Room 148 of the State Capitol might as well double as a Capitol broom closet. That's where the House Consumer Affairs Committee this morning rushed out amendments to House Bill 2191, which legalizes predatory payday lending in Pennsylvania.
The amendments to HB 2191 were misleadingly pitched as adding more consumer protections to the bill. Even the Navy Marine Corps Relief Society took a look at these amendments and said they do "nothing to mitigate the already harmful aspects of HB 2191," and that one amendment "actually worsens the problem it claims to solve."
One focus of the amendments this morning was language banning renewals or rollovers of a payday loan, as if that was a solution to stopping the long-term cycle of debt. It is not.
Payday lenders support amendments that ban renewals and rollovers because they know how to circumvent them. To avoid appearing to "rollover" or "renew" the debt, lenders ask the borrower to pay off the old loan and take out a new loan by paying a new fee and writing another check. Also, in a practice called "touch and go," lenders take a cash "payoff" for the old loan that they immediately re-loan with new loan funds the next day.
Here’s how it works: To repay the first loan, the borrower lets the lender cash the original post-dated check or pays the lender $300 in cash to tear up the check. In either case, they borrow again immediately or as soon as allowed by law.
Under HB 2191 as amended, people would be able to borrow again the next day. In this way, a borrower in Pennsylvania could be indebted every payday of the year!
Because these types of transactions technically do involve paying off the loan — if only for one day before a new loan is originated — they are not considered renewals or rollovers, thus allowing serial use of payday lending to continue unabated. In states with a rollover ban, borrowers are stuck in an average of nine loans per year, and payday lenders earn 60% of their revenue from borrowers with 12 or more loans a year.
As the Keystone Research Center explains in a new policy brief, Bankrupt by Design: Payday Lenders Target Pennsylvania Working Families:
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. 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.
In today’s committee meeting, Rep. Jesse White noted that in his legal practice helping low-income rural families struggling with bankruptcy, his clients often identified their use of payday lending (when it was legal in Pennsylvania) as the point at which their financial troubles got out of control.
It is no surprise then that the typical payday borrower takes out multiple (non-concurrent) loans over the year, each time falling further behind on their bills. It is also why payday borrowers are twice as likely to file for bankruptcy as applicants denied a payday loan. Payday lenders succeed not by targeting the completely destitute but by targeting desperate but resourceful people they can squeeze for money.
Predatory payday lending doesn't just put the squeeze on borrowers; excessive fees leave borrowers with less money to spend on goods and services, such as rent and food. This ends up erasing an estimated 1,843 good jobs from the economy. In this way, HB 2191, even with amendments, would transfer money from Main Street Pennsylvania to out-of-state and foreign payday lending corporations.
Under current Pennsylvania law, payday lending at annual interest rates of 300% or more is illegal. It's also immoral. HB 2191 would do more harm to Pennsylvania than good.