By Gideon Bradshaw
PLCA Intern
CAPITAL WIRE: Plenty of ideas to address payday lending, little consensus. -Regulatory action the state took against several online payday lenders could add momentum to a Republican lawmaker’s plan to change state lending laws.
Prominent thoroughbred owner John Paul Reddam, voluntarily signed an agreement last week that three companies he owns — the Las Vegas collection agency Delbert Services and the California-based online lenders Cash Call and WS Funding — will pull out of the Pennsylvania lending market. The agreement bars them from re-entering for at least three years and requires them to pay restitution to customers.
More than 18,000 Pennsylvania consumers took out loans from the companies, borrowing several hundred to several thousand dollars at interest rates as high as 169 percent, according to Edward Novak, a spokesman for the Department of Banking and Securities, in violation of state regulations.
Legally, companies can’t charge interest rates higher than six percent a year on small-dollar consumer loans without a state license. Companies that have state licenses can’t charge more than about 24 percent a year.
The state Supreme Court ruled in 2010 that these laws apply to online lenders based outside the state, effectively banning all forms of payday lending in the state.
Some state GOP lawmakers have pushed for changes to these restrictions. They argue that these laws — some of the strictest in the country — force Pennsylvanians who need help with sudden spikes in expenses to turn to lenders who operate outside state sanction.
“When charity runs out, when family runs out and you’re not a member of a credit union, where do you go?” said Scott Sikorski, legislative director for Sen. Jake Corman, R- Centre. “They’re going to these online, unlicensed, triple-digit [interest rate] companies.”
Corman has said he plans to introduce legislation that would allow more Pennsylvania businesses to offer short-term loans. Sikorski said the proposal has not been finalized and it’s unclear when it will be introduced.
Kerry Smith, a legal aid attorney for Community Legal Services in Philadelphia, said state usury laws are fine as they are and has spearheaded a pushback by advocacy and community groups against past efforts to legalize payday lending in Pennsylvania.
When she encounters clients who’ve borrowed from online payday lenders, Pennsylvania’s black-and-white ban on the practice works in favor of her clients.
“Anyone who claims we have an unregulated market is being disingenuous,” Smith said. “In fact, we have a highly regulated market.”
Corman’s changes to the laws would build on an existing program billed as an alternative for people who might otherwise turn to payday lenders for cash.
Run by the Pennsylvania Credit Union Association, the Better Choice program allows Pennsylvania consumers to borrow 90-day loans from participating credit unions.
PCUA spokesman Mike Wishnow said customers who take out the $500 maximum loan pay $42.50 in interest and fees. He said an equivalent payday loan would cost a customer about $450.
Credit unions also set aside a deposit for the borrower, which he or she can’t touch until after the loan is paid. Wishnow said the idea is to help customers save so they don’t need to take out another loan to deal with bumps in their expenses.
Lower interest rates and some delinquency among borrowers also mean the program is more public service than money maker for the credit unions that offer it.
“We break even, frankly,” Wishnow said, noting the costs of administering the program.
Not everyone can use the program. Many Pennsylvanians don’t live near a branch that offers the program, and some credit unions put other restrictions on who can use the program.
“We’re looking to fill that gap,” Sikorski said of Corman’s proposal. “Anybody should be able to offer this product.”
He said Corman’s plan would make short-term lending available to more Pennsylvania consumers but keep rates lower than payday loans.
Under Corman’s plan, annual interest rates would be capped at 28 percent, compared to 18 percent in Better Choice. Instead of a $500 maximum, loans could be as large as $2,000. Sikorski also said the proposal doesn’t include the mandatory savings deposit.
Lenders could charge a “maintenance fee” of as much as five percent a month on the unpaid debt. Along with banks and credit unions, private businesses would be able to get a license to offer the loans. Lenders would have to disclose all fees and rates to customers.
He said the proposal also blocks “rollover,” one of the more controversial practices in the payday lending industry. The term refers to customers with unpaid debt taking out additional loans.
“You can’t do the cycling stuff,” Sikorski said. “You can’t take out a loan to pay back the old loan.”
Still, Smith isn’t sure the proposal would be any better for state consumers than payday loans. She said lenders often divide fees up so that consumers pay more than they thought they would.
“Our experience with payday lenders encourages some pretty serious caution,” Smith said. “We want to take a very close look at the legislation when it’s proposed.”
Corman’s proposal is the latest in a series of contentious attempts to relax state lending laws. None have been passed by the full Legislature.
The Senate protested last year after House leadership inserted a non-binding commitment that the Senate would consider Senate Bill 975, a proposal to legalize payday lending, into the budget-related fiscal code for 2013-2014.
Rep. Chris Ross, R-Chester, has pushed for changes to state lending laws for more than a decade. His most recent proposal, House Bill 2191, died after it reached the Senate in 2012. It would have allowed payday lenders to operate with restrictions like an income-based loan cap and a ban on rollovers.
Ross said there’s “a gap in the market that needs to be addressed.”
“The best thing to do would be to supervise the private sector,” said Ross.
Some libertarian economists have argued that looser restrictions on lending are better for consumers. A 2007 report for the Federal Reserve Bank of New York compared consumer data from Georgia and North Carolina before and after the states banned the practice.
Comparing those states with a control group that included states that allowed payday lending and those that didn’t, the researchers tracked changes in signs of financial hardship like complaints against debt collectors, bounced checks and bankruptcy filings.
Numbers pointed to a jump in some types of financial problems after the states kicked the payday lending industry out. In Georgia, complaints about debt collectors and bounced checks increased after the state implemented the 2004 ban. The researchers reported similar patterns after the North Carolina ban in late 2005, but cautioned that less time had elapsed and the data may not be as reliable.
Chapter 7 bankruptcy rates — in which borrowers turn over assets to clear themselves of debt — increased in both states. Meanwhile, the researchers reported a decline in filings for Chapter 13, which allow debtors to keep their assets and reschedule payments on what they owe.
The researchers speculated the changes in bankruptcy filings could come from borrowers being more likely to pawn their assets off to forestall bankruptcy when they couldn’t take out the loans. When they finally threw in the towel, they had fewer assets to lose, making Chapter 7 attractive than before they pawned off their assets.
The consumer group Center for Responsible Lending later accused the researchers of extrapolating too much from their data and failed to prove a cause-and-effect relationship between the payday lending bans and patterns they observed.
Smith said consumers who can’t get short-term loans find other ways to deal with debt.
The Pew Charitable Trusts recently reported — based on voluntary responses from people who’ve taken out payday loans in the past — that 81 percent of customers would cut back on expenses if the loans weren’t available.
Pew also reported that 69 percent of borrowers take out payday loans to deal with a recurring expense like food, utilities or rent, suggesting most consumers aren’t using them in emergencies.
“Payday lenders like to paint this picture that they’re throwing a drowning man a life preserver when, in fact, they’re throwing a drowning man a lead anchor,” Smith said.
