From the Community Action Association of Pennsylvania (http://www.thecaap.org):
NOTE: Scroll down for information on contacting legislators.
How It Works
Payday loans are small-dollar, extremely high-cost loans. They are marketed as a one-time, “quick fix” for people facing a cash crunch. But the loan terms are designed to trap borrowers into long-term debt that causes a host of harms.
Traditionally, payday lenders have offered short-term payday loans: two week loans, with 300% annual interest rates, that are due in full on the borrower’s next payday. Borrowers are required to give the lender a post-dated check or electronic access to their bank account, so the payday lender gets paid back first on payday, leaving the borrower short on cash for other expenses. The borrower then returns to the payday lender to take out another loan, and the cycle of repeat borrowing continues, trapping the borrower in a long-term cycle of debt.
Draft legislation is being circulated in Harrisburg called the “Financial Services Credit Ladder” that would allow high cost installment loans to be made in PA. This time, the predatory loan product is different. Installment loans, unlike traditional two-week payday loans, are paid back over time instead of in one lump payment. But this doesn’t make the loans any safer. In fact, the draft bill has a deceptive annual interest rate capped at 36% that could effectively reach as high as 200-300% because there is no cap on the related fees. The draft bill also would allow a borrower to take out an unlimited number of loans at once.
Proponents of the legislation disingenuously suggest that the “Credit Ladder” is a safe and responsible credit product that is based on a proposed federal rule on payday lending by the Consumer Financial Protection Bureau (CFPB). But, the CFPB, unlike Pennsylvania, does not have the authority to cap the rates on these loans, which is the best way to prevent predatory lending. Replacing our state interest rate cap with the CFPB rule will weaken our consumer protections, putting the clients we serve at risk.
CAAP views this as a predatory loan, plain and simple, written by out-of-state payday lenders to benefit out-of-state payday lenders at the expense of our most financially vulnerable friends and neighbors.
Here’s one example from the Check N’ Go website: For a $3,000 installment loan paid in 26 bi-weekly installments, the finance charge is $4,654.71 for a total payback of $7,654.71 in one year (218.64% APR). CLICK HERE to be directed to Check N’ Go’s website where you can see more details of the described example. Check N’ Go is leading the effort to secure pro-payday lending legislation in PA.
The payday lenders are working now to line-up co-sponsors for their proposal.
Why We Care
- Long term financial harm associated with payday loans include:
- Increased incidence of delinquency on other bills, delayed medical care, and overdraft fees
- Elevated risk of filing for bankruptcy: payday borrowers are twice as likely to file for bankruptcy as applicants whose request for a payday loan was denied
- Increased likelihood of food stamp usage, delinquency on child support payments, and involuntary closure of bank accounts
- Thankfully, Pennsylvania’s strong laws effectively prevent these harms in the Commonwealth, and every effort must be made to uphold existing protections. Organizations such as the U.S. Department of Defense and Pew Charitable Trusts have determined the Pennsylvania’s laws are among the strongest and most effective in the country in protecting against predatory payday loan abuses. As a result of its existing laws, Pennsylvania saves its citizens more than $200 million annually in money that would otherwise be paid in excessive payday loan fees.
Talking Points
- Once again, payday lenders are trying to bring their predatory loans into Pennsylvania
- Payday loans are an abusive form of lending that traps cash-strapped borrowers into a long-term cycle of debt
- Payday loans carry astronomical rates, with fees and interest typically over 300% annually for traditional two-week loans and over 200% annually for longer term loans
- We continue to oppose bringing 200-300% interest-rate, debt-trap loans into Pennsylvania
- While a bill has not yet been introduced, a draft proposal is being circulated in the State Capitol that would allow high cost installment loans, with no maximum cap on fees and no protection against repeat re-financing
Pennsylvania already has one of the strongest payday lending laws in the country
Changing our law by adopting the current version of the Consumer Financial Protection Bureau (CFPB) proposal in Pennsylvania will weaken PA’s law. In fact, the same Pew Charitable Trusts study mentioned below says that states like Pennsylvania should keep their strong laws on the books.
Call to Action
Sen. Wiley is the Democratic chair of the Banking and Insurance Committee where this proposal would likely be assigned once it is filed
It is important that Senator Wiley understands that any type of predatory payday loan — even a 12-month installment loan — harms our collective efforts to reduce poverty and increase self-sufficiency
We ask that Sen. Wiley stand with us to keep our strong, existing protections against predatory loans in place. You can share this message at senatorwiley@pasenate.com (let him know you are contacting him in his capacity of Democratic chair of the Banking and Insurance Committee).
On June 1, 2015, Senator John Yudichak, who has co-sponsored payday lenders’ bills in prior sessions, circulated a memorandum urging his colleagues to join him in co-sponsoring legislation to legalize a new loan product in Pennsylvania, called the “Pennsylvania Financial Services Credit Ladder”
Ask your state Senator to decline co-sponsoring this bill. Find contact information for your senator at http://www.legis.state.pa.us/cfdocs/legis/home/findyourlegislator/#address. Use the talking points above to guide your call.
The legislative language is not yet released, so a complete analysis of the proposed loan product cannot yet be conducted. Stay tuned for the details.
Additional Information
See the infographic below, produced by Pew Charitable Trusts, that provides additional important facts about payday loans in America and demonstrates how Pennsylvania’s laws are working to prevent financially strapped borrowers from falling into a dangerous payday loan debt trap.
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