Predatory lenders try to stay a step ahead

When payday lenders subverted state regulations on their industry by offering a new type of high-interest predatory loan, legislators put on their best frowny faces and passed a law prohibiting companies from peddling both kinds of usury under one roof.

But they left an enormous loophole. Although payday lenders are prohibited from offering so-called "open-end" loans with triple-digit annual interest rates, they can still lure customers into car title loans, which have equally punitive terms and even greater risks.

Payday lenders didn't think that loophole was big enough, however, and now some companies have "invented" what amounts to a fake car title loan.

Real title loans aren't exactly attractive to customers or lenders.

Customers are more likely to have second thoughts because they must turn over the title to their vehicles plus a spare set of keys in order to obtain the loan. Because the vehicles may be repossessed if loans aren't repaid, lenders must complete additional paperwork to satisfy legal requirements.

Some payday lenders are trying to gloss over the dangers of title loans by allowing borrowers to simply provide a copy of their vehicle registration or drivers license. These are open-end loans disguised as title loans. Which means they are illegal when made by a payday lender.

Once again, predatory lenders have found a way to sneak around Virginia's weak consumer protection laws. State regulators with the Bureau of Financial Institutions are scrambling to respond with proposed rules addressing fake title loans and other abuses employed by the industry.

The new regulations released this week are a depressing compilation of all the dirty tricks predatory lenders are

• Title loans can't be placed on cars that already have existing liens.
• Predatory lenders sharing office space can't collude to permit a customer to borrow from one in order to pay off debts to the other.
• Payday lenders can't require a customer to purchase another service or product, such as life insurance, in order to qualify for the loan.
• Payday lenders can't operate automated teller machines with excessive fees for use by customers paying off their loans.

Regulators appear to be tiring of the game legislators are playing with predatory lenders, particularly when the lenders are so clearly winning.

The Bureau is seeking authority to veto co-locations involving predatory lenders when they are not in the "public interest." It's hard to imagine any scenario involving a predatory lender that would be in the "public interest," and industry lawyers are sure to howl at giving regulators such broad power.

Even if the proposed regulations survive that challenge, the Bureau can only do so much. The real solution to the problem must come from the legislature in the form of a 36 percent cap on interest rates for all small consumer loans.

Until lawmakers take responsibility for a problem they created, regulators will be forced to keep trying to sew patches over state laws riddled with loopholes.