Loophole in credit law opens door to 360 percent interest rate


When Pauline Honey, then 95, returned to Virginia so her grandson could take care of her, the bill was higher than her family expected. So to help her out, she took out what she thought was a payday loan.

Honey and her grandson, Randy Morse, believed that a short-term loan of $ 450 – basically, an advance on her next three Social Security checks – would get her over the bump.

“We were in a pretty desperate situation. It was about paying for food and rent,” Morse said. “They said everything was fine, in three months we would all be fine.”

A year later, Honey had paid $ 597 for her loan of $ 450 and the lender, Allied Cash Advance, said she still owed $ 776.

This type of loan is made possible by a few words added three decades ago to state law that allowed retailers to offer charge cards, says Del. David Yancey, R-Newport News. The result, he says, is debt that can be nearly impossible to pay off.

It’s the kind of crushing debt that Virginia lawmakers tried to stop in 2009 by toughening the rules for payday lenders.

Allied Cash Advance did not respond to questions from the Daily Press.

Honey isn’t the only Virginian to have felt trapped by what’s called an open-ended credit scheme, which is marketed as payday loans, car title loans, or cash advances. . The interest rate on his loan was 360 percent. On top of that, she had to pay a monthly participation fee of $ 50.

Like a credit card, an open-ended credit plan – commonly referred to as a line of credit on paperwork – is supposed to allow you to borrow as much as you want, up to a preset limit, and pay off what you borrow. as quickly or slowly as you wish, as long as you make a minimum monthly payment.

Court records across the peninsula show how quickly these fees and interest can add up:

• A pharmacy technician at Hampton VA Medical Center who borrowed $ 800 in March 2010 handled eight fee payments of $ 50 and another $ 280 for the balance, for a total of $ 680, but interest, at 221 $ per month, meant she could never move forward. She owed $ 1,249 when the lender sued her. She moved in two years later with a payment of $ 2,079. She did not return a call to ask about her experience.

• Another Hampton woman’s $ 300 loan had climbed to $ 800 a year later when she filed for bankruptcy. That loan, $ 43,000 in medical bills, the balance owed on a trade-in car, and credit card balances exceeded what she could handle with her salary of $ 2,495 per month as a sheriff’s assistant. She had managed to make payments totaling $ 220 within three months of borrowing the money, but the unpaid interest during that time stood at $ 183 and continued to accumulate thereafter.

• A man from Middle Peninsula told the Virginia Poverty Law Center hotline that he paid $ 1,750 over three months for a $ 1,000 open-ended credit agreement, and was rejected when a series of medical bills prompted him to ask the lender for an easier repayment schedule. He is regularly called to work with payment requests.

There was little the legal center could do to help.

“The perpetual loan loophole is a way for lenders to get around the laws,” said Ward Scull, an executive at a Hampton moving company whose work with Virginians Against Payday Loans has led to the crackdown on 2009.

Unlike other consumer loans, open-ended credit contracts are not subject to any interest rate or fee cap.

Payday loans – which many open-ended lenders made before the 2009 regulatory crackdown – cannot charge more than 36% plus a fee of 20% of the amount borrowed.

The crackdown also said that lenders, who charge triple-digit interest rates on payday loans, cannot grant more than one loan to a borrower at a time. The aim was to avoid the build-up of debt, such as that which results from monthly fees and high interest rates on open-ended contracts.

“When I ran for office and knocked on doors, and when I ran for office, I kept hearing about it,” Yancey said. “My constituents are injured.”

With the exception of the requirement that borrowers have a 25-day grace period to repay the balance without interest charges, there are no laws regulating the repayment of indefinite loans.

And even the grace period requirement is not always met, as court records show.

Last year, Advance ‘Til Payday paid a fine of $ 10,000 and agreed to reimburse an average of $ 130 to 306 Virginians for not granting the grace period. Six similar settlements have been negotiated by the attorney general’s office over the past five years. Consumer advocates complain that settlements are easy for lenders and exclude some borrowers.

“I just want to be sure we’re fair to consumers and to other lenders,” Yancey said.

He’s up against big hitters. Over the past decade, companies in the industry have donated over $ 1.4 million to politicians in Virginia.

His two previous efforts died in committee, with lawmakers simply sitting on their hands, voting neither for nor against.

What Yancey wants is to repeal an obscure 3-decade-old adjustment to state law originally intended to allow stores to offer charge cards – indefinite credit plans. ‘origin.

The tweak allowed loan companies to get into the business.

Giants like Household Financial, Associates and Beneficial wanted to offer credit cards, as banks are allowed to do under a different section of state law. But these companies pulled out of the market a long time ago, preferring to stick with small loans for fixed amounts subject to a 36% interest rate cap.

Charles Guthridge, a lobbyist for open-ended credit lenders, does not believe it is necessary to change the law.

He said there have been few complaints from borrowers. Lenders regularly make repayment plans when borrowers gain the upper hand, he said.

“It’s for when your car’s water pump shuts down or the baby needs diapers and you’re little,” he said. The idea is a short term flexible loan that is easy to organize.

The sums at stake are small and many borrowers simply don’t have other options, especially since open credit lenders tend not to ask for credit reports, he said. Often times, loans are unsecured or are secured by a title on a borrower’s car.

While many borrowers repay the sum within the 25-day grace period – essentially paying off the borrowed amount plus the first monthly fee – a significant percentage do not. Lenders say 30 to 40 percent of borrowers never pay interest or principal, and they have to charge fees and high interest rates to cover these losses.

But many, like Honey, end up paying dearly.

“They were relentless,” her grandson recalls. “We were told we could go to jail. … (They) cursed us, told us we were deadbeats. …

“I was trying everything I could to figure out how to get them to pay.”

• A Newport News man owed $ 1,055 after borrowing $ 600 from an Allied Cash line of credit, even after paying $ 872 on debt.

• Five months after borrowing $ 250, another Newport News man had repaid $ 315 but still owed $ 704, the lender said in a court record. None of the money the man paid went to his principal – it all went to monthly fees and interest.

By the numbers

12%: the base interest rate limit, but there are many exceptions.

36%: Maximum annual interest rate on unsecured consumer loans under $ 2,500.

36% plus 20% plus $ 5: maximum interest rate, loan fees, and processing fees allowed for a payday loan.

120%: The maximum annual rate on pawn shops under $ 25 (84% maximum for loans over $ 25).

264 percent: maximum annual rate for auto title loans under $ 700 (216% maximum for the next $ 700; 150% on larger amounts).

No cap: bank loans, unsecured consumer loans over $ 2,500, open-ended credit plans.

Ways to borrow

Besides the norm – borrowing a fixed amount, making a fixed monthly payment to cover the interest and part of the money you borrow – here are some ways that lenders are tapping into the market:

Payday loan: You write a check. The lender pays you less – basically the amount you wrote down minus an interest rate and loan fees. The lender cashes the check for the face amount later, usually after you receive two paychecks.

Car Title Loan: You get a short-term loan, using your car’s title as collateral.

Pledge an object. You borrow from a pawnshop, placing a valuable item as collateral. If you don’t repay the loan, the pawnshop can sell the item.

Credit agreement for an indefinite period: You can borrow up to an agreed limit. You pay it back as quickly or slowly as you want, as long as you make an agreed minimum payment (or monthly fee). This is how credit cards work, as do “equity lines of credit” secured by real estate or car title.

Certain cases

Here are some other examples of open-ended loans from the peninsula’s court records:

• A 44-year-old Newport News woman who borrowed $ 295 handled three monthly payments of $ 50 to meet her expenses as well as an additional payment of $ 74, but within three months she owed interest of 305 $. She ended up paying off her debt with a $ 300 payment six weeks later – her $ 295 loan cost her $ 524 to repay


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