How Capital One changed state law. 

Pay Day

At 6:53 p.m. on Feb. 12, midway through a frenzied General Assembly session, staff attorney Frank Munyan received his instructions. Not from one of the 140 delagates and senators who depend on him to turn ideas into legislation. But from one of the most powerful companies in the state.

"Frank ... here is the proposed revised wording," read the note faxed to the bill writer by Larry Goodall, a lobbyist for Capital One. Attached were directions on how to rewrite state law to erase limits on loan fees — a change that could add millions to the credit-card giant's bottom line.

Less than an hour later, Munyan had transcribed the lobbyist's suggestion as an official piece of legislation.

Despite concerns that it would strip protection from the state's most cash-strapped citizens, the Capital One bill won swift General Assembly approval and the governor's signature. On July 1, the lobbyist's language became law.

"We didn't stand a chance because it was Capital One," says James W. Speer of the Virginia Poverty Law Center, which opposed the bill.

Unelected and unfettered by oaths of office, Capital One used money and its growing clout as one of the state's most prized corporate citizens to become an unofficial member of the 2001 Virginia legislature.

The Fortune 500 banking conglomerate requested the bill, crafted its language and — while it could not cast a vote — strategically distributed campaign contributions to those who could.

Capital One's legislative victory, quick and quiet in its execution, provides the latest example of how dominant Virginia's corporations have become in the General Assembly. Cigarette-maker Philip Morris and energy giant Dominion Resources have used similar methods to win key pieces of legislation in recent years.

The banking bill's success also illuminates the deep financial ties between lawmakers and the industries that help bankroll their campaigns.

For example:

Capital One peppered key lawmakers and political action committees with $10,900 in the days just before and after the legislative session began Jan. 10.

The law firm of McGuireWoods - which Capital One hired to represent its interests at the General Assembly — distributed $57,500 to state lawmakers during the same period.

By the session's outset, Capital One had given money to 62 of the 140 legislators — a total of $53,336 since 1995 or an average of $860 apiece. Of those, 53 supported the bill, five opposed it, and four did not vote.

Gov. Jim Gilmore, whose administration lobbied in favor of the bill, has been the top overall recipient of Capital One donations since 1995, at $56,000. Senate Majority Leader Walter A. Stosch, R-Henrico, who sponsored the bill, has been the second-highest legislative recipient, at $5,500.

More than half the members of the House and Senate banking committees, which largely determine the fate of corporate bills, have financial and professional connections to the Virginia banking industry. Two committee members own stock in Capital One.

Capital One spent $59,622 on lobbying during the state fiscal year ending June 30, the most in its history and more than twice as much as the previous 12 months. Philip Morris, by comparison, spent $65,578 on tobacco lobbying; Trigon Blue Cross Blue Shield spent $38,159 on health insurance issues.

Since the session ended, Capital One has donated $16,750 to 42 lawmakers. All but one supported the bill.

In response to questions about Capital One's influence in the legislature, spokesperson Sandi Abadinsky says that the company needed the bill to begin exploring the small-loan market, which mainly caters to low-income customers.

The Falls Church-based company pitched its bill as a pro-business, pro-consumer initiative that would allow Virginia banks to play by the same rules as banks based outside the state, while granting the neediest citizens more access to affordable loans.

"We are always looking to find the best products for our customers," Abadinsky says. "And this was an opportunity for us to level the playing field."

Opponents warn that the Capital One law, which removes long-standing safeguards against predatory lending, could have a much broader impact.

While designed to assist one company, the Capital One bill allows all of Virginia's 110 banks to impose higher fees on installment loans — those paid off at regular intervals. In a legislative chain reaction, it spawned a second bill that gives new freedoms to consumer finance companies, which have traditionally served low-income borrowers.

Consumer advocates worry that these borrowers, who often are in dire need of money, may focus on interest rates and not notice the new, higher fees. As a result, they may wind up owing more than they can pay off.

Del. Harry R. "Bob" Purkey, R-Virginia Beach, a business-friendly lawmaker and Merrill Lynch vice president, says the bill reminds him of the days long ago when he worked with longshoremen on the Norfolk docks.

"They had loan sharks down there and if you borrowed a dollar one Tuesday, you paid two dollars the next," says Purkey, who opposed the bill.

"The arguments I heard about this bill weren't ones that I accepted, because I have seen firsthand what desperate people do in desperate times."

A Virginia darling, Capital One Financial Corp. was born in 1995, when Richmond-based Signet Bank spun off its credit-card division as a separate business.

Since then it has grown at a meteoric rate, earning Wall Street accolades and becoming one of Virginia's largest private employers.

Using a sophisticated marketing strategy that tailors products to match customers' credit history, it has become the nation's sixth-largest credit-card issuer.

Capital One's assets grew 297 percent between 1995 and 2000, to $18.9 billion, while its work force has quadrupled to nearly 20,000.

On Oct. 10, 2000, three months before the opening of the General Assembly session, the company announced a $700 million corporate expansion — the largest in Virginia history — aided by a $27 million state incentive package.

"Today, we have written another chapter in the shared history of this great company and our great commonwealth," Gilmore said when announcing the project that would add 8,000 jobs in the Richmond area and Northern Virginia.

This year, after Capital One decided to try expanding into new fields, it looked to Gilmore and the Virginia legislature for help.

The small-loan market it wanted to enter is one that banks normally have avoided because the clientele — generally low-income consumers needing a few thousand dollars to get over a tight spot — carry a high risk of default.

To compensate for this risk, Capital One wanted to be able to charge customers as necessary without running afoul of state usury laws, designed to curb exorbitant loan costs.

Since the expansion of interstate banking, as banks were allowed to open branches across the country, individual state limits on interest rates and fees have steadily disappeared.

While it never imposed a cap on interest rates, Virginia — unlike several other states and the federal government — restricted fees its banks could impose on installment loans. Fees have become an increasingly profitable source of revenue for banks in the past decade.

So Capital One asked Stosch, whose district includes many of the company's employees and facilities, to submit a bill. In its final form, it eliminated the restrictions on application fees, which had been capped at 2 percent of the loan amount, and late fees, which had been capped at 5 percent of the amount due. Instead, these fees would be negotiated between banks and their customers.

"Capital One wanted to offer a new installment loan product to consumers who otherwise had limited borrowing options," Stosch said in a prepared response. "When asked to submit legislation, my only criteria is that I agree with the legislative goal."

Though Stosch officially submitted the bill, Capital One took the lead in making recommendations to the attorneys responsible for writing legislation.

This level of input is uncommon but not unprecedented, legislative officials said.

"If the language they give us is clear and doesn't violate any statute of Virginia, there's no reason to reinvent the wheel," says Legislative Services Director E.M. Miller Jr., whose agency is responsible for writing bills that lawmakers propose.

While the bill applied to all banks, its purpose was clear to these government bill drafters. Scrawled on the front of the legislative draft file was the phrase "Loans by Capital One."

n the months before the bill was submitted, Capital One and McGuireWoods, its lobbying firm, gave substantial contributions to Stosch as well as Sen. Richard L. Saslaw, D-Fairfax, one of the bill's three co-sponsors.

Capital One gave $2,500 to Stosch's fund-raising committee — the Virginia Senate Majority Leader PAC — within five months of the session, bringing the senator's total to $5,500. McGuireWoods pitched in another $1,250 in September.

Since 1995, the average contribution to Stosch's committees has been $716. The average contribution to all lawmakers has been $541.

"When asked to submit legislation, whether the request comes from someone who has contributed in the past is not a consideration," Stosch said in his prepared statement.

McGuireWoods and Capital One each sent Saslaw $1,000 just before the end of the year. Saslaw did not return calls for comment.

In the days before the session began, the giving increased. On Jan. 6, Capital One sent $1,000 to Del. Kenneth R. Plum, D-Reston, co-chairman of the House Corporations, Insurance and Banking Committee. On Jan. 9, the day before the gavel fell, the bank gave $1,000 to the Dominion Leadership Fund, a political committee organized by House Speaker S. Vance Wilkins Jr., R-Amherst. Three days later, Capital One gave $8,000 to the Joint Republican Caucus, which leads both legislative chambers and determines when and how bills are considered.

McGuireWoods, which counted Capital One as its second-biggest lobbying client this year, was even more generous. The law firm is one of the largest in the country and a potent force in Virginia politics.

It gave $10,000 to Wilkins' PAC on Jan. 8 and, a day later, gave $15,000 to Gilmore's New Majority Project, $8,000 to the Joint Republican Caucus, and $8,500 to the Democrats' Commonwealth Victory Fund.

On Jan. 10, the six-week session commenced and the lobbying began in earnest.

"Capital One was all over that bill," says Del. George W. Grayson, D-Williamsburg, "like ugly on a hog."

Capital One first flexed its muscle in 1997, when it helped write a bill that deregulated aspects of the credit-card industry in Virginia.

The company was also politically active on the federal level during the 2000 election cycle, at $198,692, ranking 10th among finance and credit companies in contributions to federal campaigns. National political watchdogs have linked the generosity of these donors to federal legislation that will make it more difficult to write off credit-card debts when filing for bankruptcy.

In Richmond this year, Capital One focused its lobbying attentions on the two committees that control all corporate legislation: the House Corporations, Insurance and Banking Committee and the Senate Commerce and Labor Committee.

The Gilmore administration helped Capital One make its case, sending Joshua N. Lief, the deputy secretary of commerce and trade, to urge the committees' approval.

"I thought it was amazing that someone from the state would come and support this industry bill," says Speer, with the Poverty Law Center. "I thought it was totally inappropriate and pretty unusual, particularly when there's a real consumer protection issue."

Lief says the administration has frequently spoken out in favor of bills that help keep important corporations in Virginia.

"This is routine," Lief says. "It was a question of supporting a corporate citizen and defending a lot of jobs. We want to help them succeed. And we frequently testify to bills that are good for Virginia."

Receiving the testimony at the banking committee meetings were lawmakers with deep ties to both Capital One and other Virginia banks.

Twenty-three of the 40 delegates and senators on the committees had received contributions from Capital One, a total of $23,200. All but two had received contributions from the banking industry — a total of $311,847, or an average of about $8,200 apiece.

Ten banking and finance committee members are bank directors. Eight of them voted for Capital One's bill, one opposed it, and one abstained. Eighteen committee members have investments of at least $10,000 in banks. Thirteen of the lawmakers provide professional services for banks or work for firms that do.

Del. Harvey B. Morgan, R-Gloucester, sees his service as a bank director as a benefit — not a conflict of interest.

"If you're serving on a bank board, you'll have more grasp of what it's all about than you would as a layman," says Morgan, who retired from the board of Chesapeake Bank this spring.

Morgan supported the Capital One bill, as did Sen. John S. Edwards and Del. Clifton A. "Chip" Woodrum, both Roanoke Democrats who have benefited from holdings of stock in Capital One.

Woodrum's stock — worth more than $50,000 — is owned by his wife, stemming from the time when it was part of Signet and Woodrum was not yet in the General Assembly.

Owning stock in Capital One did not represent a legal conflict, both lawmakers say, because the bill applies to all Virginia banks.

Soon after the key banking committees approved the Capital One bill, a second piece of legislation passed that further deregulated loans largely tailored for low-income Virginians. This second bill gave new liberties to the state's consumer-finance companies, which asked that lending restrictions on their industry be waived as well.

Consumer-finance companies, unlike banks, had been limited to loans of $6,000 and were not able to impose fees on top of the interest rates they charge. As a bank, they argued, Capital One would have an unfair advantage in their field.

So the committee bowed, approving legislation that gives the state's 250 consumer finance outlets the right to issue loans in any amount and, for the first time, the right to impose fees as well as interest. The connection to the Capital One legislation was indisputable: A note attached to the second bill's file said "Hold until other 'Capital One' bill is acted on."

"We don't object to competition," says Jeff D. Smith III, a lobbyist representing the consumer-finance companies. "But if the General Assembly was going to permit them to change rules for the banks, then the General Assembly surely had to let the industry that's been serving this clientele for decades get the same playing field."

By removing the limits, supporters say, the Capital One law and the companion bill invite competition — not exorbitant fees — and will lead to better deals for people who have frequently been gouged.

"It's important for credible lenders to be in the small-loan market," says Raphael C. LaMura of the Virginia Bankers Association. "This is a wonderful example of how the industry can be an active player and provide an option to avoid going to predatory lenders."

The bill, Capital One says, would also allow Virginia banks to operate under the same rules as out-of-state banks with local branches.

"That is only fair," Stosch says.

Opponents argue that the Capital One bill — including the consumer-finance bill it spawned — would have an impact far beyond its corporate namesake.

"These laws make it easier for companies to exploit people who have the greatest need for the money and the least sophistication to get the money at a rate they can afford," says Yvonne B. Miller, D-Norfolk.

Several critics also did not buy the level-playing-field argument.

"These fees really screw the customers of banks," says Del. Kenneth R. Melvin, D-Portsmouth. "And because the national banks can screw our citizens, they tell us that we ought to let the local banks screw them too."

What the legislature has accomplished, consumer advocates say, is an unlevel playing field of a different sort on which low-income borrowers must learn to be more cautious of hidden fees.

"We're putting more and more burden in the consumer's court and we haven't prepared them for that responsibility," says Irene E. Leech, vice president of the Virginia Citizens Consumer Council.

While the banking and consumer-finance lobbyists contend that competition will keep the fees down, consumer advocates and even one former state banking regulator argue that market regulation does not often work with low-income borrowers.

"People in this category of borrower don't even know what the market is," says Sidney A. Bailey, Virginia's former commissioner of financial institutions. "They don't shop around. If they find someone willing to lend them money, they're grateful for that and don't want to argue."

Capital One is still exploring whether to enter the small-loan market, according to Abadinsky, who could provide no details about the company's plans or schedules.

During the committee process, however, Tom A. Broadhead, the company's associate general counsel, said that the typical Capital One loan would have an annual interest rate of 19.8 percent. No fee structures had been determined, but he said the company was contemplating charging $20 to $30 for late payments.

There are no estimates on how much the company stands to gain by entering the small-loan market. Household International, a leading consumer-finance company, recorded net income of $1.7 billion in 2000.

LaMura says other Virginia banks are unlikely to take advantage of this law, but an informal survey shows that at least one — the Bank of Hampton Roads — has made plans to increase its late fees. Instead of just charging 5 percent, as previously allowed, the bank will establish a minimum late payment of $20, even if that exceeds 5 percent of the amount due that month.

According to its president and chief executive officer, Jack W. Gibson, this will allow the bank to target those people who are delinquent instead of spreading the costs among all consumers.

"If we aren't allowed to charge fees to cover our costs, consumers will find themselves without a source at all for credit," Gibson says. "I'm sure all institutions that are collecting delinquents payments will use it."

Gouging won't occur, he says, "because we would lose our customers."

Smith, the lobbyist for the consumer-finance companies, says that most of his clients put the new law to work on July 1, the day it became effective.

Lawmakers who supported the bills say they will monitor how they work. If fees rise, as they have following other deregulation bills in the past, they vow to reimpose limits.

"This is not a bill I would put on a campaign brochure," says Virginia Beach Sen. Kenneth W. Stolle, a Republican member of the Senate Commerce and Labor Committee. "I was not the patron of the bill and I'm still not 100-percent comfortable."


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