Virginia’s Payday and Title Lending Markets Among the Nation’s Riskiest
Policymakers can look to other states’ experiences to modernize small-loan laws
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.
Lenders issue these loans to hundreds of thousands of Virginians each year. And this high-cost credit carries some of the most lax borrower protections in the country because lenders operating in the state can make loans according to any of four statutes, two of which allow unlimited interest rates.3 (See Table 1.) As a result, Virginia residents pay up to three times more for this type of credit than borrowers in other states, even those who get loans from the same companies.4
Other states, such as Colorado and Ohio, have modernized small-loan laws to make credit more affordable while keeping it widely available.5 Virginia could follow their lead to better protect borrowers from harmful loan terms. (See Table 2.)
Payday and title loans harm Virginians
Virginia’s small-loan statutes have unusually weak consumer protections, compared with most other laws around the nation. As a result, Virginia borrowers often pay more than residents of other states for loans and suffer harmful outcomes, such as vehicle repossession and fees and interest that exceed the amount they received in credit.
- 1 in 8 title loan borrowers in Virginia has a vehicle repossessed each year, one of the nation’s highest rates.6
- Lenders sell 79 percent of repossessed vehicles in the state because borrowers cannot afford to reclaim them.7
- Many lenders operate stores and online in Virginia without licenses, issuing lines of credit similar to credit cards, but with interest rates that are often 299 percent or higher, plus fees.8
- Virginia is one of only 11 states with no cap on interest rates for installment loans over $2,500.9
- Virginia has no interest rate limit for lines of credit and is one of only six states where payday lenders use such an unrestricted line-of-credit statute.10
- Virginia laws enable lenders to charge Virginians up to three times as much as customers in other states for the same type of loans.11
- More than 90 percent of the state’s more than 650 payday and title loan stores are owned by out-of-state companies.12
Virginia can balance affordability and access to credit by modernizing its small-loan laws
In 2018, Ohio lawmakers replaced harmful payday and title loans with affordable installment credit at lower prices. Estimates of the resulting savings to Ohio families top $75 million annually, which goes back into the state’s economy.13 And access to credit remains widely available in Ohio from hundreds of licensed providers, with new competition from lower-cost lenders.14
Ohio’s Fairness in Lending Act of 2018 requires lenders to give borrowers sufficient time to repay in equal installments, with payments taking up only a small share of borrowers’ paychecks.15 Under the act, any loan issued in violation of state law, whether originating online or in stores, is null, void, and uncollectible, and the attorney general is empowered to enforce this provision.
In Colorado similar reforms, enacted in 2010, yielded commensurate results, with lower prices, affordable payments, and reasonable times to repay.16 Stores in the state doubled their efficiency, to about 1,100 unique borrowers per year.17
Borrowers in these and other states with sensible small-lending laws have not turned in great numbers to unlicensed lenders.18
With prudent reforms like those in Ohio and Colorado, Virginia policymakers can reduce costs for their constituents, creating affordability for borrowers and a viable market for lenders, including lower-cost providers that currently avoid operating in the state because of its outdated laws,19 and saving families more than $100 million annually.20
- The Pew Charitable Trusts, “Payday Lending in America: Who Borrows, Where They Borrow, and Why” (2012), https://www.pewtrusts.org/en/research-and-analysis/reports/2012/07/19/who-borrows-where-they-borrow-and-why.
- The Pew Charitable Trusts, “Payday Lending in America: How Borrowers Choose and Repay Payday Loans” (2013), https://www.pewtrusts.org/en/research-and-analysis/reports/2013/02/19/how-borrowers-choose-and-repay-payday-loans.
- Code of Virginia 6.2-312, https://law.lis.virginia.gov/vacode/title6.2/chapter3/section6.2-312/; Code of Virginia, 6.2-1520, https://law.lis.virginia.gov/vacode/title6.2/chapter15/section6.2-1520/.
- Ohio Revised Code Chapter 1321, Ohio House Bill 123 (2018), https://www.legislature.ohio.gov/legislation/legislation-documents?id=GA132-HB-123; State of Colorado Department of Law, “2016 Deferred Deposit/Payday Lenders Annual Report” (2017), https://coag.gov/office-sections/consumer-protection/consumer-credit-unit/uniform-consumer-credit-code/general-information/; Virginia Bureau of Financial Institutions, “The 2018 Annual Report of the Bureau of Financial Institutions” (2019), https://www.scc.virginia.gov/bfi/annual.aspx.
- Colorado Deferred Deposit Loan Act, C.R.S. § 5-3.1-101 (2010), https://coag.gov/office-sections/consumer-protection/consumer-creditunit/uniform-consumer-credit-code/; Colorado Supervised Loans and Supervised Lenders Act, C.R.S. § 5-2.3-301, https://coag.gov/office-sections/consumer-protection/consumer-credit-unit/uniform-consumer-credit-code/. Payday lenders in Colorado operated under the Deferred Deposit Loan Act from 2010 through January 2019, when a ballot initiative amended the act. Since then, they have been regulated by the Supervised Loans and Supervised Lenders Act. Both laws have rate limits, which result in loan prices that are generally about three times lower than those in Virginia and require that loans be repaid in installments.
- The Pew Charitable Trusts, “Auto Title Loans: Market Practices and Borrowers’ Experiences” (2015), https://www.pewtrusts.org/en/research-and-analysis/reports/2015/03/auto-title-loans; Virginia Bureau of Financial Institutions, “The 2018 Annual Report.”
- Virginia Bureau of Financial Institutions, “The 2018 Annual Report.” After repossession, consumers have a brief window during which they can repay their loans plus fees and reclaim their vehicles, but less than a quarter of borrowers do so, which strongly indicates that loans are unaffordable.
- D. Ress, “Payday Loans Offer Fast Money, but Fees and Interest Leave Many Virginians Deep in Debt,” The Virginian-Pilot, Jan. 2, 2019, https://www.pilotonline.com/government/virginia/article_bc523d14-0ac8-11e9-b4e0-8fb4f34cd28f.html.
- National Consumer Law Center, “A Larger and Longer Debt Trap?” (2018), https://www.nclc.org/issues/a-larger-and-longer-debt-trap-installment-loan.html.
- D. Ress, “Loophole in Credit Law Opens Door to 360 Percent Interest Rate,” Daily Press, Jan. 25, 2014, https://www.dailypress.com/government/dp-xpm-20140125-2014-01-25-dp-nws-openendcredit-012-20140125-story.html.
- Ohio Revised Code Chapter 1321, Ohio House Bill 123; State of Colorado Department of Law, “2016 Deferred Deposit/Payday Lenders Annual Report”; Virginia Bureau of Financial Institutions, “The 2018 Annual Report.”
- Virginia Bureau of Financial Institutions, “The 2018 Annual Report”; websites of open-end credit lenders reviewed in August 2019. Analysis by The Pew Charitable Trusts.
- L.A. Bischoff and J. Sweigart, “New Payday Lending Law to Save Consumers $75M,” Dayton Daily News, April 28, 2019, https://www.daytondailynews.com/news/local/new-payday-lending-law-save-consumers-75m/YC2O8u3prYjfjgsJw8KGQJ/#; The Pew Charitable Trusts, “Ohio a National Model for Payday Loan Reform” (2018), https://www.pewtrusts.org/en/research-and-analysis/data-visualizations/2018/ohio-a-national-model-for-payday-loan-reform.
- The Columbus Dispatch, “Welcome to Fair Lending: New Law Allows Payday Loans Without Usury,” The Columbus Dispatch, April 30, 2019, https://www.dispatch.com/opinion/20190430/editorial-welcome-to-fair-lending-new-law-allows-payday-loans-without-usury; L. Hancock, “Ohio’s New Payday Loan Law Goes into Effect Saturday. What Will Change?” Cleveland Plain Dealer, April 26, 2019, https://expo.cleveland.com/news/g66l-2019/04/b172cdced12409/ohios-new-payday-loan-law-goes-into-effect-saturday-what-will-change-.html.
- Ohio Revised Code Chapter 1321, Ohio House Bill 123.
- The Pew Charitable Trusts, “Payday Lending in America: Policy Solutions” (2013), https://www.pewtrusts.org/en/research-and-analysis/reports/2013/10/29/payday-lending-in-america-policy-solutions.
- State of Colorado Department of Law, “2016 Deferred Deposit/Payday Lenders Annual Report”; The Pew Charitable Trusts, “Trial, Error, and Success in Colorado’s Payday Lending Reforms” (2014), https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2014/12/trial-error-and-success-in-colorados-payday-lending-reforms.
- R. Mayer, “Loan Sharks, Interest-Rate Caps, and Deregulation,” Washington and Lee Law Review 69, no. 2 (2012): 807-48, http://scholarlycommons.law.wlu.edu/cgi/viewcontent.cgi?article=4277&context=wlulr&sei-redir=1&referer=http%3A%2F%2Fscholar.google.com%2Fscholar%3Fq%3DLoan%2BSharks%252C%2BInterest-Rate%2BCaps%252C%2Band%2BDeregulation#search=%22Loan%20Sharks%2C%20Interest; The Pew Charitable Trusts, “Who Borrows, Where They Borrow, and Why.”
- Hancock, “Ohio’s New Payday Loan Law.”
- Pew’s analysis of Ohio Revised Code Chapter 1321, Ohio House Bill 123; Virginia Bureau of Financial Institutions, “The 2018 Annual Report.”
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