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Opinion/Commentary: How fairness in lending protects consumers

Opinion/Commentary: How fairness in lending protects consumers

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The commonwealth’s consumer borrowers recently won a decisive legislative battle. Amid the peak of COVID-19 cases in Virginia, the governor signed into law the Fairness in Lending Act (SB 421), capping annual interest rates at 36% for small consumer loans between $300 and $35,000.

The bill, effective Jan. 1, 2021, goes a long way toward protecting household wealth, and is a huge win in a state that previously imposed no limit on credit interest rates. In fact, current state laws allow predatory lenders to charge excessive, triple-digit APR and result in Virginians sometimes paying up to three times more for credit than borrowers in other states. This presents an unacceptable financial burden for consumers, who deserve affordable access to credit to face both planned and unplanned life events.

Safe and responsible lending options are even more important during times of economic uncertainty, like the current COVID-19 pandemic. As early as March of this year, the 2020 Equifax Global Consumer Solutions Financial Literacy Month Survey found that 71% of consumer respondents were already concerned about the effect COVID-19 would have on their personal financial situation. The survey also showed that coronavirus topped the list of factors that consumers think might impact them financially in 2020.

What these survey findings mean is that consumers need a responsible lending market to turn to for financial assistance so that they can meet the costs of life events with confidence. The Fairness in Lending Act will help consumers by separating unacceptable predatory lending practices from the more sustainable, traditional consumer lending market that has been serving Virginians for over 100 years.

The traditional, non-bank consumer lending market in Virginia has historically provided access to reasonably priced credit with fair rates for both planned and unplanned life events, such as medical bills and car and home repairs. Comprehensive underwriting helps ensure that each borrower is paired with a credit solution they can afford, with fixed rates that allow them to plan their monthly budgets without fear of sudden rate increases.

Ultimately, a well-created credit solution from a traditional, non-bank consumer lender enables the borrower to successfully address their current financial challenge, confidently repay their loan and then move on to the next chapter in their lives without worrying about ballooning debt.

Predatory lenders, on the other hand, charge consumers well over 36% APR, sometimes to the tune of eye-popping, triple-digit rates on long-term loans. A $1,000 loan from these lenders can easily cost the borrower many times that amount in interest and fees.

These credit products are not life preservers for consumers needing quick monetary assistance — as predatory lenders often claim — but instead are financial traps that can strap consumers with repayment hardship for years to come. Such practices strip household wealth and often target low- and moderate- income Americans encountering a crisis. This serves to perpetuate a cycle of debt, as borrowers are unable to repay loans due to the excessive rates.

Consider the fact that 40% of Americans would struggle to pay a $400 unexpected expense and that 53% of American household have no emergency savings. A single surprise cost can send many people hunting for a quick loan. In their desperate search for a fast credit solution, many will disregard or misunderstand excessive interest rates. But these households deserve access to credit options that are both easy and affordable, options that will empower them and contribute to a more sustainable consumer lending market.

Thankfully, the passage of the Fairness in Lending Act means high-cost lending no longer has a place in Virginia’s consumer lending market. But while Virginia is not the only state to recently modernize its lending laws — Ohio and California both reined in predatory lending with consumer-friendly legislation over the past two years — Virginia is one of the last. According to Pew Charitable Trusts, Virginia is one of only 11 remaining states that do not currently cap rates on installment loans over $2,500.

As Richard Cordray, former director of the Consumer Financial Protection Bureau, once said, “Credit markets work best when there is a beneficial alignment of interests between borrowers and lenders.”

Lendmark Financial Services and fellow members of the Virginia Financial Services Association have worked for years to combat the state’s unregulated interest rate environment. The unchecked growth of high-cost lending threatened the financial stability and well-being of both Virginia’s credit markets and its borrowers, because the benefits of extreme rates skewed so heavily towards the predatory lender, leaving borrowers floundering.

A healthy consumer market checks predatory lenders with caps on rates, and that is exactly what the Fairness in Lending Act does.

Easily passed by the General Assembly with bipartisan support this winter and subsequently signed by Gov. Ralph Northam this spring, the new policy testifies to the state’s commitment to separating traditional consumer lending from predatory lending. Further, the policy demonstrates Virginia’s duty to shield vulnerable consumers from the price-gouging effects of unregulated interest rates that have plagued the state’s credit markets for far too long.

While it would be ideal if the new legislation could go into effect immediately, instead of Jan. 1, 2021, the new law will protect consumers as the state emerges from the COVID-19 pandemic. As Virginians and the nation grapple with the long-lasting, financial repercussions of the current crisis, we look forward to the day when corrosive rates are a thing of the past and more affordable credit options are available to all.

Chris McKinley is senior vice president, government affairs for Lendmark Financial Services. He has held this role since 2014 and has been in the financial services industry since 1987. Lendmark is a national consumer finance company that serves over 40,000 consumers in the personal loan market in Virginia.

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