This dissertation examines how Virginia reformed its laws to create a more modern, vibrant, and user-friendly small loan market. Virginia’s success offers replicable lessons for policymakers in other states struggling with expensive and unaffordable loans. A related fact sheet summarizes the key elements of the law.

Overview

After years of legislative efforts to foster a safe and viable market for small loans, lawmakers in Virginia passed bipartisan legislation in 2020 – the Equity in Loans Act (SB 421 / HB 789) – to prohibit loans with large final payments, called lump sum payments, and lower prices. The law streamlines what was a patchwork regulatory structure, governed by a patchwork of laws that allowed payday loans and auto loans with unaffordable payments and unnecessarily high costs, and exposed borrowers to financial harm, including repeat borrowing. and high rates of vehicle repossession. Earlier research from The Pew Charitable Trusts showed that before the reforms, companies routinely billed Virginians three times as much as customers in low-cost states.1

Lawmakers in Virginia balanced concerns about the availability of small loans with the urgency to stop damaging lending practices, a challenge officials in other states have also faced. Virginia’s evidence-based approach builds on successful reforms previously passed in Colorado and Ohio that have maintained widespread access to credit and measurably improved consumer outcomes by filling loopholes, modernizing laws obsolete and prohibiting lump sum payments. Lawmakers designed the law to reflect “three key principles of responsible lending: affordable payments, fair prices and a reasonable time to repay.” 2

Pew’s analysis of the law confirmed that, under the law, lenders can cost-effectively offer affordable installment loans with structural guarantees, saving the typical borrower hundreds of dollars in fees. and interest, with estimated total savings to consumers exceeding $ 100 million per year. (See Table 1.) This brief examines how Virginia reformed its laws to create a more modern, vibrant, and user-friendly small loan market. Virginia’s success offers replicable lessons for policymakers in other states struggling with expensive and unaffordable loans.

Table 1

Virginia Small Loans Pricing Saves Consumers Big Savings

Examples of loans before and after the reform

Ready Before the reform After the reform Resulting savings
$ 300 for 3 months

$ 222

$ 90

$ 132

$ 500 over 5 months

$ 595

$ 171

$ 424

$ 1,000 over 12 months

$ 1,400

$ 500

$ 900

$ 2,000 over 18 months

$ 7,136

$ 1,068

$ 6,068

Sources: Pew analysis of market data; “Virginia Loan Equity Act” (2020), https://lis.virginia.gov/cgi-bin/legp604.exe? 201 + full + CHAP1258

© 2020 The Pew Charitable Trusts

The Problem: Outdated Laws Allowed Abusive Practices, Prevented Safer, Less Costly Lending

Virginia was one of 35 states that allowed payday loans and one of 22 that allowed high-cost auto title loans guaranteed by a borrower’s vehicle, loans that cater primarily to consumers whose the credit rating is damaged and need help paying bills or regular expenses. However, these loans come with well-documented pitfalls including excessive costs, unreasonably short repayment terms, and unaffordable payments that consume so much of borrowers’ income that they have to repeatedly borrow or risk losing their car or loan funds. their current accounts.3 According to regulatory data, the average title loan of $ 1,116 required a total repayment of over $ 2,700 over 12 months.4

Virginia, like many states, had a patchwork of consumer loan laws that had been enacted or revised at different times. This piecemeal approach created an uneven competitive landscape for lenders and meant that high cost credit could be issued under any of the four laws, effectively at the lender’s discretion. (See Table 2.) Many payday and securities lenders offered “open-ended” loans, which had unlimited repayment terms like credit cards, at annual percentage rates (APRs) of 299% or more. more. Additionally, the state’s Credit Services Business Act included terms that high-cost lenders relied on to justify charging brokerage fees that would otherwise be illegal under state interest rate caps. . Given Virginia’s range of inconsistent laws, revising one at a time would not have been sufficient to protect consumers; the lenders could have simply switched to an activity under another law.

At the same time, Virginia’s outdated policies have made it impossible or unprofitable for lower-cost lenders, such as non-bank installment lenders and fintech companies, to offer affordable small dollar installment loans. and compete in the Commonwealth with conventional payday and title lenders. .5 For example, prior to the reform, a lender could charge prices that resulted in APRs of over 300% for a lump sum payday loan, but installment lenders, whose prices are three or four times lower, were in fact prohibited from offering a loan of the same size. . As a result, installment lenders and other lower cost lenders could not operate profitably in Virginia, so they were not doing business in the state.

The solution: Modern laws have established effective protections, allowed affordable installment loans

The Virginia Fairness in Lending Act was sponsored by Senator Mamie Locke (D-Hampton) and Delegate Lamont Bagby (D-Henrico), had over 50 legislative co-patrons from both parties and received support from various stakeholders , including consumer advocates, community organizations, religious leaders, low-cost 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 required, despite evidence to the contrary from other markets, but both chambers eventually passed the legislation on a bipartite basis.7 Governor Ralph Northam (R) enacted the law in a ceremony on August 3, 2020; it comes into force on January 1, 2021.8

Table 2

Virginia Low Dollar Credit Market Reform Solves Common Problems

Main features of the Loan Equity Act

Problem Solution

Evasion. The high-cost lenders operated using their choice of four statutes or without a state license. There were no regulations governing interest rates for installment loans over $ 2,500 or lines of credit. Online unlicensed loans operated freely through legal loopholes, and there were no regulations governing the fees that could be charged for loan brokerage.

All high rate lenders must be licensed under the laws of Virginia (Chapters 15, 18, or 22). These licenses are available to all lenders, whether they operate in stores or online, or issue secured or unsecured loans. Loans issued in violation of state law are deemed uncollectible, which strengthens law enforcement against fraud.

Unaffordable loans. Short-term lump sum loans consumed 20% of a typical Virginia borrower’s salary, resulting in repeat borrowing.

Research-based guarantees for affordable installments have flexible terms, typically four months or more, and allow for a wide range of loan sizes. Lenders may not require lump sum payments.

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

Evidence-based pricing limits — 36% interest plus limited fees — are viable for lenders and maintain widespread access to credit. Simple rules ensure easy lender and APR compliance which automatically shrinks 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 $ 1,500; for example, for a loan of $ 1,000, a borrower cannot be charged more than $ 500 in fees and interest.

Prejudice. Aggressive collection practices endanger the funds and vehicles of borrowers’ checking accounts; 1 in 8 title loan borrowers have repossessed a vehicle.

Loans secured by checks, electronic repayment plans, or vehicle title must have affordable payments and lower prices and cannot use harmful repossession and collection practices. Lending service partnerships are subject to increased regulation and brokering of high cost loans is prohibited.

Note: The Virginia Fairness in Lending Act of 2020 (HB 789 / SB 421) comes into effect on January 1, 2021.

Sources: The Pew Charitable Trusts, “Virginia’s Payday and Title Lending Markets Among the Nation’s Riskiest” (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’s Law

© 2020 The Pew Charitable Trusts

The modernized statutes allow many business models of lending to clients with thin or damaged credit histories and require that loans have affordable payments, transparent terms and fair prices, regardless of collateral or whether they are made in a retail store or online. This set of standards creates a level playing field, allowing various businesses, including payday, title, remittance or fintech companies, to compete in Virginia, expand consumer choice, and protect borrowers from the practices. harmful. (See Table 3.)

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