Memo: PA House May Take Up Bill to Legalize Predatory Payday Lending in PA
The Pennsylvania House approved the payday lending bill on June 6. Read KRC's statement.
To: Editorial Page Editors, Editorial Board Members, Capitol Reporters & Columnists
From: Mark Price, Labor Economist, Keystone Research Center
717-255-7158 | firstname.lastname@example.org
Date: May 17, 2012
Re: Bill Would Legalize Predatory Payday Lending in PA
The Pennsylvania House may take up House Bill 2191 as soon as next week, legalizing payday loans at triple-digit interest rates. If enacted, this bill would cost Pennsylvania consumers hundreds of millions of dollars and result in the loss of good jobs from the state’s economy.
Payday lenders provide short-term loans, usually for two weeks, to borrowers who must provide a post-dated check or electronic access to a bank account as a condition of the loan. Payday lenders typically operate in storefront establishments or online.
Currently, Pennsylvania has one of the strongest laws in the nation protecting consumers from predatory payday lending. Annual percentage interest rates are capped at about 24 percent, saving Pennsylvania consumers $234 million in excessive fees each year.
HB 2191 would significantly weaken the law. It would permit a $300 two-week loan to carry a fee of about $43, amounting to an annual percentage rate of 369 percent. It would create a few poverty wage jobs while erasing more than 1,800 good jobs in the rest of the economy.
A recent poll of Pennsylvania voters found that 80 percent prefer the existing interest rate limits. Even after hearing arguments of supporters and opponents, 69 percent of voters said they would be less likely to vote for a candidate that supported legislation increasing payday loan interest rates to 300 percent. This was true for 67 percent of Democrats and 73 percent of Republicans. Given how strongly voters oppose this bill, it is clear that supporters of HB 2191 are hoping to rush it through with as little public attention as possible.
A Debt Trap for Struggling Families
Payday loans are typically targeted to low-income borrowers who are in financial straits. When payment on the loan is due, many borrowers are no better off than they were 14 days earlier. Fees continue to mount if a check bounces, so the borrower repays the loan and typically takes out a new loan shortly after, as payday lending fees add to the shortfall in their family budgets.
One recent amendment to HB 2191 would ban renewals or rollovers of a payday loan, but this will not stop the long-term cycle of debt. Payday lenders support amendments like this because they are easy to circumvent. Lenders just have to ask a borrower to pay off the old loan and take out a new loan This is practice is sometimes referred to as "touch and go," lenders take a cash "payoff" for the old loan that they immediately re-loan the next day. For the borrower, it simply means a deepening of their budget crisis, not a resolution of it. HB 2191 would permit borrowers to take out a new loan the day after paying off a payday loan.
Because these types of transactions technically involve paying off the loan — if only for one day before a new loan is originated — they are not considered renewals or rollovers. In states with a rollover ban, borrowers are stuck in debt for more than 200 days in a year, and payday lenders earn 60 percent of their revenue from borrowers with 12 or more loans a year.
As a result, payday loans are a debt trap for working families. Customers take out multiple loans a year on average because once they pay back one loan, they need another to keep the lights on and food on the table.
More Bankruptcies, Fewer Jobs
Research has found that payday borrowers are twice as likely to file for bankruptcy as applicants who are denied a payday loan. Pennsylvania, like other states with strong consumer protections from predatory payday lending, has a low rate of bankruptcy, with only three bankruptcies per 1,000 people. On average, there are five bankruptcies per 1,000 people in states with minimal or weak protections against predatory payday lending.
Supporters of the bill tout it as a job creator, although the fine print says most of the jobs created would pay poverty-level wages and would generate income for families far below that lost to excessive fees and interest rates. We estimate that excessive fees would result in the loss of 1,800 jobs – and this doesn’t even count the potential economic costs of increased bankruptcies or other social costs that accompany the expansion of payday lending.
Research in other states that permit predatory payday lending also finds that payday lenders tend to concentrate in low-income urban and rural communities.
Our full findings are available in the report Bankrupt by Design: Payday Lenders Target Pennsylvania Working Families.
For more information on the poll, the bill and the broad coalition opposing HB 2191, see http://www.stoppaydayloanspa.com/.