Bill legalizes higher interest rates for desperate borrowers
On its face, House Bill 2191 — an Act, which amends Title 7 (Banks and Banking) and Title 18 (Crimes and Offenses) of the Pennsylvania Consolidated Statutes — appears to live up to its stated goal of providing consumer protections against the predatory tactics of payday loan institutions.
Opponents suggest Pennsylvania already had stringent laws, and that HB 2191 would circumvent those laws and allow payday lenders to not only set up a string of brick-and-mortar payday lending branches, but charge an astronomical 300 percent interest rate on the loans they grant.
“Payday lenders have decided for a long time they want to try to operate here, even though the constituents here made it perfectly clear that isn’t the type of service they want,” said Center for Responsible Lending Vice President of External Affairs Nikitra S. Bailey. “Lenders are making the claim that these are short-term emergency credit sources, but what we’re finding is that these borrowers are using payday loans not for short-term situations, but for their basic living expenses.”
HB 2191 has been voted out of the House and now sits in the Senate, where it awaits a September 19 hearing, said Diana Standaert, legislative counsel for the Center for Responsible Lending.
“It was sponsored by state Representative Chris Ross. The bill was filed in March of this year and was introduced on the House side,” Standaert said. “What the bill does is legalize payday lending in the state of Pennsylvania for the first time, ever. It legalizes both storefront and Internet payday lending. Right now, Pennsylvania law restricts small loans to interest rates of about 24 percent APR, and that’s true if the loan is made online or from a storefront.
“This bill would legalize small-load loans to carry an APR of 36.9 percent,” she added. “That’s the crux of the bill and concern.”
Standaert said the bill operates in several nefarious ways, including codifying in to Pennsylvania law the core predatory techniques of the predatory product, by allowing high fees, shorter due dates, provides for balloon payments and allows the lenders to access the borrower’s banking account.
“Those four elements combined create a product that makes it difficult for families to get out of the hole of financial distress,” Standaert said. “And these four elements are written into HB 2191, and those are the terms of the product that make it difficult for borrowers to both repay the loan and meet the rest of their expenses.
“So what happens is, borrowers have to quickly re-borrow,” she added. “And that is the debt trap.”
Ross released a statement that backed up his sponsorship of HB 2191, stating there existed “a great deal of misinformation” about the bill.
“While payday lending is illegal in Pennsylvania, the services are widely available to Pennsylvanians via the Internet,” Ross wrote. “The Pennsylvania Department of Banking has been overmatched trying to stop the payday lenders that locate off-shore, use the sovereignty of Native American tribes to shift post office addresses to evade prosecution. House Bill 2191 contains a number of crucial consumer protections that do not exist now, and would require payday lenders to be licensed and strictly regulated. The legislation limits borrowing to 25 percent of a person’s gross paycheck, eliminated rollover loans, and provides for credit counseling and extended payment plans at no additional charge.
“Borrowers are charged a one-time interest fee of 12.5 percent on the principal borrowed, and an additional $5 fee to cover the cost of program monitoring and research … without these protections, Pennsylvanians may be subjected to an endless cycle of fees, interest and penalties from which the borrower may never be able to dig out,” he added.
Representative John Taylor, a Republican that represents Philadelphia and who also co-sponsored HB 2191, did not return calls for comment. Senator Anthony Williams, who sits on the Banking and Insurance Committee, also didn’t return calls seeking comment.
According to a fiscal note provided by the House Committee on Appropriations, if HB 2191 passes, the Banking Department Fund will receive a $5 million bump for the current fiscal year, while $1.5 million will go toward the Banking Department’s Consumer Credit Counseling Account.
The file also spells out the more technical aspects of HB 2191, noting that payday lenders will have to pay an annual license fee of $3,000 for its initial place of business and an additional $1,000 for every other location; a lender must also sustain a net worth of $250,000 and maintain a bond of $100,000 from a surety company. Assuming Pennsylvanians make 3 million payday loan transactions per year, the commonwealth is set to earn $500,000 annually.
If implemented, HB 2191 would actually represent a step backwards for consumer protection in the state, opponents said.
“We are fortunate here in Pennsylvania to have one of the strongest laws in the country that protect workers and families from predatory payday lending. We have state laws that cap the interest rate at 24 percent annually, but HB 2191 would give lenders a special carve-out from consumer loan laws so they could make payday loans at over 300 percent annually,” said Community Legal Services Staff Attorney Kerry Smith, who joined dozens of signees of an anti-HB 2191 petition. “Back in 2005, many payday lenders were trying to get around the law by partnering with banks. That led to storefronts popping up all over the city.
“The reality is, lots of payday lenders operated here back then, where non-bank entities were doing all of the advertising, taking the loan applications, and even though the loan may have had the bank name on it, the non-bank entity would buy that loan back the next day,” Smith continued, citing Cash America and its internet spin-off, Cash Net USA, as two of the main culprits. “We call that a ‘Rent-A-Bank’ scheme.”
That practiced ended shortly thereafter when federal regulators stepped in and strengthened Pennsylvania’s laws, which basically made it unprofitable enough for the payday lenders to cease local operations. Then, in 2010, the Pennsylvania Supreme Court ruled unanimously that state laws apply to loans made over the Internet.
Smith, in no uncertain terms, laid out what Philadelphia can expect if HB 2191 passes.
“If HB 2191 passes, these predators will come flooding into our city and peddle a product that we know traps individuals. We will see a flood of payday stores coming to Philadelphia, and Philadelphia will have no ability to control how many of these stores are operating in our community,” said Smith, noting that Community Legal Services has established a website — http://www.stoppaydayloanspa.com — to educate consumers about the bill and to provide them with the resources to fight it. “HB 2191 preempts the city and states the municipality will have no control on where the stores are located and the city can’t put restrictions on their locations.
“This is a very scary thing,” Smith continued. “All sorts of research shows these loans lead to bankruptcies, overdraft fees and [the forced closure] of bank accounts.”
Smith also referenced a Department of Defense decision, one mandated by former President George Bush that established a 36 percent APR cap on loans made to service men and women. That law also prohibited these lenders from gaining access to the banking accounts of military personnel.
“In 2006, the U.S. Department of Defense thoroughly studied the effect of the predatory loans which HB 211 now seeks to bring to Pennsylvania. The study concluded: ‘predatory lending undermines military readiness, harms the morale of troops and their families, and adds to the cost of fielding an all-volunteer fighting force,’” wrote LTC Robert : Gray USAR (ret.), the legislative liaison of the Military Officers Association of America’s Pennsylvania Council of Chapters. “Indeed, the payday loan industry relies on revenue from borrowers caught in a debt trap. Ninety-one percent of payday loans go to borrowers with five or more loan transactions per year.
“This debt trap is the rule, not the exception.”
The treble effect of the passage of HB 2191 will be felt most in the minority and poor communities, many of, which lack access to more traditional financial services, said The Reinvestment Fund Senior Policy Advisor Patricia Smith.
“We know that high-cost lending has a detrimental impact on the individual, and in the housing market, the impact is usually a foreclosure, which lead to vacancies which adversely affect a neighborhood,” Smith said. “And a payday loan is a high-cost loan that families tend to use to pay for daily living expenses. And those that use it to pay for rent and food usually end up in a vicious cycle.”
The Reinvestment Fund, Smith said, is also concerned that if a person gets into deeper financial waters that they won’t be able to keep up with the loan payments, effecting their ability to get credit in the future. And Smith believes HB 2191 would only get in the way of the sufficient state laws already in place.
“It’s taking away a strong law, one with balance in its application, that provides a way for an honest bank to make a profit and not prey on consumers,” Smith said. “Why mess with what we think is a good thing? And we have not heard compelling arguments that HB 2191 is needed.”