Just Just How Virginia’s 2020 Fairness in Lending Act Reforms Small-Dollar Loans

Just Just How Virginia’s 2020 Fairness in Lending Act Reforms Small-Dollar Loans

Legislation closes regulatory loopholes, caps interest levels, and offers lessons for any other states

Overview

After several years of legislative efforts to foster a secure and viable marketplace for tiny loans, Virginia lawmakers in 2020 passed bipartisan legislation—the Fairness in Lending Act (S.B. 421/H.B. 789)—to prohibit loans with big last re re payments, called balloon re re payments, and reduce costs. The legislation rationalizes exactly what have been a disparate regulatory framework, governed with a patchwork of laws and regulations that permitted payday and automobile name loans with unaffordable re re payments and needlessly high expenses, and uncovered borrowers to economic harm, including repeated borrowing and high prices of automobile repossession. Past research by The Pew Charitable Trusts revealed that ahead of the reforms, businesses routinely charged Virginians 3 x a lot more than customers in lower-cost states. 1

Virginia lawmakers balanced issues in regards to the accessibility to small-dollar credit utilizing the urgency of stopping harmful financing practices, a challenge that officials in other states also provide struggled with. Virginia’s approach that is evidence-based on effective reforms formerly enacted in Colorado and Ohio that maintained extensive use of credit and measurably enhanced customer outcomes by shutting loopholes, modernizing outdated statutes, and prohibiting balloon re re payments. Legislators created the work to mirror “three key principles of accountable financing: affordable re re payments, reasonable rates, and time that is reasonable repay.” 2

Pew’s analysis of this work confirmed that, underneath the legislation, loan providers can profitably provide affordable installment loans with structural safeguards, saving the normal borrower a huge selection of dollars in costs and interest with estimated total consumer cost savings surpassing $100 million yearly. (See Dining Table 1.) This brief examines exactly how Virginia reformed its legislation to produce a far more contemporary, vibrant, and consumer-friendly market that is small-loan. Virginia’s success provides replicable classes for policymakers various other states experiencing high-cost, unaffordable loans.

Virginia’s Small-Credit Pricing Yields Significant Customer Savings

Loan examples from pre and post reform

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Unaffordable loans. Short-term balloon-payment loans consumed 20% regarding the typical Virginia borrower’s paycheck, causing duplicated borrowing.

Research-based safeguards for affordable installment re re re payments set versatile durations, typically of four months or maybe more, and enable for a range that is wide of sizes. Loan providers might not require balloon re payments.

Extortionate price. Payday loan providers charged 3 times more in Virginia than they did in other states, such as for example Ohio and Colorado. Borrowers often paid more in fees and interest than they initially received in credit.

Evidence-based prices limits—36% interest plus fees—are that is limited for lenders and keep maintaining extensive use of credit. Simple rules promise effortless loan provider compliance and APRs that decrease immediately as loan sizes increase. For short-term installment loans (previously “payday loans”), total expenses might not surpass 50% associated with loan quantity or 60% for loans of greater than $1,500; as an example, for the $1,000 loan, a debtor may not be charged a lot more than $500 in charges and interest.

Damage. Aggressive collection methods place borrower account that is checking and cars at an increased risk; 1 in 8 name loan borrowers had a car repossessed.

Loans guaranteed with checks, electronic payment plans, or an automobile name should have affordable re payments and reduced rates and cannot employ harmful repossession and collection methods. Loan-servicing partnerships are susceptible to regulation that is enhanced and high-cost loan brokering is forbidden.

The modernized statutes enable numerous business models for lending to clients with slim or damaged credit records and need loans to own affordable re payments, clear terms, and reasonable costs, regardless of security or whether or not they were created at a retail location or online. This group of requirements produces a playing that is level, allowing diverse businesses, including payday, name, installment, or monetary technology organizations, to compete in Virginia, expands consumer option, and protects borrowers from harmful methods. (See Dining Dining Table 3.)

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Loan Before reform After reform Resulting savings
$300 over three months
$500 over 5 months
$1,000 over year
$2,000 over eighteen months