On January 8, Senate Bill No. 1252 (SB 1252) was introduced to the Virginia General Assembly, aiming to amend and reenact sections of the Code of Virginia related to the application of usury rates. Just two weeks ago, the bill was passed by both the House and Senate. Opponents of the bill contend that the language and effect is very unclear, but that broad language and stringent provisions could stifle innovation and ultimately harm consumers by limiting their access to credit.
Virginia’s current Usury and Interest Chapter imposes a 12% per year interest rate maximum for loans, except as otherwise provided by law. Virginia otherwise authorizes banks to impose interest and fees as agreed by the parties for installment loans. Virginia also currently contains numerous other exemptions, including for business purpose transactions of more than $5,000.
Key Provisions of SB 1252
- Unclear Anti-Evasion Measures: The bill includes an apparent attempt to expand an anti-evasion provision to prevent circumvention of the applicable interest rate cap through various means, such as disguised loans or third-party arrangements. This includes:
- Loans disguised as personal property sale and leaseback transactions;
- Loan proceeds disguised as a cash rebate for the pretextual installment sale of goods or services; and
- Assisting a debtor to obtain a loan with a greater rate of interest than permitted through any method, including mail, telephone, Internet, or any electronic means, regardless of whether the person has a physical location in the commonwealth.
- Earned Wage Access:
- The bill targets earned wage access services by providing that any person who “receives a cash advance” that is based on income the person has earned but has not been paid is considered a loan if “repayment to the cash advance provider will be made by some automatic means” such as a preauthorized ACH debit.
- The bill further provides that “any” amounts the person is “obligated” to pay in addition to the cash advance is interest.
- Expansive Loan Definition: The bill also expansively defines a “loan” subject to the usury law to include “recourse and nonrecourse loans” so long as the transaction provides for interest, fees, or other charges.
- “Making” a Loan: The bill defines “make” or “making” a loan to mean advancing, offering to advance, or making a commitment to advance funds to a borrower for a loan.
Any contract made in violation of these provisions is void and no person would have the right to collect, receive, or retain any principal, interest, fees, or other charges in connection with that contract.
Unclear Potential Impacts on Banks and Fintech Companies
Critics of SB 1252 argue that the bill creates significant uncertainty due to unclear application of the anti-evasion provision and could significantly restrict the ability of banks and innovative fintech companies to provide credit to high-risk borrowers.
Some language of the anti-evasion provision is broad, as discussed above. However, the anti-evasion provision does not remove any exemptions to the usury law or change the authorization to charge rates “otherwise permitted by law.” As a result, the plain language of the bill does not clearly limit the authority of banks to charge interest — including when banks receive assistance from third parties in arranging a loan.
Notably, the bill also does not include expansive “true lender” tests or otherwise define “making” a loan to include the activities of partners. Instead, the definition of “making” a loan continues to focus on advancing or committing to advance money, and not on facilitating loans.
However, uncertainty created by the bill and potential for an aggressive regulator to broadly interpret the anti-evasion provision may chill investment and innovation in the commonwealth. It is currently unclear whether the Governor will sign or veto the bill.
