By Chris McKinley
Whether the borrower is from the suburbs of Alexandria or a rural town in Virginia’s coal country, access to fairly priced consumer credit that permits both sustainable lending markets and affordable repayment terms for consumers is more important today in the COVID-19 environment than ever.
Affordable and accessible access to credit helps consumer borrowers address important life events – planned and unplanned – so that consumers are not burdened with income disparities or savings shortfalls. And, as stated by Richard Cordray, former director of the Consumer Financial Protection Bureau, “Credit markets work best when there is a beneficial alignment of interests between borrowers and lenders.”
Virginia’s Fairness in Lending Act (S.B. 421), which becomes law on January 1, 2021, will reinforce that support for aligned, beneficial interests for Virginia’s consumer lending market. Among other benefits, it will set a ceiling of 36 percent on interest rates for consumer loans between $300 and $35,000. This is a significant step forward for the Commonwealth, where current state laws allow uncapped interest rates on small loans, resulting in Virginians sometimes paying up to three times more for credit than borrowers in other states.
Our company, Lendmark Financial Services, was actively engaged for the past three years in the debate about this state’s unregulated interest rate environment. Together with other members of the Virginia Financial Services Association, we were increasingly concerned about the growth of high-cost lending, and what this increase in extreme rate lending would mean to the financial stability and well-being of both Virginia’s credit markets and borrowing consumers.
This troubling trend drove our strong support of Virginia’s Fairness in Lending Act as the right approach for consumers to have a loan that is affordable and accessible while promoting a sustainable, healthy credit market for lenders in Virginia.
Traditional consumer lending vs. predatory lending
For more than 100 years, the traditional, non-bank, consumer lending market has served this State’s consumer credit needs with a strong focus on the importance of a beneficial alignment between borrowers and lenders. From its beginnings as community-based, brick and mortar lenders, to its newer variations providing online accessibility, traditional consumer lending provides access to reasonably priced loans to help Virginians manage planned and unplanned life events.
Today, consumer lenders have a responsibility to make borrowing easy and convenient and, most important, affordable. Providing consumers with fixed, predictable, and affordable rates empowers consumers to meet financial challenges and life events without creating additional hardship.
High cost, extreme rate, long-term loans, on the other hand, are clearly not a safe option for financially struggling consumers. How many borrowers who live paycheck to paycheck – the very borrowers who S.B. 421 opponents claim benefit from their loans – have been forced to sacrifice basic needs just to cover these extreme interest loan repayments? The truth is, such wealth-stripping credit products are not a financial lifeline, as has been often claimed by opponents, but instead serve as a financial trap that can place consumers in a long-term debt repayment hardship for years. These harmful credit products are nothing more than throwing a lead-weighted life preserver to someone who is drowning.
Until Virginia’s Fairness in Lending Act becomes effective next year, Virginia will remain part of an unenviable group of 11 states that still do not cap interest rates for installment loans over $2,500, according to Pew Charitable Trusts. Fortunately, states’ laws are slowly changing to shield more and more consumers. In addition to Virginia, the California State Legislature recently voted to cap rates on consumer loans of $2,500 to $10,000 at 36 percent.
The Fairness in Lending Act, which passed Virginia’s General Assembly with bipartisan support and was signed by Governor Northam, separates traditional consumer lending from predatory lenders, and provides a real solution to the corrosive effects of unregulated interest rates that had been growing in Virginia’s consumer lending market. This important legislation will now protect Virginia’s financially vulnerable households from what can only be described as interest rate ’price gouging’ in a time of need or emergency – as we emerge from the pandemic, and beyond.
By establishing credit options that promote the beneficial alignment of interests between borrowers and responsible lenders, Virginia can finally free vulnerable consumers from the punitively high interest rates that have plagued this State for far too long.
Chris McKinley is senior vice president, government affairs for Lendmark Financial Services. Lendmark is a national consumer finance company that serves over 40,000 consumers in the personal loan market in Virginia.