Predatory Lenders Find Loophole in New Lending Law
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July 30, 2009
RICHMOND, Va. - Quick-cash lenders have found a loophole around Virginia's new law cracking down on predatory lending. Last year, legislators limited payday loans (money borrowed against a person's next pay check at an exceptionally high interest rate). As a result, the governor's office says, the number of payday loans in Virginia decreased by about 84 percent. However, consumer advocates say, there's no way to tell if that number includes transfers from payday loans to open-ended lines of credit.
That's the snare that snagged retiree Donna Thompson, Suffolk, Va. When she contacted her lender about her $500 dollar payday loan, they steered her into an open-ended line of credit.
"After that, I was paying $130 every month. I kept on saying 'How come, if I'm paying this much, why isn't it coming down?' And then they told me, 'Well, you're just paying the interest.'"
Thompson says she needed the small, short-term loan to make repairs on the car she uses to get to a job that supplements her retirement income.
The new law limits payday loans for people on Social Security and disability. As a result, advocates say, those borrowers often were moved to new open-ended lines of credit. That's what happened to Thompson. As she learned, the average yearly interest rate on those loans is 300 percent.
"I'd borrowed $500. Well, I've already paid $600, and that was the interest. Now I'm starting to pay the principle, so I still have to pay $500 dollars."
The new predatory lending law doesn't limit interest rates on open-ended loans. The only regulation on open-ended loans is a 25-day grace period for the first payment.
For assistance on escaping a predatory loan, people are encouraged to contact the Virginia Partnership to Encourage Responsible Lending at www.virginiafairloans.org or to call the partnership hotline, 866-830-4551.