By Jackie Robel, Staff Writer
Driving down a street on the way to run some routine errands, the average person does not think twice about the tiny shop nestled between their favorite place to get fries and their go-to destination for a manicure. Yet, places like that small, innocuous store-front shop are where the majority of payday loans occur.
For many who have never faced a financial crisis that required an immediate loan, payday lending may be a foreign concept. For others, payday lending is a part of their daily lives, often leading to a life plagued by debt and grappling with unconscionable interest fees.[1] For those who have not grown up with an understanding of payday lending, what it is, who it affects, and why many states such as Pennsylvania care deeply about prohibiting or regulating it, hopefully this article can shed some light on this common, but concerning, practice.
Payday loans are “small-dollar, short-term, unsecure loans that borrowers promise to repay out of their next paycheck or regular income payment.”[2] Typically these loans are advertised as meeting an immediate emergency financial need, such as a medical bill or car repair; the majority of borrowers, however — around 69 percent — utilize the loans to cover recurring expenses, such as mortgage payments or credit card bills.[3] Many take these loans as “quick fixes” to looming problems, never realizing their predatory nature designed to “trap borrowers into long-term debt that causes a host of harms.”[4]
Borrowing can have an annual percentage rate of 300-1,000 percent or more, and lenders profit most when borrowers are trapped in a series of loans.[5] Of the 12 million payday loan users recorded in 2010, the most common “loan borrowers [were] white, female, and [ ] 25 to 44 years old,” though after controls, there were other groups that had “higher odds” of borrowing: “those without a four-year degree; home renters; African Americans; those earning below $40,000 annually, and those who [were] separated or divorced.”[6] Usury is “the practice of lending money and requiring the borrower to pay a high amount of interest”; thus, it is no surprise that many states view traditional payday lending as a usurious practice and have begun to put regulations in place.[7]
States differ in how they respond to payday lending, manifesting a wide-range of responses. The Pew Charitable Trusts publishes a helpful resource for ascertaining the particular laws and regulations of each state.[8] While some states, such as California and Indiana, do not prohibit the practice, other, such as Pennsylvania, have been proactive in leading the charge against allowing unregulated payday lending.[9] In Pennsylvania, its restrictions include placing a cap on small loan rates to avoid unconscionable interest rates and prohibiting check cashers from granting payday loans.[10]
Pennsylvania has also extended these protections to online lending practices from out-of-state lenders. For example, in Pa. Dep’t of Banking v. NCAS of Del., LLC, the Supreme Court of Pennsylvania ruled that lending companies such as NCAS of Delaware, LLC, could not violate the state’s Consumer Discount Company Act; the act forbids unlicensed lenders of under $25,000 from having aggregated fee and interest rates above 6 percent.[11] Although Pennsylvania is certainly not perfect at monitoring payday lending, and though lenders work to avoid regulations, the state is taking significant steps toward ending predatory practices and providing greater protections for demographics targeted by payday lenders.[12]
For states where there are regulations in place, there is a significant decrease in payday loan usage, as borrowers tend to respond to financial needs by reducing spending, delaying paying some bills, and borrowing from family and friends.[13] With this type of response when protections are put into place, it would behoove other states that lack firm regulations regarding payday lending to consider modeling their approaches after states like Pennsylvania. They should take a stab at protecting those who would otherwise be harmed by predatory lending practices.
Sources
[1] Nick Bourke, Alex Horowitz, & Tara Roche, Payday Lending in America: Who Borrows, Where They Borrow, and Why, The Pew Charitable Trusts, 1, 15 (2012), http://www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets/2012/pewpaydaylendingreportpdf.pdf.
[2] Federal Deposit Insurance Company, An Update on Emerging Issues in Banking: Payday Lending, fyi@fdic/gov, (Jan. 29, 2013), https://www.fdic.gov/bank/analytical/fyi/2003/012903fyi.html.
[3] Bourke, supra note 1, at 5.
[4] Community Legal Services, Inc., About Payday Lending, Stop Predatory Payday Loans in Pennsylvania, http://www.stoppaydayloanspa.com/about-payday.html (last visited Nov. 11, 2016).
[5] Federal Deposit Insurance Company, supra; Bourke, supra note 2, at 15.
[6] Bourke, supra note 1, at 4.
[7] Encyclopedia Britannica, Merriam-Webster: Usury, www.merriam-webster.com/dictionary/usury, (last visited Nov. 11, 2016); Consumer Federation of America, Payday Loan Consumer Information: Pennsylvania State Information, http://www.paydayloaninfo.org/state-information/46 (last visited Nov. 11, 2016).
[8] The Pew Charitable Trust, State Payday Loan Regulation and Usage Rates, (Jan. 14, 2014), www.pewtrusts.org/en/multimedia/data-visualizations/2014/state-payday-loan-regulation-and-usage-rates.
[9] Id.; Community Legal Services, Inc., supra at note 4.
[10] Consumer Federation of America, supra at note 7.
[11] Pa. Dep’t of Banking v. NCAS of Del., LLC, 596 Pa. 638, 653 (Pa. 2008).
[12] Public Justice Center, Ending Predatory Lending: Brief Filed in Payday Loans Case, (2011), http://www.publicjustice.org/news/press/1489.
[13] Bourke, supra at note 19, 16.
