By Gideon Bradshaw
PLCA Intern
Capitolwire
HARRISBURG (July 22) – Pennsylvania consumers who borrowed from several online payday lending companies may be eligible to get back money they paid on interest that exceeded state caps.
The refund is one condition of a voluntary consent agreement John Paul Reddam, owner of several out-of-state payday lending services, signed with the Department of Banking and Securities last week.
The agreement alleges that WS Funding and Cash Call — California-based lending companies Reddam owns — charged Pennsylvania consumers rates that exceed those allowed under state law. The agreement also says Delbert Services Corporation, a debt-collection firm based in Nevada that Reddam also owns, collected interest from Pennsylvania customers at rates that were illegal under state law.
The companies are banned from lending to Pennsylvania consumers until they receive a license to issue loans in the state. They will also be ineligible to apply for a license to lend in Pennsylvania for at least three years.
Attorneys who represented Reddam during the negotiations declined to comment.
Edward Novak, a spokesman for the Department of Banking and Securities, said more than 18,000 Pennsylvania consumers took loans out from the companies named in the agreement.
Novak said interest rates on the loans ranged from 89 percent to 169 percent over periods as short as six months. Loans ranged from several hundred to several thousand dollars.
Pennsylvania usury laws cap interest rates at a fraction of those rates, Novak indicated. The Loan Interest and Protection Law sets the maximum annual interest rate on non-mortgage loans at six percent. Under the Consumer Discount Company Act, companies must get a license from the state to charge more.
Whether these laws governed web-based companies was murky until 2008, when the Department of Banking and Securities announced that they would enforce them in online transactions that involve Pennsylvania customers. The state Supreme Court upheld this interpretation of the law in a 2010 ruling.
The companies named in the agreement must pay $1 million. The Department of Banking and Securities says it will use that money to refund consumers on interest they paid in excess of the six percent annual rate the companies were allowed to charge.
Novak said the total amount owed back to consumers who borrowed from these companies is unclear.
“Some of that is going to depend on how many consumers come forward,” Novak said.
Consumer advocates say regulations against payday lending protect borrowers from financial ruin.
Mark Price, a labor economist with the liberal Keystone Research Center, said low-income customers often borrow from payday lenders when they struggle to make ends meet between pay checks.
“You’ve got a bill, you have to pay it back. And within that short-term window, it makes sense,” said Price, who was not familiar with the agreement Reddam signed but spoke about the payday lending industry in general.
Some payday lenders offer customers a chance to take out another loan before they’ve paid off the first, according to Price. These additional payouts leave struggling borrowers with more interest and fees they can’t pay.
“They want to catch you in a cycle, where you borrow once, then you borrow again and again and again,” Price said.
But free-market proponents say bans on the practice hurts the same low-income consumers they are supposed to protect.
Tom Lehman, a professor of economics at Indiana Wesleyan University, said customers who don’t have access to other means of credit take out payday loans to cover expenses like utilities or to repair their cars. In such cases, the interest on the short-term loan might be lower than the penalties charged by utility companies or the cost of losing a job because they can’t get to work.
“You have taken their preferred option in a cash-constrained setting off the table,” Lehman said.
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