Va. loan program an attempt to curb predatory lending

By Dena Potter

RICHMOND

Virginia will offer state employees short-term loans up to $500 in an effort to prevent them from turning to payday or car title lenders during tough economic times.

Gov. Timothy M. Kaine announced the Virginia State Employee Loan Program on Monday. It offers non-probationary employees emergency loans with no credit checks and no late fees at an annual interest rate of about 25 percent.

Payday and car title loans charge borrowers an average of 36 percent annual interest.

Borrowers must belong to a Virginia Credit Union and have at least $5 in a savings or checking account. To qualify for a loan, participants must successfully complete an online financial course and a 10-question financial literacy exam.

Loans come due in six months, with payments through direct debit from the employees' credit union account. Employees can have only one loan at a time and two per year.

Over the past few years as legislators debated whether to regulate payday and other lenders, Kaine said his office worked with other departments to develop a way to offer small-dollar loans to employees in financial emergencies. Banks and other lenders usually do not make loans below $1,000.

"We can certainly regulate payday lending and other predatory lending — and we should — but people do have a need for small-dollar loans that is not being met in the marketplace right now," he said.

Officials decided to use the Commonwealth of Virginia Campaign, the state's employee charity-giving program, to set up a fund where Virginia's nearly 100,000 employees could donate money for co-workers in distress. In a year it collected about $70,000.

The program dolled out about $31,000 in grants. But because of the high number of applicants, officials decided they needed a fund that was self-sustaining and settled on the 25 percent interest, said Sara Wilson, director of the Department of Human Resource Management.

Employees who take out a $100 loan would pay back about $108, or $540 on a $500 loan. Borrowers would pay less interest if they paid off the loan sooner.

For years, advocates have called for Virginia to prohibit payday and car title lenders from charging more than 36 percent annual interest. But lawmakers have refused to do so out of fear it would drive the lenders out of the state and lose that option for those who can't get loans from traditional lenders.

Last year legislators cracked down on payday lenders, limiting the number of loans and extending the amount of time borrowers have to repay their loans. Bills to further regulate car title lenders have continuously failed, but a legislative committee is studying the issue this summer.

Since the payday lending regulations took effect in January, the number of payday loans doled out in Virginia has decreased about 84 percent — down from an average of 281,000 loans per month to about 45,000 per month. But advocates fear many of those who relied on payday loans before have turned to car title loans, where borrowers can lose their vehicles if they fall behind.

Advocates said they were pleased with the new program, but still feel more should be done.

"Despite its limitations, the program is a solid first step toward expanding the menu of affordable small loan options available to low- and moderate-income consumers," said LaTonya Reed, a consumer finance policy analyst with the Virginia Interfaith Center for Public Policy.

Kaine said he hoped other local governments and private employers would follow suit with similar programs.