An End to Payday Loans?

In late March, the town council of Kilmarnock, Virginia, voted 4 to 2 to keep in place zoning laws that would effectively block the payday-loan industry from expanding in their town. Fifty citizens -- an impressive turnout in a town of just 1,244 -- crowded into the council meeting to plead with elected leaders not to change the town's zoning laws to let Advance America, one of the largest payday lending companies in the country, set up shop at the local Wal-Mart complex.

"I think they practice usury," said Frank Tomlinson, the council member who led the opposition to the proposed zoning change. "They loan to people who have their backs against the wall, and then they quite frankly stick it to 'em."

Tomlinson's concerns were echoed by members of the clergy, local residents, and statewide anti-poverty advocates from the Virginia Poverty Law Center and Virginians Against Payday Lending, who showed up in force at the town meeting. The coalition that has sprung up in Kilmarnock and across the state is an unusual one, an alliance of the left, religious groups and conservative politicians. Such activism is unusual in Kilmarnock, which occupies just 2.69 square miles along the Chesapeake Bay. Kilmarnock's picturesque Main Street has been featured in a JCPenney "Living in America" commercial, and most classify the town as politically and socially conservative.

But Advance America filed suit against the town, claiming that it deserved "equal protection" under the law. Scared by the potential costs of litigation, the Kilmarnock city government reversedĀ its decision several weeks later.

This outcry about the payday-lending industry isn't just happening in tiny Kilmarnock: Similar coalitions of have sprung up across the state, setting an unprecedented example for protecting the interests of poor and working-class Americans. When the Virginia state legislature considered a bill to curb payday loans this year, the industry sent dozens of lobbyists to the state House and flooded the state with a multimillion-dollar ad campaign, successfully derailing the tough legislation. But by building on the diverse coalition of support for regulation, advocates hope to continue their fight to take down this powerful, predatory industry.

"Payday lending" businesses allow customers to borrow cash against a future paycheck, without requiring a credit check. Most customers borrow several hundred dollars, which they are expected to pay off along with a fee when they get their next check. But calculated at an annual rate, the interest on these loans comes in at an average of 391 percent, and it's not uncommon for borrowers to take out a second loan in order to pay off the first, pushing them deeper into debt.

This type of lending became common in Virginia after the legislature passed the Payday Loan Act in 2002, which granted the payday-loan industry an exception to the usury cap, which is the upper limit a government sets on interest rates for loans. Since then, payday lending has grown from a handful of businesses in the state to a $1.5 billion industry with more than 800 locations. While the industry argues that the loans are intended to provide money in "emergency" situations, the average payday-loan user in Virginia takes out 8.3 loans a year from a single lender, according to the Virginia Bureau of Financial Institutions. In 2006, 89 percent of payday-loan users in Virginia took out multiple loans, and 22 percent reported taking out more than 13 loans. The average amount for a single loan in Virginia is $365, for which the borrower will pay back $793. This creates a downward cycle of debt for most users, which has prompted consumer-rights and anti-poverty groups to take on the industry for bilking the most vulnerable populations.

Christian, Jewish, and Muslim sacred texts all include admonishments of unsavory lending practices, and, according to Doug Smith, executive director of the Virginia Interfaith Center for Public Policy, this shared moral value has prompted the religious community in Virginia to take on an industry that they find to be immoral.

"We are very much witnessing to our sacred texts that call for us to protect the poor," said Smith. "America still is a place where business is strong, but should not overpower the weak."

In the last three years, the Interfaith Center has linked up with anti-poverty and consumer-rights activists and groups like the AARP, AFL-CIO, and NAACP, under the banner of the Virginia Partnership to Encourage Responsible Lending. The partnership also includes staunchly conservative, "pro-family" organizations like the Family Foundation, a group traditionally focused on fighting gay marriage and abortion.

"The more we looked at it, the more we saw the negative effects of payday lenders on families, and really on churches as well, because a lot of these families that were caught in the debt trap were having to go to churches for help," said Chris Freund, vice president of policy and communication for the Family Foundation.

Some of the partnership's strongest supporters the State house have been Republican legislators like Delegate John O'Bannon, a social conservative who once served as the lead sponsor of legislation to recognize Feb. 6 as Ronald Reagan Day.

"I think it's a pretty straightforward issue that people get," said O'Bannon. "This is predatory lending, and they make their money on hooking people and then taking them to the cleaners."

O'Bannon said he was pushed to action on the issue after a number of members of the clergy in his district came to talk to him about the issue. When he raised the issue in a questionnaire that went out to his constituents, 90 percent said they were concerned about predatory lending and wanted something done about it. The partnership's legwork in the statehouse allowed them to bring legislators like Dwight Jones, head of the state's black caucus, and Terry Kilgore, head of the Labor Committee, on board. "The coalition is one of the wonderful parts of this story," said O'Bannon. "You will never see a coalition like that again."

"The people that are impacted have no voice. The people at the bottom of the pyramid don't vote, they don't make contributions, and they usually are embarrassed when they get into these kinds of situations," said Ward Scull, co-founder of Virginians Against Payday Lending. "They feel tricked and ashamed about all the money that they've spent."

Partnership members have worked to get 60 towns to issue proclamations to the governor and the General Assembly saying that they want the industry reigned in. They also identified sympathetic legislators to sponsor state legislation, and worked with those legislators to build support in the assembly, and employed the services of two major lobbying firms.

After three years of grassroots effort and several failed attempts to pass statewide legislation to abolish payday lending, in March the Virginia legislature approved the first piece of legislation to regulate the industry. But, in the eyes of many members of the coalition, the legislation doesn't go far enough to protect citizens.

The new law restricts borrowers to one loan at a time, limits individuals to five loans in a 180-day period, and extends the loan term to two times the borrower's pay cycle. But in many ways, the legislation actually increases the burden on borrowers by raising fees from $15 per $100 borrowed to $20, and some borrowers can still obtain up to 15 loans per year. Though it capped interest rates at 36 percent, between the interest and additional fees, borrowers are still paying a 362 percent annual percentage rate on loans, according to Dana Wiggins of the Virginia Partnership to Encourage Responsible Lending.

Even a compromised bill was difficult to pass thanks to a multimillion-dollar campaign on the part of the payday-loan industry. The industry hired a fleet of lobbyists and took out ads in major print and broadcast media all over the state. According to the money-in-politics watchdog group Virginia Public Access Project, lending and consumer-credit companies made $551,660 in campaign contributions in 2007. Democratic Senate Majority Leader Richard Saslaw, one of the industry's biggest allies in the fight over payday-loan legislation, received $40,750 from the industry last year alone.

Similar fights have also been waged or are underway at the state level in many of the other 37 states that allow payday lending. The North Carolina legislature successfully booted lenders from the state in 2001 by allowing the sunset provision that the industry was operating under expire. In Arkansas, though the state constitution prohibits lenders from charging more than 17 percent interest, payday lenders have been allowed to operate there for years. But in mid-March, the state attorney general sent a letter to all the payday lenders in the state, telling them to shut down operations immediately and void customers' debts. Several other states have capped interest rates at 36 percent, and last September, Washington, D.C., passed a law capping the rate at 24 percent. A number of other states are also currently considering bills to regulate the industry.

Scull and other advocates hope that in addition to continuing the fight for tougher legislation in Virginia, they can take on the industry in local fights, as Kilmarnock tried to do. "If the state is not going to take strong leadership, it will fall to the localities to take the leadership to protect the people in their communities," said Scull.

They've had some success so far. Two years ago, the Norfolk city council refused to pass a law prohibiting new payday-lending outlets unless the businesses receive council approval, and the council hasn't approved a single new shop since then. The city council in Alexandria is also currently considering a proposal to impose a steep new tax on payday lenders, the proceeds of which would finance a consumer education campaign aimed at low-income citizens who are the payday loan industry's target.

But as Kilmarnock has learned, localities that try to take on payday lending must deal with bullying from the industry as they attempt to protect their citizens from unsavory practices. Yet these local battles strengthen the call for tougher statewide standards and help build a larger grass-roots lobby to counter the industry's power.

"To have the Family Foundation and the NAACP in the same room, in agreement, that doesn't happen very often. Those kinds of situations just don't happen in a political environment that is so divided," said Freund of the Family Foundation. "It's been a good thing for everybody that's been involved to be in agreement on an issue and understand that we can agree, and we can communicate."