An end to payday lending? Not quite, but it's a start

Inquirer readers may have noticed a fascinating little story last week by my colleague Todd Mason, buried in the Business section on Friday, that chronicled the latest blow to the payday-lending industry in Pennsylvania: Under pressure from the Federal Deposit Insurance Corp., the out-of-state bank that services one of Pennsylvania's largest payday lenders, Advance America, plans to quit the business here on March 27.

Todd's story (read it here) went on to quote the state banking secretary as saying that BankWest's withdrawal removed the primary impetus for the Rendell administration's support of legislation to legalize payday lending in Pennsylvania: the opportunity to regulate a business that was already operating here, anyway.

"If we were to support the legislation, we would be enabling these payday lenders to stay in business," Secretary A. William Schenck III told Todd. "That is not what we are about at the Department of Banking. ... The governor is strongly in favor of not going forward."

Yesterday came word of the final nail in this particular coffin: According to PennPIRG and Irv Ackelsberg, a Community Legal Services advocate who has also been fighting the payday-lending bill, the state Senate committee considering it has decided to set the subject aside for the "foreseeable future."

Don't count the payday lenders out just yet, though. Cash Today, for one, has showed disturbing resilience since it lost its own out-of-state banking partner.

At first, it operated under the pretense that it was making "Internet" payday loans from inside its offices. After Ackelsberg filed a lawsuit in December challenging that practice, it sought bankruptcy-court protection, but it remains in business. Walk up to the check-cashing window, ask about a loan, and you'll be given a toll-free phone number to borrow money: 800-899-CASH.

It's a seductively simple process, like any payday loan: No credit check, no muss, no fuss. All you need is a fax machine or an Internet connection.

Give the company proof of a regular paycheck, and the keys to your checking account, and it will gladly deposit, say, $300 in your account. Two weeks later, if you can't afford to pay it off, the lender will happily roll the principal over and take only the two weeks' interest, perhaps $75. Just don't think too long – especially about how a $300 loan will have cost you $300 in interest in just eight weeks.

"Legal loansharking" is a fair characterization for this business. The fact that desperate people use it, and that some manage to pay off loans and walk away, is no justification for legalizing a business built on repeat customers who pay the annual equivalent of 400 percent or more for small, short-term loans that will likely just dig them deeper into a financial pit.

Schenck has said that he'd like to persuade credit unions and other financial institutions to offer similar loans at an APR that would exceed our current small-loan usury limit but still be modest in comparison – perhaps 50 to 100 percent. He believes they could do so without a change in the law, by classifying some of the loans' costs as fees.

Could a market develop at rates in that range? Perhaps. The rates still sound excessive – a credit-card cash advance would probably be better for anyone who has that option. But they'd beat 400 percent.

Here's part of what PennPIRG said today in a news release crowing about payday lending's sudden troubles in Pennsylvania:

Yesterday, Chairman Gibson Armstrong’s office confirmed that the Senate Committee on Banking and Insurance would not be considering House Bill 1478 for the foreseeable future. A February committee vote on HB 1478 had been tentatively postponed for the week of March 13, 2006. This comes on the heels of Banking Secretary Bill Schenck’s withdraw[al] of the department’s support for HB 1478. Recent FDIC activity convinced the Secretary that HB 1478 was ultimately an authorization bill.

Payday lending in not authorized by Pennsylvania law, but it has been going on anyway due to the existence of partnerships between payday lending companies and out-of-state banks. While Pennsylvania usury law would prohibit payday lenders from making these directly, banks are not covered by state usury laws. By making the loans in the name of the banks, the payday lenders have been able to circumvent the law. However, pressure from the FDIC has resulted in all such banks pulling out of these partnerships during the last several weeks.

"The consequence of these two actions – the FDIC stopping "rent-a-bank" scams and the death of HB1478 – means that payday lending is, for all practical purposes, over in Pennsylvania," explained Irv Ackelsberg of Community Legal Services in Philadelphia. "This is a very satisfying victory for Pennsylvania consumers."

We can only hope he's right.

Is builders' bill truly 'working in 27 other states'? A top Texas official would beg to differ

In its campaign to persuade Gov. Rendell to sign House Bill 1467, the "Residential Construction Dispute Resolution Act," the Pennsylvania Builders Association has said repeatedly that similar legislation "already is working in 27 other states," as Brad Elliott, the PBA president, put it in a letter to the editor in Sunday's Inquirer

The next letter, from Cindy Schnackel of Homeowners Against Deficient Dwellings, disputes that conclusion, calling these laws "wolves in sheep's clothing."

But you don't have to take an advocate's word – or mine – that serious doubts have arisen since these "tort reform for builders" laws started to spread swiftly thanks to a national lobbying campaign by the home-building industry. Just listen to criticism about one of those 27 laws by a state official who has looked closely into her own state's version: Texas Comptroller Carole Keeton Strayhorn.

Strayhorn, in case you're wondering, is no died-in-wool Democrat or anti-business flame-thrower. Although she recently left the Republican Party to run for governor as an independent, she calls herself a "common-sense conservative." One of her sons, Scott McClellan, is press secretary to President Bush. Still, she doesn't pull any punches about the Texas law's strong tilt in favor of contractors over consumers.

The Texas law differs a bit from Pennsylvania's, in part because it establishes a Texas Residential Construction Commission to oversee the new dispute-resolution process. But the goals of the Texas law and its dispute-resolution procedure are similar to what the builders and contractors lobbyists are on the brink of getting here. And that dispute process drew scathing criticism from Strayhorn in a January report.

Strayhorn said her "research found no evidence the Texas Residential Construction Commission has had a favorable impact on the homeowner. It is clear that the Texas Residential Construction Commission functions as a builder protection agency."

"If our standard is giving all Texans a fair shake, this agency has fallen far short of that goal," Strayhorn added. You can read Strayhorn's whole statement here.

If Rendell wants to give all Pennsylvanians a fair shake, he should stop HB 1467 before it becomes law.

New Jersey wrestles with the Brave New World of insurance

When New Jersey rewrote its insurance laws in 2003 with an eye toward encouraging more competition and lower prices, most people focused on the likelihood that new entrants would seek a competitive edge by drawing different ratings maps or using credit histories in pricing — already common practices in Pennsylvania and most other states.

Little attention was paid to the other aspects of the sophisticated pricing models that have moved into the industry’s mainstream over the last decade. But that changed abruptly last week, when the Star-Ledger of Newark reported that Geico was using education and occupation as part of its New Jersey pricing models.

The head of New Jersey Citizen Action labeled the practice unconscionable, and told the paper: “I would love to know who they are marketing themselves to? Are they writing letters to doctors and lawyers? Everybody should be putting down that they are Rhodes scholars.”

Now, legislators have introduced bills in both the General Assembly and the Senate to ban the practice. “Education and occupation has nothing to do with someone’s driving record,” said Assemblyman Neil Cohen of Union County, who introduced one of the bills, according to an article in today’s Star-Ledger. “There’s no relationship at all except to give someone the opportunity to charge regular folks a higher rate.”

The same criticisms have been leveled at insurers' use of credit information — typically reduced to a credit-score-like "insurance score" or "financial-responsibility score" — in pricing. How can it be a legitimate factor, critics ask, when whether you pay your bills on time has no obvious relationship to driving performance?

Insurers who rely on credit — probably the vast majority now — respond that they use the data along with a host of other factors to try to predict the likelihood that they'll have to pay out claims on somebody they insure. Whatever the underlying reasons, they say, how you handle your finances has proved to be a pretty good predictor of their risk of future losses.

But the jury is still out on the use of credit-based scores in auto insurance. Pennsylvania doesn't allow their use in decisions to cancel or rerate an existing policyholder — so your premium can't go up, say, if your bill-paying performance suffers because you lost your job. But it doesn't bar insurers from using credit in their initial decisions to issue a policy or assign it to a pricing tier.

Interestingly, "occupation" is among the classifications that Pennsylvania bars insurers from using in deciding whether to write a policy, or whether to refuse renewal, according to Randy Rohrbaugh, a deputy insurance commissioner. It's listed in the state's Unfair Insurance Practices Act, along with race, religion, nationality, ethnic group, age, sex, family size, place of residence, and marital status.

But the state does allow occupation — unlike race, religion, nationality or ethnic group — to be used in pricing policies, so long as they have data showing that occupation does, in fact, help them predict risk. That's the same standard New Jersey has adopted in allowing Geico and other insurers to use occupation and education in auto-insurance pricing.

One oft-heard argument against the use of credit data could also be raised against the use of education and occupation: that they could be proxies for discrimination against racial or ethnic groups. Since insurers treat their scoring models as proprietary, it's been very hard for outsiders to judge. But the Geico story has provided an unusual glimpse into one company's use of occupation-based ratings.

According to the Star-Ledger's initial article, a Geico internal manual showed how the company viewed a person's job and education.

Accountants, architects, lawyers, teachers, engineers and dentists were listed as occupations with "superior loss experience," the paper quoted Geico as saying. Among those at the other end of the spectrum were clerks, long haul drivers, route men, and "unskilled and semi-skilled blue- and gray-collar workers."

As for education, the manual said: "Risks who have achieved at least a high school diploma or its equivalent are more favorable than those without a high school education. Bachelors, masters and other advanced degrees are considered most favorable."

Is that discrimination? Absolutely. But it's the kind of discrimination routinely defended as a key aspect of the insurance business: finding ways to slice and dice the population to predict relative risk, and charging enough to cover a range of risks at a profit. The law says insurers "can't unfairly discriminate," Rohrbaugh says.

Rohrbaugh points out that some insurers have built entire business models around occupational classifications — offering to cover "all members of the Grange," for instance, which means covering farmers, or to cover active members of the military.

He says Pennsylvania has disciplined some companies for refusing to cover some people because of their occupations — for instance by turning down professional athletes, students or actors. But if what you do can be shown to be a reliable predictor of how much you'll cost your insurer in claims over the long haul, the state isn't saying no.

"That’s why we always talk about 'shop, shop, shop,'" Rohrbaugh told me. As a consumer, you want to find a company that elevates factors that make you look good, and discounts factors that don't.

Personally, I'm glad to see New Jersey's experience shedding more light on how insurers do their business. Insurance really is all about discrimination. That's why regulators and the public should want to know more of the disturbing details — because when it comes to discrimination, deciding what's unfair and what's unfair is really up to us.

Unhappy with House Bill 1467? Here's how to tell Gov. Rendell – it's all up to him now

Readers have been asking how to contact Gov. Rendell about House Bill 1467, the "Residential Construction Dispute Resolution Act," which has been passed by the Pennsylvania legislature and made its way to the governor's desk – for signature or veto – with virtually no news coverage.

Here's how:

* Call Rendell's office at 717-787-2500.

* Send an e-mail via a Web-based form.

* Send a letter to:

Governor Edward G. Rendell's Office
225 Main Capitol Building
Harrisburg, PA 17120

If nothing else, HB 1467 deserves much more scrutiny – and opportunity for the public to comment – than it has gotten. (Click here to read my column urging Rendell to veto the bill.)

Passed without any real public hearings, this stealth legislation could affect any consumer in the state. HB 1467 would apply to new homes and condos, but it also would apply to many much smaller jobs – even a new porch or deck that costs $2,000 or more (To read the bill itself, click here.)

The bill would mandate a step-by-step procedure for dispute resolution, and would meanwhile bar any lawsuit for at least 75 days. It's part of a national push by homebuilders to address a purported problem – too many lawsuits, and high liability-insurance prices as a result – that Pennsylvania builders don't even seem to have.

The legislature got nailed last year for its stealthy pay-raise legislation, but this time it's doing more than lining its own members' pockets. If an entire new procedure is going to apply to Pennsylvania consumers in disputes with contractors, shouldn't we have at least been in the loop?