RICHMOND, Va. (WRIC) — Attorney General Mark R. Herring is encouraging Virginians to use National Consumer Protection Week as a time to familiarize themselves with the risks associated with small-dollar loans including payday, auto title, open-end, and online loans, and to understand their rights when taking out one of these potentially risky loans.
“Too often these small dollar loans that seem like a lifeline wind up being financial quicksand,” AG Herring said. “It’s not uncommon to see a few hundred dollars intended to get a borrower through a tough few weeks balloon into a few thousand dollars that remains unpaid months or even years later. The laws to protect Virginians against this kind of predatory and abusive lending are not nearly as strong as they need to be. That’s why it’s so important for Virginians to understand the risks associated with these products, to carefully review any terms and understand your own ability to repay the loan, and to consider any alternatives that may be available.”
Herring’s recently reorganized Consumer Protection Section includes the OAG’s first dedicated Predatory Lending Unit to investigate and prosecute suspected violations of state and federal consumer lending statutes, including laws concerning payday loans, title loans, consumer finance loans, mortgage loans, mortgage servicing, and foreclosure rescue services. The Unit also focuses on consumer education so Virginians are aware of the potential risks of these loans, as well as alternatives.
During his administration, Attorney General Herring’s Consumer Protection Section, and its Predatory Lending Unit, has successfully brought enforcement actions against, among others, motor vehicle title loan lenders, online payday lenders, online closed-end, installment loan lenders, online open-end credit plan lenders, mortgage-servicing companies, and pawnbrokers.
If a borrower believes their rights have been violated, or that their lender may have violated lending statutes, they should contact Attorney General Herring’s Consumer Protection Section to file a complaint or to get additional information about any consumer protection related matter:
- By phone: (800) 552-9963
- By email: firstname.lastname@example.org
- Online: Online Contact Form/Online Complaint Form
Motor Vehicle Title Loans
According to the State Corporation Commission, in 2015:
- 20,448 Virginians had their car repossessed for inability to repay a motor vehicle title loan
- 16,122 Virginians had their car repossessed and sold for inability to repay a motor vehicle title loan
- 29 motor vehicle title lenders issued 160,073 loans totaling $161,559,141 ($1,009 average loan) to 134,655 borrowers (1.2 loan average per borrower)
- The annual percentage rate of interest ranged from 12% to 268%
Virginia law provides certain restrictions on motor vehicle title loans and protections for borrowers:
- Interest-Title lenders can charge interest based on the following sliding scale:
- 22% per month on the first $700 in principal;
- 18% per month on any amount above $700 up to $1,400; and
- 15% per month on any amount above $1,400.
- For a one-month loan of $500, the total APR of the loan will be 264%.
- Length of a loan– The loan term must be between 120 days (four months) and one year.
- Number of loans-Only one loan may be issued at a time to each borrower, or on each title.
- Amount of loan-The amount loaned cannot exceed 50% of the value of the vehicle.
- Post-repossession protections-After default, a lender generally may only repossess the vehicle. They cannot continue to charge interest on the loan.
- Loans to military personnel-Lenders cannot make a title loan to a borrower who is a member of the armed forces or one of his or her dependents.
According to the State Corporation Commission, in 2015:
- 2,639 Virginians were sued by payday lenders for inability to repay a loan
- 18 licensed lenders operating 191 different locations issued 352,385 loans totaling $137,747,381 ($356 average loan) to 112,364 borrowers (3.1 loan average per borrower)
- Average annual percentage interest rate charged was approximately 231%
Virginia law provides certain restrictions on payday loans and protections for borrowers:
- Limitations on interest and other fees-Interest on a payday loan is generally capped at 36% annually. Lenders may not charge more than 20% of the loan proceeds as a loan fee, and may only charge a $5 verification fee for checking the state’s payday loan database prior to issuing a loan. For a one-month loan of $500, the total APR will be 288%.
- Length of loans-The term of a payday loan must be at least twice the borrower’s pay cycle so they have a better chance of repaying it. After that time, lenders cannot charge interest of more than 6% per year.
- Loan amount-Lenders cannot loan more than $500 to a borrower.
- Number of loans-Lenders cannot issue more than one loan at a time to a borrower.
- Number of loans in a 180 day period-If a borrower receives and pays off 5 payday loans in a 180 day period, there is a mandatory 45-day cooling off period when a lender cannot issue another loan to that borrower.
- Loans to military personnel-Lenders cannot make a payday loan to a borrower who is a member of the armed forces or one of his or her dependents.
Online loans are a growing segment of the consumer lending industry. Online consumer loans generally remain subject to Virginia’s “usury statutes” and interest rate limits of 12%, unless the lender qualifies for an exception, such as being an SCC-licensed payday or motor vehicle title lender. Interest charged in excess of that amount should be reported to Attorney General Herring’s Consumer Protection Section as soon as possible.
Online payday and motor vehicle title lenders who issue loans to Virginians are required to be licensed by the State Corporation Commission. However, closed-end installment lenders that operate online from outside Virginia and make loans to Virginia consumers are not required to be licensed by the SCC under current law.
Attorney General Herring recently won $15.5 million in restitution for Virginia consumers under the terms of a settlement subject to court approval to resolve claims that Virginians were charged illegal interest by internet lender CashCall, Inc. as part of a “rent-a-tribe” scheme.
Open-End Credit Plan Loans
Lenders are increasingly exploiting a loophole and steering borrowers towards open-end credit plans that afford borrowers very few consumer protections and can expose borrowers to unlimited interest rates. These loans can be offered by both online and brick-and-mortar lenders, often using phrases like “line of credit” and “cash advance.”
While open-end credit loans might look like more traditional loans, open-end credit lines can stay open for an unlimited amount of time and lenders can often charge unlimited interest. One of the few consumer protections in this area is a 25-day “grace period” during which the borrower has an opportunity to pay off the loan without interest or other finance charges, but once the 25-day grace period expires, a lender can charge an unlimited interest rate.
Alternatives to Predatory Loans
Before obtaining a potentially predatory loan from a non-traditional lender, consumers should consider their other alternatives. Among others, those alternatives might include:
- Traditional lenders-See if you can meet your needs through a traditional lender such as a bank, credit union, or consumer finance company, which typically will have a longer term and lower interest rates. Even if it is a small amount, a community bank or credit union may be willing to loan you the money you need.
- Credit card cash advance-If you have a traditional credit card with remaining credit available, obtain a credit card cash advance, which will often have a lower interest rate than that offered by a payday or motor vehicle title lender.
- Negotiation with creditors and companies-If you need money because you are having temporary trouble keeping up with routine bills, speak with your creditors, explain the financial difficulties you are having, and see if they will let you enter into a payment plan to take care of what you owe them.
- Personal connections-Consider whether you can get a temporary loan from family, friends, your congregation or place of worship, or a local charity.
- Military options-If you are in the military, check with the applicable military aid society to see if they have any financial assistance programs that could be of use.
- Paycheck advance-Some employers will allow you to borrow against your future paycheck.
- Authorized overdraft-Some banks will allow an authorized overdraft that may be preferable to taking out a risky loan that could saddle you with debt for months or years. If you utilize this option, be sure you understand the associated limitations, rates, or penalties.