Virginia Study on Internet Lending Concludes

The working group of the Virginia Bureau of Financial Institutions (the “Bureau”), which was established to consider potential legislation for the licensing and supervision of online lenders, held its last meeting on September 14th. The Bureau will now prepare a report, possibly with proposed legislation, to submit to the Virginia General Assembly for its consideration in the 2018 session.

At the September 14th meeting, it was established that there is consensus (no opposition) among the working group members to recommending legislation to amend Virginia’s consumer finance company statutes to require the licensing of online lenders and to subject such lenders to the same supervision by the Bureau that exists today for Virginia consumer finance companies with physical office locations in the state. The enactment of such legislation would mean that out-of-state online lenders making closed-end loans to Virginia consumers would have to obtain a license and comply with the other requirements of the consumer finance statutes. Currently, out-of-state lenders are not able to obtain such a license because the licensing provisions in the law contemplate a physical office location in Virginia. This has created uncertainty for online lenders.

But licensing was about the only substantive area where consensus was reached. There was considerable opposition from industry representatives to proposals to add a host of new consumer protection provisions to Virginia’s consumer finance statutes as part of any legislation. The Bureau had suggested adding a number of consumer protections that are in Virginia’s payday and motor vehicle title lending statutes. Theses statutes are more recent enactments of the legislature relating to finance, and the thinking was that the outdated Virginia consumer finance statutes could be further “modernized” by adding such provisions. But industry representatives opposed this by arguing that the costs to comply and the additional legal risks would drive many traditional consumer finance companies out of business.

There was also considerable opposition to proposals for the licensing and regulation of open-end loans. Under current Virginia law, such lenders are not subject to any licensing or other supervisory requirements, or any interest rate or fee limitations, except for a 25-day grace period requirement. (Virginia’s consumer finance company statutes govern closed-end lending, but not open-end lending; open-end lending by non-depository lenders is governed by a separate statute that is seen by some as a “loophole” in the law.) Industry representatives argued that any rate or fee limitations would have the effect of restricting the availability of credit to those in need who are unable to secure financing from traditional sources, such as banks. There was much the same opposition to suggestions to add new interest rate caps for closed-end loans under the consumer finance statutes. Currently, there is a interest rate cap of 36% on loans of $2,500 or less; loans greater than $2,500 are not subject to any interest rate cap.

As mentioned, the Bureau will now prepare a report and possibly legislation for the 2018 Virginia General Assembly session based on the work of the study group. The study group members will get one final opportunity to weigh in, however, as the Bureau has indicated it will share a draft of any proposed report and legislation with working group members for comment before finalizing it and sending to the General Assembly.

Jay Spruill

About: Jay Spruill

Jay leads the Marketplace Funding Industry Team and is a member of the Banking Industry Team. Jay has extensive experience advising financial institutions in the development of products and services, including online loan products, and on regulatory matters affecting financial institution business models. View all posts by Jay Spruill
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