As restrictions hit payday loans, lenders change tactics

For years, payday lenders expanded throughout Virginia, promoting quick cash to borrowers who have a job and a checking account.

That’s changing in the wake of new state rules that took effect Jan. 1 . More of the store front lenders now are offering larger loans, including car-title loans, that fall outside the scope of state regulation.

Some have even surrendered their payday-lending licenses to concentrate on these open-end lines of credit. Like the credit available from a credit card, these loans provide a fixed amount that a borrower can use, pay down and tap again.

Since the year’s end , the number of payday lenders in the state has declined 16 percent to 58, according to Virginia’s Bureau of Financial Institutions. Some closed their doors. Others, including Allied Cash Advance, Oceana Auto Title Loans and Jerry’s Payday Loans, remain in business but concentrate on title loans and other forms of open-end credit.

The shift, said lenders, was prompted by recent changes to Virginia’s Payday Lending Act, which included :

- Extending the time borrowers have to repay to twice their pay period, so that someone who is paid weekly has two weeks to pay off what they owe.

- Changing what lenders can charge to a simple annual interest rate of 36 percent plus a fee of as much as 20 percent of the loan amount, or $100 for a $500 loan.

- Prohibiting borrowers from rolling over an existing loan and limiting them to one loan at a time.

“We looked at the new legislation and asked, 'Can we make this work?’” said Jeff Kursman , a spokesman for payday-lender Check ’n Go .

Because of falling demand for its loans in Virginia and their reduced profitability, Check ’n Go decided it couldn’t, Kursman said. The Cincinnati-based company is in the process of closing its 68 offices in Virginia, including 26 in Hampton Roads.

Check ’n Go’s business also was hurt by the rise in joblessness, which reduced the number of potential borrowers, Kursman said.

“I can’t speak to the specifics” of profitability, he said, “but if there’s revenue to be made, you don’t close up shop.”

The volume of payday lending in Virginia may be modest when compared with other forms of consumer lending, but it isn’t pocket change. In 2007, lenders extended $1.36 billion of the loans to 450,000 Virginia residents, according to the most recent figures available from the Bureau of Financial Institutions.

With 260 offices, Hampton Roads accounted for a third of the payday-lending locations in Virginia at the end of 2008.

Advance America Cash Advance Centers, the largest payday lender in the state, continues to make the loans in Virginia but added car-title loans to provide its customers with an option, said Jamie Fulmer , a spokesman for the Spartanburg, S.C., company. Explaining the details of a payday loan to borrowers became more complicated under Virginia’s new rules, and demand for the loans has fallen, Fulmer said.

In most cases, the amounts available from a title loan are greater than the $500 maximum for a payday loan. Advance America lends as much as $750 with its title loan. Allied Cash Advance will lend as much as $5,000 in Virginia.

Consumer advocates express concern about the increased availability of the loans, contending that essential disclosures are often lacking from the loan contracts. Lenders typically charge a base interest rate of 25 percent a month for the loans, which works out to an annual percentage rate of 300 percent. Then there are miscellaneous fees.

Partly because of the fees, “you can’t figure out what you paid and what you still owe,” said Jay Speer , executive director of the Virginia Poverty Law Center in Richmond and a critic of payday and car-title lending. Borrowers, he said, often leave assuming that they owe 25 percent a year on the loans when they owe 25 percent a month.

The amounts that title lenders make available are based on a percentage of the wholesale value of the borrower’s car. If borrowers fail to repay what they owe, they risk losing their vehicle.

Critics of payday lending argued that the interest expense from lenders’ triple-digit annual percentage rates sometimes crushed borrowers who rolled over a loan or who had several loans outstanding at one time. The cost of credit from a title loan can be just as dangerous, said Jennifer Johnson, senior legislative counsel in Washington for the Center for Responsible Lending, a consumer-advocacy group.

“Even with one loan, you can get to the point where you’re drowning in debt much faster” than with a payday loan, she said.

Amid complaints from consumers, Virginia began regulating payday lending in 2002 when it defined the terms and maximum rates that could be charged.

Title lenders have sidestepped regulatory scrutiny by relying on a state statute that limits the regulation of open-end lending by credit-card issuers. The statute allows providers of open-end credit to charge what they want as long as they provide a 25-day grace period for borrowers to repay without having to pay a finance charge.

Proposals for imposing interest-rate caps and other restrictions on title lenders have failed to emerge from the General Assembly in recent years. However, the momentum for regulation, including a cap on the rates that can be charged, appears to be building.

During the 2009 session, the Assembly decided to create a six-member committee to study the matter and report back with recommendations for next year’s session.

Tom Shean, (757) 446-2379, tom.shean@pilotonline.com