Debt trap or credit creator? Pending bill sparks heavy opposition

(Harrisburg) — Democratic state Senator John Yudichak’s been representing Carbon and Luzerne counties since 1998.

They’re among the poorest counties in Pennsylvania.

“The per capita income in both my counties is less than $25,000 a year,” he said recently. “If the vast majority of [my constituents] get hit with an unexpected thousand dollar bill that comes due, they’re going to struggle to pay that bill. [They] get trapped in a cycle of debt.”

Sometimes that entails turning to payday loans.

They’re effectively banned in Pennsylvania because the 24 percent cap in interest on loans from licensed banking entities makes it unprofitable to open up shop here. It’s that way in 15 states. Eight allow payday lending without any limits and the rest fall somewhere in the middle, according to the Pew Research Center.

But some people – typically, those with the worst financial struggles – still get involved online or other states, or find the rare illegally operating storefronts in the Commonwealth.

Since they can’t get a better deal at a bank, they agree to triple-digit interest rates in exchange for quick cash.

Yudichak says that’s why he’s put in more than a year of work on the Pennsylvania Financial Services Credit Ladder Act. It would increase the state’s cap on interest and fees on some loans, effectively giving access to credit to people who currently don’t have it.

Every so often, state lawmakers suggests relaxing the state’s lending rules. They also say Pennsylvanians who need credit and can’t get it are turning to unregulated, higher-risk credit options. They meet opposition from those who say the changes would open the door for pay-day loans.

But this time, a proposal in Harrisburg has come along as national regulations are changing.

Yudichak says he won’t file the bill for at least a month, but he talked this week about what it’s expected to do.

It would allow for loans repayable over one year at up to 36 percent interest – 8 points over the current state limit.

Payday loans typically are 15 percent or so – but, over much shorter terms – just 10 days, in some states.

That quick compounding is part of the reason repayments can snowball into multiples of the original loan amount.

Another reason: fees.

“The fees are not express expressly mentioned in the bill. That will be determined by the banking department in Pennsylvania,” Yudichak says.

That is a nonstarter for opponents, including the United Way of Greater Philadelphia and Southern New Jersey.

Yudichak said the group supports the bill as currently envisioned.

But an email from a United Way spokeswoman was clear: their support hinges on a legislative cap on fees and interest, combined, at 36 percent.

That’s the same as the federal limit on loans to military personnel.

“Payday loans were found to be so predatory and so harmful to our nation’s soldiers that the Department of Defense found that they were impairing military readiness,” says Kerry Smith, an attorney with Community Legal Services in Philadelphia.

The organization is one of 99 across the state, including multiple United Way chapters, opposing Yudichak’s efforts.

“Critics say, ‘We really don’t have payday lending in Pennsylvania, anyway. You know they pulled up stakes.’ They’re still finding ways, whether it’s online, whether it’s across the state lines. They’re finding ways to take advantage of folks,” Yudichak says.

A relentless pursuit

Payday companies have operated out of storefronts here long after current rate caps took effect, first by leasing space from federally-chartered banks and then through Native American tribes, according to the state Attorney General’s office.

Smith’s office was involved in the cases which closed these loopholes. She’s been focused on this issue since 2005.

“Since then, the payday lenders have been on a pretty relentless pursuit to bring their high-cost loans into Pennsylvania by lobbying our state legislature to weaken our state law,” Smith says.

Opponents flagged a 2013 bill, for example.

Yudichak one of four co-sponsors – and the sole Democrat.

But he says this proposal is different.

He’s right: The legislation from three years ago raised the annual interest cap to just 28 percent and set separate caps on fees.

But Yudichak also says his bill is driven by movement at the national level.

The Consumer Financial Protection Bureau released a final draft of related rules last week.

“We tried to create a legislation that would use a lot of those consumer protection suggestions,” he says.

That’s what some experts and advocates watching this, in Pennsylvania and nationally, are afraid of.

“There’s no reason for Pennsylvania to change its law. It should not undo its strong consumer protections just because the CFPB is issuing a proposal,” says Alex Horowitz, a senior fellow with the Pew Research Center’s Small Loans project.

CFPB’s proposal is actually weaker than Pennsylvania’s law. Pew’s expressed disapproval and Horowitz attributed the proposed regulations’ missing the mark to intense lobbying by the payday loan industry. That’s a noticeable shift from its optimistic, supportive reaction to the draft rules released last year.

“No state has legalized payday lending in the last decade, but the CFPB proposal is one that lenders may try to use to get back in, in the states that are protecting consumers with interest rate limits,” Horowitz says.

Safety in simplicity

Yudichak’s suggesting a repayment term of one year and banning the two-week type. But payday lenders have been offering longer terms elsewhere.

Another central feature: unfettered bank account access. That also would be prohibited, along with incentives for consent from consumers.

There are other components.

Horowitz says keeping it simpler would be more effective.

“Payday lenders have traditionally thrived in complexity.  At the state level, payday lenders have changed their products to evade consumer protections in states like Ohio, Delaware, Wisoncsin and New Mexico,” Horowitz says.

The Bureau of Consumer Protection in the Attorney General’s office would would enforce these provisions.

Basil Merenda, the bureau’s chief deputy, says he hasn’t been apprised of the developing bill. But he knows about this issue because his team is embroiled in a lawsuit against some of those payday companies we mentioned earlier.

“There’s a concern that there is really no regulation out there effectively protecting the rights of some of these consumers,”  Merenda says.

People with bad credit might have other options.

There’s a credit union program, known as Better Choice, that offers small-dollar loans at 18 percent interest, max, to anyone, regardless of their financial history.

But Yudichak points to lack of access.

Just 70 of 400 credit unions in the state offer the program, according to the state credit unions’ association.

That program also lends in increments of $500 or less. Yudichak’s proposal would apply only to loans between $1,000 and $5,000 (a ceiling that’s way too high, says Horowitz, for its target audience).

But Merenda says he thinks it’s more a lack of awareness. He says predatory lending victims haven’t complained about lack of access to credit unions.

At least not the 120 people whose complaints helped spur the lawsuit.

Pew estimates 360,000 Pennsylvanians use payday loans.

“I really can’t put my thumb on an exact number, but that sounds about right. Just my opinion: a lot of this is driven by the fact that. … If people were receiving a fair reasonable income on which they can you know pay their bills and raise their families, I don’t think you’d have a lot of these problems,” he says.