Wednesday, March 15, 2006

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.


Anonymous Jim Swoyer said...

First, I would like to thank Jeff for all his hard work in providing consumers with a strong and credible voice on issues affecting their health, safety, and financial security. He does a great job of reminding readers that seemingly esoteric business policies and practices have real human consequences, often for our most vulnerable citizens.

What the continued activity of Cash Today and really the whole legislative struggle around HB 1478 (the authorization bill) demonstrates is the industry’s willingness to exploit lax enforcement policies. Payday lenders created a climate in which any “regulation” was considered an improvement on the status quo, even though the supposed vehicle for regulation (HB 1478) deregulated the most predatory aspect of the product. Thankfully, Senator Fumo’s efforts to stand up to this industry prevented them from ramming through a state authorization bill that would have allowed payday lenders to avoid FDIC scrutiny.

We need to take the final step and close the loophole that allowed payday lenders to engage in the original “rent-a-bank” scheme. SB 101, which is also in Senator Armstrong’s Banking and Insurance Committee, would close the door on payday lenders leaving the state. This is important because payday lenders have demonstrated that they will exploit any opening you give them. We need to be sure they are gone for good.

On a final note, internet payday lenders are a problem, but one that can be addressed by enforcing existing state law. States with anti-payday lending statutes have had success enforcing their restrictions, and Pennsylvania Attorney General Tom Corbett’s action against an internet-based payday lender last fall is evidence it can work in Pennsylvania too.

Jim Swoyer

Thursday, March 16, 2006  

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