In the six years since the Virginia General Assembly passed the Payday Loan Act in 2002, the industry has exploded in the commonwealth. Everyone has heard the numbers: Payday lending stores now outnumber McDonalds 2 to 1, and Starbucks 3 to 1. Stores have clus tered together so that borrowers could get a loan from one to pay off a loan from another. As of 2006, annual percentage rates on payday loans have been as high at 782 percent, and average 378 percent.

Virginians in financial need have been lured into a sticky web of seemingly "quick and easy money," often through a free first-time loan. Rather than bridging a financial gap, payday loans have led borrowers down the road to financial ruin. The result has been more than $1.3 billion in loans to borrowers who average more than eight loans a year from a single lender. More than 22 percent of borrowers in 2006 had more than 12 loans in a single year.

Particularly worrisome are the trends for military, elderly, and disabled borrowers. Increasing debt led to decreasing numbers of deployable military personnel. Social Security, disability, and veterans' benefit recipients were increasingly targeted by payday lenders.

In response, for the past three years, the General Assembly has attempted to repeal or reform the Payday Lending Act. In 2006 and 2007, the industry drafted a weak reform bill that limited a borrower to three loans at a time and a database to track the loans. Fearing floor amendments that would adopt meaningful reform, the industry was able to get patrons to strike the bills.

And the problem continued to get worse.

Perhaps the third time was the charm. This year, the General Assembly has passed meaningful payday lending reform that will take significant steps to break the cycle of debt. These reforms will also apply to internet loans.

The reform bills limit a borrower to one loan from any lender at a time and require a real-time database to track consumer loans and enforce this limitation. The bills include longer loan terms, a cooling off period after every loan, and the option of an extended payment plan's lock-out periods to restrict access to additional loans.

Specifically, the bills extend the loan term to at least two times the borrower's pay cycle, and a one-day cooling off period after a loan is repaid before a new loan can be obtained.

At any time on or before the day a loan is due, a borrower may enter into one extended payment plan to repay the loan within a 60-day period, followed by a 90-day lockout period before a new loan can be obtained. The lender must inform borrowers of their right to an extended payment plan orally and in writing.

If a borrower obtains five payday loans within a 180-day period, he or she may not get another loan until 45 days after the fifth loan is paid if it is paid on time. Alternatively, he or she will repay the loan in 60 days, followed by a 90-day lock out period before obtaining a new loan.

The bill also prohibits loans to members of the military or their spouses or dependents, subjects lenders to the Fair Debt Collection Practices Act, and requires lenders to wait 60 days after the date of default before initiating any legal proceeding. If a lender threatens criminal or initiates criminal proceedings against a borrower, the borrower can seek treble damages.

Finally, the bill caps the annual interest rate on payday loans to 36 percent, and permits lenders to charge a loan fee not to exceed 20 percent of the loan proceeds and a verification fee to defray the costs of the database not to exceed $5.

While the bill is not perfect, it is the strongest payday lending regulation in the country. It takes a significant step in breaking the cycle of debt, and puts a database in place that will allow us to track repeat borrowing in ways we cannot do now.

Moreover, the Bureau of Financial Institution must report to the General Assembly the progress made under this bill. With such hard data, we can determine whether additional reforms will be necessary in the future. This is far better than maintaining the status quo for yet another year.
Jennifer McClellan is a Democrat who represents Virginia's 71st House of Delegates District, which includes parts of Henrico and Richmond. She may be contacted at deljmcclellan@house.state.va.us or (804) 698-1071, and she has a newsletter available at www.jennifermcclellan.com.