By Bill Rice
For most Americans, it’s long past time for a real raise. For too long the average wage in our country, after accounting for inflation, has remained stagnant, with the average paycheck retaining the same purchasing power as it did 40 years ago.
Recently, much has been written of this trend and the larger issue of growing wealth inequality in the U.S. and abroad. To make matters worse, housing, healthcare, and education costs are ever rising.
Oftentimes many Americans bridge this gap between their income and their rising costs with credit. This is not new. Expanding access to credit was a key policy tool for fostering economic growth and catalyzing the development of the middle class in the U.S. Yet, these policies were not undertaken fairly. As expounded in her seminal work “The Color of Money: Black Banks and the Racial Wealth Gap,” University of Georgia professor Mehrsa Baradaran writes “a government credit infrastructure propelled the growth of the American economy and relegated the ghetto economy to a permanently inferior position,” adding that “within the color line a separate and unequal economy took root.”
In other words, not only do we have a larger issue of wealth inequality and stagnant wages, but within this issue lies stark contrasts of government fomented racial inequality.
So it is no wonder that many Americans seek quick and easy access to credit through the payday lending market. According to the Pew Research Center, some 12 million Americans utilize payday loans every year. Furthermore, Experian reports that personal loans are the fastest form of consumer debt.
The problem with this type of lending is its predatory nature. Those who use these services often find themselves in an unnecessary debt trap – owing more in interest and other punitive or hidden fees than the amount of the initial loan.
Virginia is no stranger to this issue. The number of underbanked Virginians is 20.6 percent and growing, according to the Federal Deposit Insurance Corporation (FDIC). And according to the Center for Responsible Lending, Virginia ranks sixth out of all states for average payday loan interest rate at 601 percent.
There are two main areas of concern in Virginia regarding payday lending: internet lending and open-end line credit loans. While Virginia passed much-needed payday lending reform in 2009, these two areas were left mostly unregulated.
Currently, internet lending is a vastly unregulated space, where lenders can offer predatory loans with interest rates as high as 5,000 percent.
Similarly, open-end line credit loans (lending agreements of unlimited duration that are not limited to a specific purpose) have no caps on interest or fees. Not only must this type of lending be restricted, but we must also expand access to credit through non-predatory, alternative means.
The Virginia Poverty Law Center advocates for legislation applying the Consumer Finance Act to internet loans, thus capping interest rates and reining in other predatory behaviors. The organization also calls for regulating open-end line credit loans in a number of ways, including: prohibiting the harassment of borrowers (e.g., limiting phone calls; banning calling borrower’s employer, friends, or relatives, or threatening jail time), instituting a 60-day waiting period before lenders can initiate lawsuits for missed payments, and limiting such lending to one loan at a time.
In addition, Virginia should pursue alternative means of credit lending for these underserved communities. These alternatives include supporting community development credit unions and encouraging larger banks to offer small, affordable but well-regulated loans.
Thankfully legislators, such State Senator Scott Surovell (D-36), have taken initiative on this issue, introducing two bills last session. Surovell’s first bill would prohibit car dealerships from offering open-end credit loans and restrict open-end credit lending in general. The second would close the internet lending loophole, applying needed regulatory standards (e.g., capping annual interest rates at 36 percent, requiring these loans to be installment loans with a term not less than six months but no more than 120 months). Sadly, the Senate passed neither bill. But hopefully Surovell will introduce such measures again this coming session.
It’s also heartening to see candidates for office, like Yasmine Taeb, take a strong, vocal stand on the issue. Taeb, running for Virginia State Senate in the 35th District, not only attended Agenda: Alexandria’s event “Predatory Lending or Loans of Last Resort?” last month but also has wholeheartedly endorsed the reforms championed by the Virginia Poverty Law Center, saying “the open-end credit loophole needs to be closed and all lenders must follow the same laws.”
Although there are some clear measures that can be taken to limit the role of predatory lending in Virginia, there is still much to be done regarding the larger issues of economic inequality. Such lending reforms should be a piece of a larger effort by politicians and the community at large to address this growing issue.