim made by abusive lenders who opposed the new law that they couldn’t possibly make a profit without making borrowers pay many times their original loan amounts in fees and interest.”

That brings us to the current legislative debate in Virginia, where high-cost lenders are making the same arguments that they previously made in Colorado and Ohio—hoping to find a new audience that will take them at their word instead of looking at clear systematic evidence. Senator Mamie Locke and Delegate Lamont Bagby have proposed reform (S.B. 421 and H.B. 789) similar to Colorado’s and Ohio’s but with somewhat more flexibility for lenders, allowing larger loan sizes and holding vehicle titles as collateral.

This legislation will save Virginia families more than $100 million each year and protect the 1 in 8 borrowers who have their vehicles repossessed by title lenders annually. This reform has earned widespread support in Virginia, including from an overwhelming majority of voters, Governor Ralph Northam, Attorney General Mark Herring, the Legislative Black Caucus, the House of Delegates (on a 65-33 bipartisan vote), and two Senate committees. If the legislation is enacted, the evidence demonstrates that struggling families will each save hundreds of dollars annually and gain access to affordable credit, rather than loans that decimate their budgets.

Alex Horowitz is a senior research officer at The Pew Charitable Trusts.

This op-ed first appeared in The Roanoke Times on February 11, 2020. 

VA Capitol Building
VA Capitol Building
Fact Sheet

Virginia’s Payday and Title Lending Markets Among the Nation’s Riskiest

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Fact Sheet

Americans from all walks of life use payday and vehicle title loans, and they do so typically to cover recurring expenses such as rent, mortgage payments, groceries, and utilities, rather than for unexpected expenses.1 Only a checking account and verifiable income are needed to get a payday loan;2 a clear title to a vehicle is usually required to get a title loan.

Small Dollar Loans
Small Dollar Loans
Article

State Payday Loan Reform

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Article

Pew’s research has found that when states do not implement standards around pricing and affordability, payday and auto title loans cost three to four times more than is necessary to have widespread access to this credit.

Money jigsaw
Money jigsaw
Issue Brief

Standards Needed for Safe Small Installment Loans From Banks, Credit Unions

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Issue Brief

Standards Needed for Safe Small Installment Loans From Banks, Credit Unions

Several recent developments have raised the possibility of banks and credit unions offering small installment loans and lines of credit—which would provide a far better option for Americans, who currently spend more than $30 billion annually to borrow small amounts of money from payday, auto title, pawn, rent-to-own, and other small-dollar lenders outside the banking system. Consumers use these high-cost loans to pay bills; cope with income volatility; and avoid outcomes such as eviction or foreclosure, having utilities disconnected, seeing their cars repossessed, or going without necessities. Many of these loans end up harming consumers because of their unaffordable payments and extremely high prices; in the payday and auto title loan markets, for example, most borrowers pay more in fees than they originally received in credit.