Payday Loan Times

The Pittsburgh Post-Gazette is not exactly confident about the future of payday loans in Pennsylvania. After seeing two of the major cash advance ldners in the state exist, it would be difficult to argue with this point of view.

1. Advance America, which has more than two dozen locations in this region and is the largest payday lender in Pennsylvania, plans to stop making new payday loans after tomorrow.
2. Ace Cash Express, with almost two dozen stores in the area, has set June 30 as the deadline for halting payday loans.

The news is a victory for consumer advocates, long critical of the industry. Still, some see it as a loss for cash-strapped consumers who have nowhere else to turn in a pinch.

Consumer groups and others accuse payday loan lenders of preying on low-income and vulnerable people by trapping them in a revolving door of debt with flat fees that amount to annual interest rates ranging from about 400 percent to 700 percent or more.

“It’s textbook predatory lending,” said Jim Swoyer, a Harrisburg-based advocate for the Pennsylvania Public Interest Research Group, a leading critic of the industry.

Such high rates violate state usury laws, which generally limit the annual interest rate on small loans to 27 percent. But resourceful companies focusing on instant payday loans have circumvented those rules by operating in partnership with out-of-state banks that are not subject to Pennsylvania regulations.

That strategy began falling apart last March when the Federal Deposit Insurance Corp. issued stricter rules for financial institutions engaged in payday lending.

Since then, the handful of banks that had been willing to partner with payday store operators in Pennsylvania began dropping out. As a result, both Ace and Advance America lost their source of funds.

“We’ve heard from reputable sources that all the banks will be out of the business,” said Paul Wentzel, a spokesman for the Pennsylvania Department of Banking.

A majority of clients at these companies take out payday loan after payday loans. This is known as “flipping” or applying for a “rollover.” According to the Center for Responsible Lending in Washington, D.C., the typical loan is flipped eight times.

The new FDIC guidelines essentially place limits on flipping.

“We are troubled when we see banks extending these very high-cost loans to customers who really need an alternative longer-term credit product,” the FDIC, which regulates certain state-chartered banks, said in a news release when issuing the new rules last March.

Supporters of the industry, including customers who rely on the short-term cash advances to pay for medicines, car repairs or other essentials in an emergency, defend payday loans.

“We believe our product is a cost competitive alternative to other short-term financial options, such as the bounced check and credit card late fees,” said Advance America spokesman Jamie Fulmer.

Although the industry appears dead for the moment in Pennsylvania, it could find new life.

“If you look at the history of this industry, they are pretty adaptable,” the banking department’s Ms. Tyler said. “The industry may find another way to meet the demand [for payday loans].”