PHILADELPHIA–Reforms enacted by the state of Virginia have led to significantly more affordable small-dollar loans for borrowers in the state, according to a new analysis released by Pew Research Trusts.
Pew examined Virginia’s 2020 Fairness in Lending Act and its effect on closing regulatory loopholes and capping interest rates, and said the results have been successful enough to offer lessons to other states.
The Fairness in Lending Act, which had bipartisan support, put a number of new restrictions in place, including prohibiting loans with large final balloon payments. The organization noted that previous research by The Pew Charitable Trusts showed that before the reforms, companies routinely charged Virginians three times more than customers in lower-cost states.
“Virginia lawmakers balanced concerns about the availability of small-dollar credit with the urgency of stopping harmful lending practices, a challenge that officials in other states also have struggled with,” Pew said in releasing its findings. “Virginia’s evidence-based approach builds on successful reforms previously enacted in Colorado and Ohio that maintained widespread access to credit and measurably improved consumer outcomes by closing loopholes, modernizing outdated statutes, and prohibiting balloon payments. Legislators designed the act to reflect ‘three key tenets of responsible lending: affordable payments, fair prices, and reasonable time to repay.’”
Profitable for Lenders
Pew said its analysis of the Act confirmed that under the legislation lenders can profitably offer affordable installment loans with structural safeguards, saving the typical borrower hundreds of dollars in fees and interest with estimated total consumer savings exceeding $100 million annually.
The result, Pew said, has been a more modern, vibrant, and consumer-friendly small-loan market that offers replicable lessons for policymakers. One of those lessons, according to Pew: Given Virginia’s array of inconsistent laws, revising just one at a time would not have been sufficient to protect consumers; lenders would have been able to simply switch to operating under a different statute.
“At the same time, Virginia’s outdated policies made it impossible or unprofitable for lower-cost lenders, such as non-bank installment lenders and financial technology companies, to offer affordable small-dollar installment loans and compete in the commonwealth with conventional payday and title lenders,” observed Pew in its analysis. “For example, before reform, a lender could charge prices that resulted in APRs of more than 300% for a balloon-payment payday loan, but installment lenders, whose prices are three or four times lower, were effectively prohibited from offering a similarly sized loan. As a result, installment and other lower-cost lenders could not operate profitably in Virginia, so they did not do business in the state.”
Lessons for Other States
Pew noted that in many states legislative proposals with bipartisan support have been derailed because of concerns about restricting consumers’ access to credit.
“However, research has shown that policymakers can foster a viable market for loans with safeguards and lower costs without reducing the availability of small-dollar credit, and Virginia’s evidence-based approach illustrates how states can adopt robust consumer protections while establishing a level playing field for businesses,” Pew said. “Other states can achieve comprehensive high-cost lending reform by prohibiting balloon-payment products and requiring that all loans can be paid back in affordable, amortizing installments, establishing reasonable pricing by limiting interest rates to 36% plus a monthly fee of up to 8% of the loan amount, capped at $25, capping total loan costs, setting minimum loan terms of four months, and preventing lenders from evading those safeguards.”
The Results
Pew said it found that as a result of the Fairness in Lending Act, the small-dollar loans issued in Virginia will cost approximately three times less than before reform.
To read the entire report, go here.