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A Kinder, Gentler Payday Loan in PA? Nope.

Currently under consideration by state legislature, SB 975 is the third attempt to legalize payday loans (PDLs) in Pennsylvania since 2010. It claims to accommodate many of the criticisms against its predecessors, but the tweaks are superficial, and the basic impasse remains: that which makes payday lending profitable also makes it dangerous.

Interest rates that accompany PDLs are famously excessive. Wyoming lenders can legally charge 780 percent APR on a 14-day loan. The industry justifies these high rates by arguing that short-term loans for a variety of reasons cost lenders more to offer than long-term ones. Why then, according the Philadelphia Controller's Office, does SB 975 permit an annual effective interest rate of 65 percent on a $300 loan with a 52-week term? This is about 5 times the average rate on a credit card, as estimated by Bankrate.com. Here, term length seems to matter little.

The PDL industry depends on repeat borrowers for a large portion of its revenue. Loans of this type tend to railroad consumers into borrowing multiple times in a row, and this aggravates the excessive interest problem. The average PDL user takes out 10 loans a year, according to The Consumer Finance Protection Bureau

This is another issue SB 975 only pretends to address.

Co-author and Senator Patrick Browne writes in a memo that his “legislation limits a consumer to no more than 8 consecutive successful two week loans.” But the text of SB 975 itself defines a “consecutive short-term loan” as one taken out “no earlier than one business day nor more than two business days after the payment by the consumer of a previous short-term loan.” In other words, a borrower can side-step the rule altogether simply by waiting 3 days after paying off one loan before they take out another one.

SB 975 would produce at least one other consumer-adverse side effect. Attorney Robert Salvin of Philadelphia Debt Clinic and Consumer Law Center nicknamed the bill "The Payday Loan Collection Authorization Act." Out-of-state and Internet-based companies currently lend to PA residents at interest rates in excess of the state-mandated 24% cap. The lenders make "borrowers sign arbitration agreements to protect them[selves] against being sued." The tradeoff, he explained, is that those lenders cannot 

file collection actions against borrowers who default since the loans are illegal. The upshot of SB 975 would be to authorize thousands of new collection actions against PA residents who default on these loans.

While supporters claim the legislation would extend credit to those in need, “helping low-income areas out of poverty is not one of the main interests of this bill,” according to Markita Morris-Louis, Vice President of Community Affairs at Clarifi, a Philadelphia-based non-profit credit counseling organization. Low-income people “don’t need better access to loans. They need better wages and access to mainstream financial products, not something that will keep them on the financial fringes,” she said.

That's exactly right.