A move to legalize high-cost short-term loans in Pennsylvania is being resurrected in the Legislature.
Unlike the legislation that stalled out in the Senate last year after passing the House, this plan brings with it an avenue for borrowers to earn their way to longer-term, cheaper loan products.
Sen. Pat Browne, R-Lehigh County, on Friday introducedlegislation that he believes responds to the criticisms raised about the proposal offered in last legislative session.
It even has a new name for the two-week loans. Browne’s bill calls them “micro loans.”
But opponents say they aren’t fooled.
Just by reading the memo that Browne distributed to his Senate colleagues seeking their support, opponents see little difference between it and the proposal they fought last year.
“No matter what proponents want to call it, a predatory payday loan is still a predatory payday loan. Payday loans take advantage of vulnerable people by charging outrageous interest,” said Stephen Drachler, executive director of the United Methodist Advocacy in Pennsylvania. “There is no reason — no reason — to bring them here.”
Supporters of the bill say they agree with opponents on one thing: predatory payday lending going on now in Pennsylvania must be stopped.
That includes illegal Internet loans, blackmarket loans, and offshore creditors that provide no protections for borrowers and are difficult for law enforcement officials to locate so they can prosecute.
“What we’re trying to do is give consumers the ability to enter the credit market which everyone wants them to do and prove in a consumer transaction, the trustworthiness which is essentially the foundation of the credit market,” Browne said.
“This presents a stronger credit product for someone who doesn’t have access to a typical secured bank loan.” Sen. Pat Browne
“In other types of payday loans available, that type of dynamic doesn’t exist. That’s my perspective. This presents a stronger credit product for someone who doesn’t have access to a typical secured bank loan.”
His bill would cap the maximum loan amount to 25 percent of the consumer’s gross monthly income. According to a description of the bill, interest rates for each loan would be capped at 28 percent, and fees restricted to 5 percent of the loan amount. The bill allows loans to be rescinded the next day without penalty or fee and provides for an extended repayment option.
It would not permit any borrower to obtain another short-term loan on the same day they pay off another. And it creates a three-tiered short term credit structure that allows families to earn their way to more affordable, longer term credit options that start with eight successfully paid back micro loans.
“The Browne bill is the only short-term credit reform bill that has the promise of ending payday lending in the state,” said Al Bowman, executive director of the Pennsylvania Consumer Credit Association, a statewide advocacy and credit education organization representing consumers and the credit industry.
Demand for short-term loan options is there, Bowman said. A Pew Charitable Trusts studyfound that about 300,000 Pennsylvania adults took out a payday loan in the past year.
Community Legal Services staff attorney Kerry Smith said the so-called protections in the Browne bill fall short of the ones Congress requires of payday loans offered to active military members and their families. Those loans provide for a 90-day repayment period and have interest and fees, combined, capped at 36 percent.
Plus, the short-term loans available to active military do not give the lender access to the borrower’s bank account as is the case with the loans that Browne’s bill is looking to legalize.
The pitfall to allowing the creditor to have access to the bank account is it can lead to even more fees for borrowers who default on their loans and are stuck paying fees to the lender and the bank for overdrafting their bank account, Smith said.
What’s more, Smith said the only reason a borrower would take out eight payday loans is not to prove their credit-worthiness.
More likely, she said it’s because “once they pay back a payday loan they don’t have enough to keep the lights on and put food on the table so they have to go back and borrow again and again.”
Pointing to a finding from a 2008 study by economists Paige Marta Skiba, a professor at Vanderbilt University, and Jeremy Tobacman, a University of Pennsylvania professor, Smith said payday borrowers are twice as likely to file for bankruptcy than similarly situated people who do not use payday loans.
What’s more, she said the legislation’s prohibition on rolling over one payday loan to another is really no protection at all. She pointed to another study, this one by the Center for Responsible Lending from 2011, conducted in states with rollover bans.
It shows payday lenders elude that restriction by making a new loan shortly after closing out the old one. That practice left consumers saddled with payday loan debt for more than 200 days in the first year of borrowing.
Bowman of the Pennsylvania Consumer Credit Association said as many studies are out there supportive of payday lending as there are against.
He offered up two studies that conclude payday loans have a place in the loan marketplace.
One done by a Federal Reserve Bank of New York assistant vice president Donald Morgan, along with a Cornell University doctoral student and an AIG economist, indicates that bouncing a check may cost more than a payday loan so the short-term loans help households avoid costlier alternatives.
Another by Kelly D. Edmiston, a senior economist at the Federal Reserve Bank of Kansas City, saw a correlation between better credit scores and the availability of short-term alternatives in that geographic region because the high-risk borrowers had fewer late payments and delinquent accounts.
Bowman said an informal survey his organization is conducting shows Pennsylvania residents who travel across the state’s borders to obtain a short-term loan want to be able to get them closer to home.
They indicate they used the loans to pay utility bills, car repairs, medical expenses and other bills. One woman said she used it to pay for her wedding.
Smith said using this short-term credit option to pay monthly bills is not a reason to legalize them in Pennsylvania.
“If you got such an income and expense gap that you are not covering your basic expenses at zero percent interest, how is adding a 300 percent APR loan going to help you It’s not. It’s going to hurt you,” she said.
Better options would be to negotiate with a creditor to get a two-week delay on payment, borrowing from an employer, cut back on expenses or as a last resort, use a credit card, she said. Another option, Smith said, is Pennsylvania’s Better Choices program that gives borrowers 90 days to pay back loans and charge 18 percent interest and flat $20 application fee.