Usury requires a simpler solution

It looks like state lawmakers are about to miss yet another opportunity to do something simple and effective to end the scourge of predatory lending in Virginia.

Payday lenders morphed from a minor annoyance to a plague after legislators passed a law in 2002 intended to improve regulation. Instead, the law legitimized a form of usury and, in the process, attracted more lenders to Virginia.

Since then, lawmakers have pretended to get tough on payday lenders with a series of inept laws that merely encouraged the businesses to search out and take advantage of loopholes in existing consumer protections. Many payday lenders have switched to open-end and car title loans, which are unregulated and can have annual interest rates of nearly 400 percent.

Now Senate Majority Leader Dick Saslaw is determined to give car title companies the same credibility the legislature granted to payday lenders nearly eight years ago. Saslaw is leading a legislative study commission whose members appear inclined to grant him his wish.

Advocacy groups representing consumers and low-income families are in a bind. Past failures have convinced the groups that the most airtight consumer protection available - a 36 percent cap on interest rates for all small loans - cannot pass the General Assembly.

And so the consumer groups this year are taking a new tack. The bill they are backing includes some vitally important reforms - but pairs them with provisions that carry serious risk.

The most important component of the bill is its elimination of the open-end credit loophole that allows both payday and title lenders to peddle loans with unlimited interest charges. That action is needed regardless of the debate on other parts of the legislation.

The bill also places car title lenders under regulation by the state's Bureau of Financial Institutions. Title loans would be limited to a 12-month payout period. Repossession of a vehicle would be prohibited if a borrower has paid 100 percent of the principal, and consumers would have the right to a 60-day notice before repossession. A title lender would be banned from placing a loan on a vehicle with an existing lien.

Those regulations would allow the state to charge penalties for the most serious abuses now being committed by title lenders. But by regulating the businesses, the state would also be giving them its blessing, repeating the mistake made in 2002 with devastating results.

If there was any certainty that the bill could pass as it now stands, its benefits might outweigh its very real dangers. But past experience makes it clear this bill will not survive the 60-day legislative session unscathed. Lobbyists for title lenders will grind away at the proposal, forcing trade-offs and compromises.

The proposal now calls for a maximum 50 percent annual interest rate on title loans. That number will likely be doubled or worse in a final deal. Further, Saslaw has promised to file his own proposal that will likely start the bidding with a far higher interest rate.

The Virginia Poverty Law Center and other groups working to curb predatory lending are making a sincere effort to pass reforms in a legislature that is numb to the suffering caused by its past mistakes.

But the bill they are offering this year is too complex and vulnerable to sinister manipulation.

The easiest, most straightforward cure is still a 36 percent annual interest rate cap on small loans. It's appalling that legislators have not learned that simple lesson after so many years and so many missteps.