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

Legislation closes regulatory loopholes, caps interest rates, and offers classes for any other states

Overview

After several years of legislative efforts to foster a safe and market that is viable 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 payments, referred to as balloon re re payments, and reduce costs. The legislation rationalizes just just what was a disparate regulatory framework, governed with a patchwork of legislation that permitted payday and automobile name loans with unaffordable re payments and needlessly high expenses, and uncovered borrowers to economic damage, including duplicated borrowing and high prices of automobile repossession. Past research because of The Pew Charitable Trusts revealed that prior to the reforms, companies routinely charged Virginians 3 x a lot more than clients in lower-cost states. 1

Virginia lawmakers balanced issues about the option of small-dollar credit using the urgency of stopping harmful financing techniques, a challenge that officials various other states also provide struggled with. Virginia’s evidence-based approach develops 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that maintained extensive use of credit and measurably enhanced customer outcomes by shutting loopholes, modernizing outdated statutes, and prohibiting balloon re payments. Legislators created the act to mirror “three key principles of accountable financing: affordable re re payments, reasonable rates, and reasonable time for you to repay.” 2

Pew’s analysis of this work confirmed that, beneath the legislation, loan providers can profitably provide affordable installment loans with structural safeguards, saving the standard borrower a huge selection of bucks in charges and interest with estimated total consumer cost cost savings surpassing $100 million yearly. (See Dining Table 1.) This brief examines how Virginia reformed its rules to obtain a newer, vibrant, and consumer-friendly small-loan market. Virginia’s success provides replicable classes for policymakers various other states fighting high-cost, unaffordable loans.

Virginia’s Small-Credit Pricing Yields Significant Customer Savings

Loan examples from pre and post reform

payday loans in Ohio

Unaffordable loans. Short-term balloon-payment loans consumed 20% associated with the Virginia that is typical borrower’s, causing duplicated borrowing.

Research-based safeguards for affordable installment re payments put versatile durations, typically of four months or maybe more, and invite for a wide variety of loan sizes. Loan providers may well not need balloon re re payments.

Exorbitant 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 rates limits—36% interest plus fees—are that is limited for lenders and keep extensive use of credit. Simple rules confirm simple loan provider compliance and APRs that decrease immediately as loan sizes enhance. For short-term installment loans (formerly “payday loans”), total expenses might not go beyond 50% associated with loan quantity or 60% for loans of greater than $1,500; for instance, for the $1,000 loan, a debtor can not be charged significantly more than $500 in costs and interest.

Damage. Aggressive collection methods place borrower bank account funds and vehicles at an increased risk; 1 in 8 name loan borrowers had a car repossessed.

Loans guaranteed with checks, electronic payment plans, or a car name will need to have affordable re payments and reduced prices and cannot employ harmful repossession and collection methods. Loan-servicing partnerships are subject to regulation that is enhanced and high-cost loan brokering is prohibited.

The modernized statutes enable business that is numerous for lending to clients with slim or damaged credit records and need loans to possess affordable re re payments, transparent terms, and reasonable costs, whatever the collateral or if they are manufactured at a retail location or online. This pair of requirements produces a playing that is level, allowing diverse businesses, including payday, name, installment, or economic technology businesses, to compete in Virginia, expands customer option, and protects borrowers from harmful techniques. (See Dining Dining Table 3.)

Loan Before reform After reform Resulting savings
$300 over a few months
$500 over 5 months
$1,000 over year
$2,000 over 18 months