Bankrupt by Design: Payday Lenders Target PA Working Families

Authors: 
Mark Price
Authors: 
Stephen Herzenberg
Publication Date: 
May 8, 2012

The Pennsylvania House approved the payday lending bill on June 6. Read KRC's statement.


Download the Full Policy Brief (PDF)

Read a Press Release

Read a Memo to Reporters & Editors

Pennsylvania’s payday lending bill would transfer money from Main Street Pennsylvania to Wall Street, while stifling economic security in low-Income rural and urban areas

Overview

Pennsylvania has a model law for protecting consumers from predatory payday lending. Currently, state law limits the annual percentage interest rate (APR) on small loans to approximately 24%. The Pennsylvania House of Representatives, however, is poised to consider legislation that would substantially weaken consumer protections against predatory payday lending, putting Pennsylvania families and jobs at risk.

The Corporation for Enterprise Development ranks Pennsylvania’s current policy as providing the strongest protections for consumers against payday loans.[1] This strong protection from payday lenders saves Pennsylvania consumers an estimated $234 million in excessive fees each year.[2]

Despite having a model law in place, Pennsylvania lawmakers have introduced House Bill 2191, promoted by payday lenders, to relax consumer protections from payday lending.  HB 2191, even with proposed amendments described misleadingly as a compromise, would permit a $300 two-week loan to carry a fee of $43, resulting in a 369% APR.  In short, out-of-state payday lenders are seeking a carve out from Pennsylvania’s lending laws to legalize payday lending at triple-digit interest rates.

Research and experience in other states shows that payday loans with triple-digit APRs and quick due dates lead to the accumulation of long-term debt for working families, rather than serving as timely financial aid, as the industry often claims.  Customers typically do not use a payday lender just once; the average payday borrower takes out nine payday loans per year.[3]  Many borrowers cannot afford to pay back the principal, let alone the principal plus high interest and fees, two weeks or less after borrowing.  When borrowers do pay back the loan, they often need an additional loan to meet their already established bills and obligations.  The structure of the payday product itself exploits the already stretched budgets of low- and moderate-income families by luring them into a debt trap.   

Contrary to the claims of its supporters, HB 2191 would not create new economic activity in Pennsylvania.  It will create some near poverty-wage, high-turnover jobs at storefront payday lending locations.  Beyond this, legalizing payday lending will reduce spending and therefore employment in other sectors of the Pennsylvania economy.  The excessive fees typical of payday loans leave working families with less money to spend on goods and services, such as rent and food, in the process erasing an estimated 1,843 good jobs. In this way, HB 2191 would transfer money from Main Street Pennsylvania to out-of-state and foreign payday lending corporations.  We should strive to create jobs that provide an economic net benefit and not ones that leave families trapped in debt. 

Read the Full Policy Brief


Footnotes

[1] The Corporation of Enterprise Development, Assets and Opportunity Score Card available online at http://scorecard.assetsandopportunity.org/2012/measure/protections-from-predatory-short-term-loans?state=pa

[2] Uriah King, Leslie Parrish and Ozlem Tanik, Financial Quicksand: Payday lending sinks borrowers in debt with $4.2 billion in predatory fees every year. Center for Responsible Lending, November 30, 2006. Available online at http://goo.gl/oHNNJ

[3] Page 7 of Uriah King, Leslie Parrish and Ozlem Tanik, Financial Quicksand: Payday lending sinks borrowers in debt with $4.2 billion in predatory fees every year. Center for Responsible Lending, November 30, 2006. Available online at http://goo.gl/oHNNJ