February 20, 2025
Despite Noble Intentions, Va. Usury Bill Is Bad For Consumers
Originally published on: Law360, February 19, 2025
Reposted with permission from: Law360
In the last few years, state legislatures have enacted legislation to curtail online bank lending in response to advocacy efforts by consumer activists.
Such programs, in which nonbank financial technology companies partner with banks to offer lending products, have provided millions of dollars of credit to consumers in all states. Now, one such effort in Virginia has the potential to end such opportunities for Virginia consumers.
Virginia's Interest and Usury Chapter, found in the Financial Institutions and Services Title of the Virginia Code, sets out basic rules for what rates of interest various entities may charge in the state.
The general rule in Virginia is that, "[e]xcept as otherwise permitted by law, no contract shall be made for the payment of interest on a loan at a rate that exceeds 12 percent per year."[1]
The chapter provides numerous exceptions to the general rule, including specific exceptions for different types of lenders, as well as different types of loans in Article 4, titled "Loans Exempt from Limit on Contract Rate of Interest." Article 4 permits a bank or savings institution, regardless of where it is headquartered,[2] to "impose finance charges and other charges and fees at such rates and in such amounts and manner as the borrower has agreed" in connection with an installment loan.[3]
In an effort to curtail perceived abuses by out-of-state banks lending to Virginia borrowers over the internet at rates that exceed the general rule, the Virginia Legislature is considering S.B. 1252.[4]
S.B. 1252 amends the anti-evasion subsection of the chapter to state that the general rule "shall apply to any person who seeks to evade its application by any device, subterfuge, or pretense whatsoever," including persons "[m]aking, offering, assisting, or arranging a debtor to obtain a loan with a greater rate of interest, consideration, or charge than permitted under [the General Rule] through any method, including mail, telephone, Internet, or any electronic means, regardless of whether the person has a physical location in the state."[5]
S.B. 1252 further amends the definitions in the chapter to define "'[m]ake' or 'making,' when used in reference to a loan, [as] advancing, offering to advance, or making a commitment to advance funds to a borrower for a loan.[6]
The bill has passed out of the Senate and passed the House chamber on Feb. 18.
Although the bill claims to be aimed at protecting consumers in Virginia from predatory lending, the effect of the bill, if enacted, would be to choke off the availability of credit to consumers. The language is broad enough to capture all third-party vendors, including marketing and direct mail agencies, that assist banks, including Virginia banks.
If S.B. 1252 is passed as it currently exists, banks — including Virginia banks — that use any third-party vendor to originate loans that exceed 12% interest per year would be in violation of the statute.
Although there have been some efforts to amend the bill, none of the amendments have changed this conclusion, and with sine die approaching on Feb. 22, time is fast running out.
Significantly, the proposed amendment to the anti-evasion subsection also impairs other exceptions to the general rule under Article 4, including Virginia Code Annotated, Section 6.2-317, which allows all lenders to originate business-purpose loans of $5,000 or more at any rate of interest. Such business-purpose lenders face a voiding penalty if they originate their loans with the assistance of a third party.
Banks, especially community banks, increasingly work with financial technology companies to expand their offerings in a cost-effective manner. Although large banks have the ability to invest sizable capital into technology, smaller banks do not. Fintech companies act as service providers to banks and offer technology-based solutions that banks cannot financially develop on their own.
This collaboration has extended to lending, where banks work in conjunction with their technology service providers to provide credit to businesses and individuals.
In consumer lending, banks increasingly work with fintech companies to offer loans of differing amounts, durations and pricing to individuals seeking credit.
Because of the wide use and availability of online access through computers and smartphones, almost any consumer can search for credit through an array of competing products to help them with their credit needs, including installment loans; lines of credit; cash advances; and buy now, pay later.
The bank and the fintech company generally memorialize their commercial arrangement in a set of contracts that carry legal and regulatory requirements. Banks are highly regulated by state and federal officials who oversee the banks' activities for compliance with myriad laws and regulations, including consumer protection laws and safety and soundness standards.
Fintech companies that act as service providers to banks are also subject to a high level of scrutiny from the banks and regulators.
For example, on May 3, 2024, the Office of the Comptroller of Currency, the Federal Reserve Board of Governors and the Federal Deposit Insurance Corp. published "Third-Party Risk Management: A Guide for Community Banks"[7] as a resource for community banks to bolster their third-party risk management programs.
The agencies had also published "Interagency Guidance on Third-Party Relationship: Risk Management"[8] the year prior, providing principles that banking organizations may consider when developing and implementing risk management practices for all stages in the life cycle of third-party relationships.
Furthermore, contrary to the assertions of some consumer advocates, fintech companies generally operate with a high number of regulatory requirements. Fintech companies also contractually agree, as the service provider of the banks, to comply with the panoply of consumer financial services laws that apply to consumer lending, and they may need to comply with specific requirements in certain states, depending on what functions they are performing as service providers to the bank.
The goal of eradicating actual predatory lending is a noble one. Unfortunately, this bill does nothing to achieve that goal, and instead would limit credit opportunities for Virginia residents.
If state legislatures want to demonstrate that they are in favor of access to credit for their constituents, they would do well to steer clear of bills such as that being contemplated in Virginia.
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Catherine Brennan is a partner at Hudson Cook LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of their employer, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] Va. Code Ann. §6.2-303(A).
[2] The Chapter defines "bank" as "any national bank, any bank organized under Chapter 8 (§6.2-800et seq.), or any bank incorporated and organized under the laws of another state." Va. Code Ann. §6.2-300. "Savings institution" means any savings institution, as defined in §6.2-1100, incorporated and organized under the laws of the United States, the Commonwealth, or another state. Id.
[3] Va. Code Ann. § 6.2-309, which provides that "Notwithstanding any statutory or case law, a bank or savings institution making a loan payable in installments may impose finance charges and other charges and fees at such rates and in such amounts and manner as the borrower has agreed." Va. Code Ann. § 6.2-309(A). Importantly, this section of the Chapter preserves Article 4, entitled "Loans Exempt from Limit on Contract Rate of Interest. The section of the Chapter provides an exception to the general rule of 12% interest per year for other entities, including licensed Consumer Finance Act licensees. Va. Code Ann. § 6.2- 309(B).
[4] See https://legiscan.com/VA/text/SB1252/id/3084921.
[5] Senate Bill 1252 amending Va. Code Ann. §6.2-303.
[6] Senate Bill 1252 amending Va. Code Ann. §6.2-301.
[7] See https://www.occ.gov/news-issuances/bulletins/2024/bulletin-2024-11.html.
[8] See https://www.fdic.gov/news/financial-institution-letters/2023/fil23029.html.