Sunday, March 05, 2006
With debt, the first rule is: Stop digging
Elizabeth Strother
Recent columns
- For those who have too little
- Time to gather mountain views
- Our blind spot on roads
- Following the money trail
From the RoundTable blog
Del. Dave Nutter thinks payday loan companies are predatory and immoral. I respect that.
I can't go quite so far as he does in wanting to ban them -- not as long as they remain the only legitimate, and by that I mean no broken legs as late fees, businesses where low-income people can go for quick, small loans when they are desperate.
Nutter doesn't see a rollback to the days before Virginia's Payday Loan Act of 2002 as likely anyway. He does see, he says, a growing awareness in the House of Delegates that payday loans need to be more tightly regulated to curb their worst abuses. And I can go along with that.
Unfortunately, his colleagues in the House could not. Not this year.
The Blacksburg Republican was a co-sponsor of House Bill 619, Richmond Del. John O'Bannon's bill to repeal the Payday Loan Act. It was sent to a House subcommittee and carried over until next year.
Quixotic or not, it reflects Nutter's steadfast opposition to payday loan companies in Virginia since the initial legislation passed in his very first year in the General Assembly.
"I voted against it," he told me in a phone conversation last week.
"It was one of those classic paradox bills. It was already happening. Banks with federal charters could come in anyway with no oversight" by Virginia. But to pass state regulations was "also sanctifying them under state law."
"Do you try to bring something bad in and regulate it? Or do you not want to give it the sanction of the state?"
The state took the first option and capped the interest rate payday lenders can charge on these short-term -- typically, two-week -- loans.
And Nutter sees the unexpected proliferation of payday lenders as evidence he was right to vote no.
Del. Harvey Morgan introduced the 2002 legislation. "He initially estimated there'd be maybe 100 of these things around the state," Nutter recalled. Now, "I think there are 100 just in the city of Richmond."
The people who are forced to use them don't make much money. If they can't pay the debt on time, the temptation is to roll it over. Debtors find that if they do much of that, the interest -- capped at 15 percent for the initial term -- can quickly exceed the amount of the original loan.
"You're roughly looking at 400 percent APR" if you figure the annual percentage rate, Nutter said.
He sponsored a bill in 2003 to at least make that clear in all advertising. The legislation passed but only after Senate changes weakened the language.
Several House bills this year aimed to crack down on the industry's predatory practices: to prohibit rollovers, track and limit the number of loans anyone could take out in a year, increase the minimum term from seven to 60 days. None of the bills made it out of the House.
Nutter didn't sign on as a co-patron on any of them. But, he says, he "supports any and all efforts to rein in payday lenders."
He understands that federal regulations have been tightened since Virginia passed its law. So he still holds out hope for the eventual repeal of the Payday Loan Act, which would make all the other restrictions proposed in the House unnecessary.
My heart is with him on that. But, so far, my head remains unconvinced.
Payday lenders argue they provide a valuable service for low-income people who are hit with a temporary crisis and would have a hard time getting a small loan from a bank. And there is some truth in that.
A car breaks down and there's no getting to work without it; a child gets sick and there's a lag time between the need for expensive medicine and getting the Medicaid benefits that will pay for it. And you're broke. I know working poor people who have been in these situations. They were lucky. They had families who could help.
Many who live close to the edge of solvency do not.
Payday loans are never a smart way to weather a crisis -- except when there is no other way.
Of course, the industry markets these short-term consumer loans in unconscionable ways, encouraging people to go into debt to take a vacation or buy Christmas presents. But in a real crisis and without a personal safety net, where else are the poor to turn?
Such small loans -- up to $500 -- yield too little return to interest most banks and credit unions.
Nutter is determinedly optimistic, though.
"There are other ways for people to get access to credit," he told me. He thinks institutional banks have "begun to recognize that there's more of a market here." All they have to do, really, is look around. In some neighborhoods, signs hawking cash advances are on every street corner.
"We're seeing from diverse interests" indications that people want change, he said. "The banking industry, the interfaith community. I think this is of growing interest to the interfaith community. They're asking, 'Are we just creating a perpetual cycle of debt? One more shackle on them?' "
For many, yes.
So let's see something better, that won't send the poor to Tony Soprano for "help" when their kid gets sick.
