Below The Beltway

Anita Kumar reports in today’s Washington Post that the Virginia Senate and General Assembly are set to consider a number of bills to increase regulation of the payday lending industry:

RICHMOND — In the five years since payday lenders opened their doors in Virginia, nearly 800 stores have sprouted in all corners of the state. That’s more than all the Starbucks coffee shops, even more than all the McDonald’s restaurants.

As borrowers have taken out cash advances against their paychecks, the industry has exploded, leaving thousands of Virginians in a cycle of debt they cannot escape.

The fact that there are more payday lending stores in Virginia than there are Starbucks or McDonalds locations is both irrelevant and a bad analogy. It’s a bad analogy because the payday lending industry is made up of a number of different companies, each of whom run their own stories. Starbucks and McDonalds are individual companies that are part of a wider industries.  And, it’s irrelevant because the number of payday lending stores, rather than being a problem, is a sign that the industry itself is meeting a demand that wasn’t being met five years ago. In other words, the market works and, in this case, the market, it seems, has spoken.

But that’s not how the opponents of the industry see it. To them, this undeniable success is a sign of a problem:

Payday customers typically borrow a few hundred dollars against a future paycheck for a few weeks. Lenders hold a customer’s personal check until the next payday, when borrowers pay off the loan or lenders cash the personal check, made out for the amount of the loan plus the fee. Loans are capped at $500 and are only available to those with a paycheck.

In Virginia, lenders can charge $15 for every $100 loaned. Calculated as an annual rate, the interest comes to 391 percent, according to industry officials and consumer groups. Industry supporters say the alternative — bouncing a check — costs far more, the equivalent of more than 1,300 percent.

In 2006, about 434,000 people in Virginia took out almost 3.6 million loans worth $1.3 billion, according to the state Bureau of Financial Institutions. That’s roughly one in 18 residents.

In other words, prior to 2002, one in eighteen Virginians who had short-term cash needs that traditionally lending sources could not or, because of poor credit, would not satisfy either had no place to go or spent their time playing the check-float game and paying bounced check fees to banks that ended up costing them more than the interest they would pay to a payday lender.

I wrote about this issue back in January when the General Assembly last considered payday lending regulation and the argument is the same today as it was then:

There’s no denying that pay-day loans can be expensive for the people that enter into them. Depending upon how long the loan is outstanding, the effective interest rate can be as high as 390 percent or more, but when you consider the fact that the people who are serviced by this industry typically have bad credit, low income, and few assets, it’s not all that surprising that they would be charged high interest rates for a loan.

By placing limits on the amount of interest that these lenders can charge, the legislature is going to cause the industry to be more conservative about how it lends money to people who are, admittedly, bad credit risks. The only people who will be hurt by that are the people who make use of the loans to begin with.