How Virginia Credit Act 2020 Helps Reform Petty Dollar Loans

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This brief looks at how Virginia reformed its laws to create a more modern, dynamic and consumer-friendly small loan market. Virginia’s success teaches replicable lessons for policymakers in other states struggling with costly and unaffordable credit. BUT relevant newsletter summarizes the key elements of the law.

Overview

After years of legislative efforts to create a safe and viable small loan market, Virginia legislators passed a bipartisan law in 2020 – the Credit Equity Act (SB 421 / HB 789) – to ban loans with large final payments known as air payments. and bring down prices. The law rationalizes what used to be a scattered regulatory structure, regulated by a patchwork of laws that allowed payday loans and car ownership with unaffordable payments and unnecessarily high costs and exposed borrowers to financial damage, including repeated borrowing and high vehicle return rates. Previous research by Pew Charitable Trusts found that before the reforms, companies typically charged Virginia residents three times as much as customers in lower-cost states.one

Virginia lawmakers have balanced concerns about the availability of small dollar loans with the need to end harmful lending practices, a problem that officials in other states are grappling with. Virginia’s evidence-based approach builds on successful reforms previously carried out in Colorado and Ohio that provided wider access to credit and tangibly improved consumer outcomes by closing loopholes, modernizing outdated laws and banning inflated payments. Legislators drafted the law to reflect “three key principles of responsible lending: affordable payments, fair prices, and reasonable time to repay.” 2

Pew’s analysis of the law confirmed that, under the law, lenders can profitably offer affordable structural-guaranteed installment loans, saving the typical borrower hundreds of dollars in fees and interest, and the total consumer savings are estimated to be in excess of $ 100 million annually. (See Table 1.) This brief looks at how Virginia reformed its laws to create a more modern, dynamic and consumer-friendly small loan market. Virginia’s success teaches replicable lessons for policymakers in other states struggling with costly and unaffordable credit.

Table 1

Pricing for Small Loans in Virginia Provides Significant Savings to Consumers

Examples of loans before and after the reform

Loan Before the reform After the reform The resulting savings
$ 300 for 3 months

USD 222

90 USD

132 USD

$ 500 for 5 months

USD 595

USD 171

USD 424

1000 USD for 12 months

USD 1,400

USD 500

900 USD

$ 2,000 for 18 months

USD 7,136

USD 1,068

USD 6068

Sources: Pew Market Data Analysis; Virginia’s Credit Fairness Act (2020), https://lis.virginia.gov/cgi-bin/legp604.exe? 201 + full + CHAP1258

© 2020 Pew Charitable Foundation

Problem: Outdated laws abused and discouraged safer and cheaper lending.

Virginia was one of 35 states that allowed payday loans and one of 22 states that allowed high-value car loans secured by the borrower’s car, loans that primarily cater to consumers with impaired credit ratings who need help paying. regular bills or expenses. However, these loans have well-documented pitfalls, including excessive costs, unreasonably short maturities and unaffordable payments, which cause borrowers to have so much income that they have to re-borrow or risk losing their cars or funds in their checking accounts.3 According to regulatory data, the average $ 1,116 title loan required a full repayment of over $ 2,700 over 12 months.four

Virginia, like many states, has had many consumer lending laws that have been passed or revised at various times. This phased approach created an uneven competitive environment for lenders and meant that high value loans could be disbursed under any of the four statutes, in fact, at the lender’s discretion. (See Table 2.) Many payday lenders and title lenders offered open-ended loans with unlimited repayment terms, such as credit cards, at an annual percentage rate (APR) of 299% or more. In addition, the State’s Loan Services Act includes language that high-cost lenders have relied on to justify charging brokerage fees that would otherwise be illegal under government interest rate restrictions. Given Virginia’s many conflicting laws, revising just one at a time would not have been enough to protect consumers; lenders could simply move on to work under a different law.

At the same time, Virginia’s outdated policies made it impossible or unprofitable for low-cost lenders such as non-bank hire-purchase lenders and financial technology companies to offer affordable low-dollar installment loans and compete in the Commonwealth with conventional payday lenders and title lenders. …five For example, before the reform, a lender could charge prices that would result in an annual interest rate of over 300% for a payday loan with a lump sum, but installment lenders, whose prices were three or four times lower, were effectively prohibited from offering a loan of a similar size. … As a result, hire-purchase lenders and other cheaper lenders were unable to profitably operate in Virginia, so they did not do business in the state.

Solution: modern legislation provides effective protection and allows you to get affordable installment loans.

The Virginia Credit Fairness Act was sponsored by Senator Mamie Locke (Hampton Democrat) and Delegate Lamont Bagby (Henrico Democrat), had over 50 co-legislators from both sides, and received the support of various stakeholders, including consumer advocates, civil society organizations. , religious leaders, low installment lenders, and the state attorney general.6 High-cost lenders opposed the reform, saying they would not be able to operate at the lower prices demanded, despite evidence to the contrary from other markets. but both chambers eventually passed the law on a bipartisan basis.7 Governor Ralph Northham (Germany) signed the law at a ceremony on August 3, 2020; it will enter into force on January 1, 2021.eight

table 2

Small Virginia Dollar Credit Market Reform Solves Common Problems

Key features of the Credit Fairness Act

Problem Decision

Evasion. The high-value lenders worked with their choice of four statutes or without a government license. No regulation applies to interest rates on installment loans over USD 2,500 or lines of credit. Unlicensed online lending was carried out freely through legislative loopholes and no statutory fees that could be charged for brokerage loans.

All high-interest lenders must be licensed under the laws of Virginia (chapters 15, 18, or 22). These licenses are available to all lenders, whether they operate through stores or online, or provide secured or unsecured loans. Loans made in violation of state law are considered bad loans, which reinforces protection against evasion.

Impossible loans. Short-term loans with air payments consumed 20% of the salary of a typical Virginia borrower, leading to repeated borrowing.

Research-based guarantees for affordable installment payments are flexible, typically four months or more, and allow for a wide range of loan sizes. Lenders may not require additional payments.

Excessive cost. Payday lenders charged three times as much in Virginia as other states such as Ohio and Colorado. Borrowers often paid more in fees and interest than they originally received on the loan.

Fact-based pricing limits of 36% per annum plus limited fees are acceptable to lenders and provide broad access to credit. Simple rules make it easy for lenders to comply with requirements and automatically lower annual rates as loan sizes increase. For short-term installment loans (formerly “payday loans”), total costs cannot exceed 50% of the loan amount or 60% for loans over USD 1,500; for example, for a loan of $ 1,000, the borrower cannot be charged any commission or interest in excess of $ 500.

Harm. Aggressive collection practices put the funds and vehicles of borrowers’ checking accounts at risk; 1 out of 8 borrowers of the title loan had their vehicle returned.

Loans secured by checks, electronic repayment plans, or vehicle ownership must have affordable payments and lower prices and must not use harmful return and collection methods. Loan servicing partnerships are subject to increased regulation and high cost loan brokerage is prohibited.

Note: Virginia’s Credit Equity Act 2020 (HB 789 / SB 421) goes into effect on January 1, 2021.

Sources: The Pew Charitable Trusts, Virginia’s Payroll and Title Credit Markets Are Some of the Rishest in the Country (2019). https://www.pewtrusts.org/en/research-and-analysis/fact-sheets/2019/10/virginias-payday-and-title-lending-markets-among-the-nations-riskiest; Pew analysis of Virginia law

© 2020 Pew Charitable Foundation

The modernized legislation allows for multiple business models to lend to customers with insufficient or damaged credit history and requires loans to have affordable payments, transparent terms and fair prices, regardless of collateral, in retail or on the Internet. This set of standards creates a level playing field by allowing a variety of companies, including payroll, title, hire purchase, or financial technology companies, to compete in Virginia, broaden consumer choices, and protect borrowers from malicious acts. (See Table 3.)



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