Lending Act will pay dividends for Virginia
Virginians across the commonwealth deserve access to fairly priced consumer credit options, especially in today’s uncertain COVID-19 environment. Affordable access to credit helps consumer borrowers address important life events — both planned and unplanned — without creating additional financial hardships. Until recently, Virginia law “legalized” these additional hardships.
Thankfully, Gov. Ralph Northam signed the Fairness in Lending Act (S.B. 421) into law this spring to shield consumers from predatory, high-cost lending practices and provide cost-savings to those seeking small loans. For example, among other benefits, the new law, effective Jan. 1, will cap interest rates at 36% for consumer loans between $300 and $35,000.
This is a huge step forward for consumers in a state where current, more lax laws result in Virginians sometimes paying up to three times more for credit than borrowers in other states. Indeed, before the passage of the Fairness in Lending Act, Virginia was one of only 11 states that did not limit interest rates for installment loans greater than $2,500, according to The Pew Charitable Trusts. Without these limits, predatory lenders were free to charge financially struggling consumers extreme, eye-popping rates that could leave them in a much deeper hole than when they started.
For the past three years, our company and other members of the Virginia Financial Services Association were increasingly concerned about the growth of high-cost lending in the state and the negative impact it would have on consumers. We actively supported policy changes that would both provide consumers with financial stability and separate predatory lending practices from the more responsible and sustainable traditional consumer lending market.
As we all have experienced at one time or another, life events can strike without warning, and for many households, emergency funds and savings are not enough. Consumers can be left wondering where to turn for assistance. Even before the current crisis, four out of 10 Americans reported that they would have difficulty quickly covering an unexpected $400 expense with their existing cash, savings or credit card bandwidth. And as recently as March, 71% of respondents to the 2020 Equifax GCS Financial Literacy Month Survey said they were concerned about the potential effect COVID-19 would have on their own financial situation.
The rampant financial uncertainty created by COVID-19 that is plaguing households in Virginia and nationwide is why consumers, now more than ever, need access to beneficial personal credit without the punitive costs of excessive rates. Where predatory lenders may have tossed struggling consumers leadweighted life preservers, Virginia’s traditional, non-bank, consumer lending market has a responsibility to continue providing consumers with fixed and affordable rates on credit that empowers them to meet life events head on.
With the economy roiling and financial uncertainty commonplace, it is vital to protect vulnerable households. We applaud Virginia’s leadership for passing the Fairness in Lending Act. While we wish the new rules could go into effect tomorrow, we are glad the state will finally be free of wealth-stripping rates and have the consumer-friendly laws it deserves.
Chris McKinley