Payday lending reform bill is worth adopting

In a rare showing of bipartisan cooperation, Virginia delegates appear poised to rein in the worst excesses of the payday lending industry.

A compromise bill announced Monday caps interest rates but allows lenders to charge other fees. Of more significance, it limits borrowers to a single outstanding loan and sets a yearly limit of five loans.

These loan limits will help struggling families avoid the snare of insurmountable debt. They won’t harm responsible borrowers, who take out one or two loans a year to pay unexpected expenses.

The proposed reforms strike a proper balance. They protect state residents without eliminating the entire payday lending industry. Lawmakers should support this measure.

The compromise proposal has earned the backing of a rare coalition – including House Republicans, who were once allied with the payday lending industry; the House Democratic leadership; members of the Legislative Black Caucus; church groups and advocates for the poor. Delegate Terry Kilgore, R-Gate City, is among the key Republican supporters.

In the past, Kilgore favored industry-blessed reforms that didn’t go far enough to stop the abuses. His participation in this compromise solution should enhance its chances of becoming state law. We applaud his decision to stand with his hard-working constituents in Southwest Virginia, which has a disproportionately high number of payday lending outlets relative to its population.

Indications are that the payday industry will not go quietly. Industry advocates back some reforms, but not this proposed compromise.

The industry opposes the single-loan limit, preferring to allow up to two loans per person at a time. The industry also opposes the five-loan annual limit; its reform package sets no annual restrictions. The industry-blessed reforms would allow borrowers to keep borrowing and digging a deeper financial hole.

In an effort to influence the legislative debate, payday lenders have mounted a massive advertising campaign in support of their product. In that campaign, they note that 95 percent of borrowers pay back their loans on time.

Another, more troubling statistic is omitted from their slick presentation. The typical borrower in Virginia takes out eight to 14 short-term loans a year. Often, these borrowers are using new loans to pay off existing ones. It’s a treadmill that few borrowers are able to escape, particularly as the cost of life’s necessities, like food, gasoline and health care, continues to climb.

Kilgore and his partners in compromise are offering these Virginians a way off the treadmill.

In addition to the loan limits, the bill creates a computer database to monitor outstanding payday loans and mandates a 24-hour "cooling off period" between loans. The bill caps interest rates at 36 percent, but minimizes the financial risk to the lending companies by allowing them to charge a fee equal to 10 percent of the loan and a $5 verification fee. This reduces the cost of a $365 loan (the Virginia average) from $418.07 to $411.54.

It is unlikely that such a small change in the cost of a loan will impact the industry’s bottom line. More likely, the industry fears the limits on the number of loans will cut into profits because some of its "best" customers will no longer be able to use its product to the same extent.

If the industry needs to prey on those in financial despair to be profitable, it doesn’t deserve to survive. Customers who take out eight to 14 payday loans a year are in serious trouble; they cannot manage their money or aren’t earning enough to live or both. They deserve protection under the law – even protection from themselves.

Lawmakers should move quickly to reform the payday lending industry and give state residents a chance to escape the debt snare.