Why? Payday loans are not what we have always considered loans to be–the offering of credit at a reasonable rate after a lender has carefully considered whether the borrower is able to repay the loan. To the contrary, payday loans are merely a device to entrap a borrower who is most likely unable to repay into a long-term cycle of repeated payments to the lender.

Why would a lender want a borrower who can’t repay? Because predatory lenders discovered that a whole lot of money can be made as the desperate borrower will divert his limited funds to pay back the lender who either holds his bank account hostage, has the keys to his only car that the lender is ready to repossess, or can kick the borrower out of his own home.

Virginia had already eliminated an important credit option for consumers, available at a fee of $15 per $100 , two-week loan. Now it is open-ended loans. Never mind that overdraft fees, NSF, ATM fees, late fees and other penalties are all on the rise and access to traditional credit sources continues to dry up like prunes in the sun.

A FDIC study published in December concluded that 75% of checking account holders overdraft their accounts and 5% overdraft nine or more times a year at an average cost of $27 plus interest on an average overdraft of $36. That’s a fee of more than $80 to “borrow” $100 or nearly 2,000% APR based upon a two week overdraft. And, that study was concluded before the onset of the current economic crisis.

A follow-up analysis by Bretton Woods determined that residents in states without the availability of short-term loans pay an average of $300 more annually in bank and credit union fees.

By the way, banks and credit union fees are unaffected by the new Virginia laws.

A 36% annual APR cap means restricting short-term lenders to charging $1.38 per $100, 2-week loan. That’s less than the fee charged by Banks to maintain ATM machines. It cannot possibly cover the costs associated with operating a lender (rent, salaries, benefits, etc.)

In citing restriction on loans to the miitary, the authors also fail to mention the taxpayer subsidized loan programs that needed to be established to support these families when payday lending was eliminated.

In an economic crisis, when Virginia is running historic rates of deficit, foreclosure, bankruptcy and unemployment, when the demand for jobs and quality education and affordable healthcare requires immediate attention, the attention of the media, the General Assembly and Governor is misplaced.

By caping the allowed return to pay day lending, the state is putting the lenders out business. It is not profitable to lend for a return less than the default rate. All that has been accomplished by this act is to eliminate from the market place a tax paying business and in its place substitute a crimminal activity. People without good credit still need short term financing solutions so they will find them. In the end, this will increase the cost of government by requiring the police to supress the crimminal lending business.

Loan sharking has been around almost as long as drinking. The Volstead act crimminalized the manufacture and possession of alcohol in 1919. In 1933, it was repealed after the Federal Government realized that all it was doing was creating a powerful non-tax paying criminal empire.

Some politicians have realized that it is better to harness the desire and achieve good ends. Some years ago the crimminal enterprise known as the “numbers racket “was virtually eliminated in Virginia when the State created the legalized numbers “game” know as the “Lottery”. Now the profits extracted from working men and women by that enterprise are used for the educational system.

Finding positive solutions for difficult social problems is the mark of sound and caring political leadership. Denying economic freedom of choice eventually leads to an undesirable consequence.