Outside of the Advance America storefront on the South Side, it's alternately snowing and sleeting. Inside, the chart on the wall offers short-term loans at annual percentage rates of 443 percent. Neither the weather nor the rates deter a steady trickle of customers from walking by the image of Advance America mascot Unexpected Bill, spending minutes at the counter, and coming out with a few hundred dollars they'll have to pay back -- with interest -- at their next payday.
"I know it's a high rate, but it's going to help me out," says one 30-ish woman as she leaves with her cash. "It's cheaper than a $30 bounced check." She drops in when she faces "car repairs, house repairs, things like that," she says. "It's for people who live paycheck to paycheck."
When people who live paycheck to paycheck can't wait for payday, they increasingly turn to the payday lending industry, which offers fast cash at a hefty price. At Advance America, for instance, for every $100 you borrow, you pay back $117 at your next payday. Keep rolling that loan over for a year, and you get the 443 percent interest rate listed on the wall chart. That would seem to run afoul of Pennsylvania law, which caps interest rates at around 30 percent. But Advance America and other payday lenders have found a way around that cap: They offer loans underwritten by banks from states with no interest rate limits. Federal law bars Pennsylvania from regulating loans made by out-of-state banks. That loophole has turned into a gaping breach, permitting some 350 payday lending outlets statewide to extend some $400 million in credit at any given time, with virtually no regulation.
State Rep. Chris Ross, a Chester County Republican, has proposed legislation that would legalize payday lending, regulate it, and give frequent borrowers the option of extending their loan terms to escape from mounting debt. But consumer groups have panned his bill as toothless, and Secretary of Banking William Schenck says Gov. Ed Rendell's administration will fight for stronger regulations. It's not clear, though, that any state regulation, short of a total ban, can stop the growth of an industry that reaps its own payday by taking a big bite out of its customers' paychecks.
Say you need $300, and can't wait until payday. A payday lender will put that $300 in your hands in a matter of minutes, with no credit check; all you have to do is give them a post-dated check for about $351. When payday comes around, you have two options; 1) you can let them cash the check, thereby paying off the loan; or 2) you can pay them $51 to "renew" the loan until the next payday, when the same options are available.
That second option, Secretary of Banking Schenck says, is the dangerous one. People of limited means might be tempted to keep paying a fee to renew the loan, rather than covering the entire balance. If a consumer keeps paying the $51 fee every two weeks, and then finally pays off the balance after three months, they'll have paid $606 for the privilege of borrowing $300. "When you get down into it -- and we've done substantial research -- in fact the business model for payday lending is to make these loans over some time, and roll them over and over," says Schenck.
The payday-lending industry, represented by the Community Financial Services Association, says it's only trying to help consumers through occasional times of need. "The general rule for our association members is [no more than] four" loan renewals, says Steven Schlein, the CFSA's spokesman. The CFSA's "best practices" guidelines don't limit the number of loans per customer per year. The association's Web site claims that "more than 70 percent" of the industry's customers use the service once a month or less.
If that's true, then presumably close to 30 percent of customers are making more than 12 trips a year. That's tantamount to addiction, says Irv Ackelsburg, managing attorney of Community Legal Services of Philadelphia, who authored a 2003 study on check-cashing and payday-lending services. "It's the lending equivalent of heroin," Ackelsburg says. "This is an industry that has the intentional plan of hooking people, like a heroin dealer does."
Rep. Ross's bill would cap payday loans at $500, and allow consumers to hold multiple short-term loans totaling no more than $1,000 at a time. His bill would cap fees at $17.50 per $100 borrowed. It would bar lenders from letting borrowers renew their loans more than once. It wouldn't prevent borrowers from paying off one loan and then immediately taking out another. But if a borrower took out four successive loans, he or she could opt for an "extended payment plan" of 60 days or more. That provision "gives them the opportunity to extend their repayment, so they can get out of the cycle of debt," says Ross.
Schenck says he was initially amenable to Ross's approach, because he "was taking the industry at face value" and bought its claims that it primarily served borrowers' occasional needs. "The more I understand what their business model is, and how they [are] telling us they're doing one thing and using that as a ruse to do short-term loans at 400 or 500 percent interest rates, I just couldn't condone this," he says. "What [Ross's bill] does is legalize loan sharking."
It's not clear whether Democrat Rendell could stop the passage of Ross's bill; Republicans control both chambers of the General Assembly, and eight Democrats have joined 12 Republicans as cosponsors. The Short-Term Loan Act would be "a step in the right direction," argues Rep. Tom Tigue, a Luzerne County Democrat and one of the co-sponsors. "Is it a cure-all? No." Others, like Philadelphia Democrat Jewell Williams, want regulations, but nothing so onerous that it'll eliminate a service some low-income people need.
Schenck says he can understand the industry's high fees, since short-term loans are risky and expensive. But he'd like to see a mandatory 60-day "cooling-off period" between payday loans. "If you really are interested in making loans for one-time needs, let's have the legislation reflect that."
Ross says he's negotiating with Schenck, but doesn't want a cooling-off period or a limit on the number of payday loans per year. "We don't tell people how many times they can bounce checks," he says. "We don't tell people how many lottery tickets they can buy. ... There's a difference of opinion about whether government should put itself in the position of telling people what to do."
It's not entirely clear that state government can even tell payday lenders what to do. The Constitution, after all, prohibits states from regulating interstate commerce. Payday lenders have taken advantage of that prohibition by partnering with banks in states like Delaware and South Dakota that have no usury laws, effectively importing the right to charge unlimited interest rates. The Federal Deposit Insurance Corp., which regulates those banks, has warned them that any involvement in payday lending carries "substantial credit risk" and may count as a negative when the bank's compliance with community-reinvestment law is reviewed. But the FDIC has stopped short of barring banks from backing payday lending.
The banks keep doing it because they get a piece of the action. Under Ross's bill, the payday lenders wouldn't have to pay out-of-state banks a cut, as long as they abided by the bill's restrictions. Make the regulations too strong, Ross says, and the lenders will dodge it by sticking with the loophole they're using now. "I don't want to do something that's going to enable a black market," he says.
That's an approach the payday-lending industry has encouraged. Community Financial Services Association spokesman Schlein says his organization supports Ross's bill, and similar measures under consideration in a number of other states. "The goal of all of our legislation is to do something reasonable that keeps this service available," he says, while weeding out "bad actors."
The industry is in a running battle with groups like the Washington, D.C.-based Consumer Federation of America, which believes states can and should ban payday lending. Though states can't regulate loans backed by out-of-state banks, says CFA Director of Consumer Protection Jean Ann Fox, they can outlaw the kinds of agreements payday lenders make with those banks. "If Pennsylvania doesn't want lenders on every street corner enticing people to write checks for money they don't have, and charging triple-digit interest, they can enact a law barring brokering for this type of loan," Fox says.
"The goody two-shoes people like the Consumer Federation, say, 'Why don't they borrow from family?'" says Schlein. "Obviously, that's not an option for some people." Their options, he says, might include pawning something or letting a check bounce -- either of which can be more expensive than a payday loan.
"The interest rates are high," says one Advance America customer, a man who looks to be in his 50s, as he strolls into the sleet. "It's a loan shark. But what are people going to do?" He shrugs. "I've got friends who come in every week" for loans, he says. He gets payday loans "just for emergencies." And yet, when asked for his name, he hints that he'll be back. "If I give my name," he says, "they might not give me money next time."