FUMO SEEKS TO PROHIBIT PREDATORY PAYDAY LENDING
HARRISBURG, November 17, 2005 – State Senator Vince Fumo (D-Philadelphia) and 22 other co-sponsors from both political parties have introduced legislation to outlaw abusive payday lending practices in Pennsylvania.
Payday lenders impose extraordinarily high finance charges for short-term loans, which are usually for amounts between $300-$500. The default risk is low because the borrower is required to sign an automatic electronic debit authorization that permits the lender to withdraw money from the borrower’s account when he deposits his paycheck – hence the term "payday loan."
The typical finance charge on a $300 loan is $61.25 for two weeks, which converts to an annual interest rate of 400 percent. Although the loan is short term, most payday customers takes multiple loans each year, thus incurring substantial finance charges that end up exceeding the total of the original sum borrowed.
Fumo said that this equates to predatory lending, the purpose of which is to convert the one-time emergency borrower into a repeat customer.
For example, Advance America, the largest provider of payday loans, reported that it’s average customer is provided more than eight payday loans in a single calendar year, generating $431 million in customer fees. The business model is dependant on repetitive borrowing to generate transaction fee revenue.
"This form of lending is illegal in Pennsylvania; however, lenders have been able to circumvent state law by aligning themselves with out of state banks. This bill would close the door on that practice," Fumo said.
Federally insured banks outside the state are not subject to Pennsylvania law. Fumo’s legislation would address the legal fiction of a partnership with an out-of-state bank by specifically prohibiting any person or business operating in Pennsylvania from engaging in the making, arranging or providing of payday loans if that person or business holds or acquires a "preponderant economic interest," in the revenue generated by the loan. Therefore, if a lender is making most of the money from the loan, it would not matter if the lender has a partnership with an out-of-state financial institution.
Similar legislation was upheld this year by the U.S. 11th Circuit Court of Appeals. Recently, Georgia, Maryland, and North Carolina have taken legislative steps to prohibit payday lending.
"As a banker, I find this type of lending product to be wholly inappropriate for the purpose for which it is used," Fumo said. "It is not a coincidence that other states have recently taken action on this issue."
The United States Department of Defense has voiced opposition to payday lending, expressing concern that lenders are preying on the families of military personnel. Other groups to have spoken out publicly against the practice are the Center for Responsible Lending, the National Association of Attorneys General, the AFL-CIO, and the Pennsylvania Council of Churches.
Fumo was optimistic about the widespread bipartisan support for the legislation both in and out of the legislature.
"It is always encouraging when nearly half the members of the Senate co-sponsor a bill," Fumo said. "It speaks well of the Senate that so many of its members are determined to prevent consumers from being drawn into the vicious cycle of debt represented by payday lending practices."
The bill (SB 101) will probably be referred to the Senate Banking and Insurance Committee.Click here to listen to the audio story
# # #