Virginia's car-title lending industry has exploded in the six years since the General Assembly crafted regulations legalizing loans that have more than 200 percent interest rates. But Virginia is not alone. States across the country are struggling to deal with payday loans and Internet loans and open-ended credit loans - a set of financial products critics call "predatory lending."
No job? No credit? No problem. That's the motto of the car-title lending industry, which is thriving in Virginia. Senator Mark Warner says it's the most recent example of small-dollar high interest loans that can be devastating for the people who get trapped in them.
"Some of the worst practices that were involved in payday lending, as more scrutiny is focused there, move now to car-title lending, where someone has to bring in their car title and it's lent against that asset."
That's why the newly created Consumer Financial Bureau is about to issue a new federal rule, essentially forcing lenders to prove that borrowers can pay back loans before they are issued. The rule would apply to car-title lenders and payday lenders and anyone else seeking to offer small dollar loans at interest rates more than 200 percent. During a recent hearing of the Senate Banking Committee, Massachusetts Senator Elizabeth Warren told the bureau's director ...
"You know, I hope you will move quickly to complete your rule making on payday loans. You are the best hope for millions of American families to avoid these debt traps in the future."
The director of the Consumer Financial Protection Bureau, Richard Cordray, told the committee the rule must be crafted to prevent these businesses from finding ways to evade regulators.
"If loopholes are allowed and if rules are flimsy then the industry will circumvent those rules and in fact they have shown their ability to do so."
But not everyone is persuaded that the rule is necessary. Senate Banking Committee Chairman Richard Shelby is one of the critics.
"By targeting some of these products in its rule making, the bureau may be blocking access to the very financial services many Americans may need in a crisis."
But is a loan that has an annual percentage rate of more than 200 percent really a financial service to people in crisis?
"To me, the proper term is loan sharking."
That's Jay Speer at the Virginia Poverty Law Center.
"And people, when you say the word loan sharking, they think of the guy who breaks your knee caps."
But, he says, loan sharking is really when lenders issue loans without making any analysis of whether borrowers have the ability to repay.
"They make the loan based upon their ability to collect on the loan and their ability to keep you in the loan as long as possible based on a very high interest rate."
And that's where the new rule comes into play, forcing lenders to prove - beyond a shadow of a doubt - that borrowers can pay back the loan before any money exchanges hands. Senator Warner says many people find themselves in these kinds of loans because of how their jobs pay them.
"Oftentimes, people run out of money because they get paid on a two-week basis. At the end of the two week basis they are short and they have to default to one of these less than savory lending institutions."
One potential solution, the senator says, is something called financial technology tools, known as "fintech," that would pay employees on a daily basis or set aside monthly savings.
"That's a whole new area that might end up preventing people from falling into the kind of debt traps that our system too often allows."
Until that happens, though, Warner says he supports the new rule. The Consumer Financial Protection Bureau plans to issue the rule in the next two months.
