Real reform or a faux version?

Two versions of payday lending reform are moving through the Virginia legislature.

Only one of them – the House of Delegates’ version – represents a legitimate attempt to rescue state residents who are drowning in a pool of high-interest debt. The Senate version is a gift to an odious industry.

We urge lawmakers to get behind the House-crafted compromise before the session ends March 8. Virginia needs real payday lending reform not a sham measure.

The House reform bill caps interest rates at 36 percent but allows payday lenders to charge two other fees. For practical purposes, the cost of a payday loan will stay about the same. The extra fees allow lenders to recoup income lost to the interest rate cap.

The real protection for consumers is a cap on the number of loans that a borrower can obtain. The House limits borrowers to five loans a year, and a single loan at a time. It also gives borrowers two pay periods rather than one to repay each loan.

These limits won’t hurt responsible borrowers who use a short-term loan or two a year to pay for car repairs or another emergency. They are intended to break the cycle of debt that traps too many payday lending customers. These customers take out new loans to pay off old ones or juggle multiple loans at a time. Often, they lack the income to pay off the debt. Under this scenario, a short-term cash crunch morphs into a long-term financial problem with devastating results.

The industry opposes the five-loan-a-year rule. Clearly, this is because losing these repeat customers would slice into the payday lenders’ profits.

In 2007, Virginians took out $155.3 million in payday loans. Most payday-loan users took out seven to 13 loans a year. That’s not a one-time emergency measure but a recipe for financial ruin.

The Senate version of payday lending reform does little to end the cycle of debt. It doesn’t include the annual loan limit or extend the repayment cycle to two pay periods.

Instead, the Senate allows borrowers to agree to an extended repayment period, but only if they forgo any additional loans for three months. Industry opponents believe this provision, as drafted, will actually deter payday lending customers from seeking the longer repayment period.

The Senate bill caps interest at 36 percent, but, like the House, allows payday lenders to charge other fees to recoup their loss. If there’s any real reform in the Senate bill, it’s well hidden.

As Virginia debates, several other states have banned payday loans outright. Washington, D.C., has capped interest rates at 24 percent, and Congress capped interest rates for active duty military members. The military brass supported the cap because payday-lending debt (or worries about it) was interfering with soldiers’ preparation to deploy.

If soldiers deserve protection from predatory lenders, so do civilians. Virginia lawmakers should give it to them. Adopt the House reform and toss a lifeline to state residents slowly drowning in ruinous debt.