LAMPa advocates have worked tirelessly to help defeat repeated efforts to introduce payday lending bills that would end the Commonwealth’s strong consumer protections against abusive loans. Check back for updates on new legislation.
Payday loans are small-dollar, extremely high-cost loans, which typically carry triple-digit interest rates of 300% annually or higher. They are called payday loans because they generally must be paid back in full, with all interest and fees, on the borrower’s next payday.
While payday lenders market these loans as “short-term” loans, they really are just a debt trap. Because the loans are so expensive, secured by access to the borrower’s checking account, and due in full just two short weeks later, most people who take out a payday loan are unable to pay it back AND still have enough money to pay for their regular expenses. Once borrowers pay back a payday loan, they have to take out another payday loan to keep the lights on and food on table. This begins the debt trap cycle.
In fact, payday lenders depend on the debt trap as the core of their business:
• Data show that 76% of payday loan revenue is generated by borrowers caught in the debt trap—borrowers who, after repaying one payday loan, cannot make it to their next payday without having to borrow again;
• The typical payday borrower remains in debt for about 200 days a year;
• According to a comprehensive report on payday lending conducted by the Department of Defense, “The debt trap is the rule not the exception: the average borrower pays back $864 for a $339 loan.”
Payday loans were so harmful to the finances and military readiness of our service members that Congress established a 36% APR rate cap for military families.
Long term financial harm associated with payday loans include:
• Increased incidences of delinquency on other bills, delayed medical care, and overdraft fees;
• Filing for bankruptcy: payday borrowers are twice as likely to file for bankruptcy as applicants whose request for a payday loan was denied;
• Increased likelihood of food stamp usage, delinquency on child support payments, and involuntary closure of bank accounts.
Thankfully, Pennsylvania’s strong laws effectively prevent these harms in the Commonwealth, and every effort must made to uphold existing protections.
Organizations such as the U.S. Department of Defense and Pew Charitable Trusts have determined the Pennsylvania’s laws are among the strongest and most effective in the country in protecting against predatory payday loan abuses. Experiences from the military and other states show that weaker laws with provisions like databases, rollover bans, and extended payment plans do not stop the payday loans debt.
The Pennsylvania Supreme Court has ruled that our law applies to loans made over the Internet to Pennsylvania borrowers. Our Banking Department has successfully enforced our small loan law against payday lenders operating illegal lending schemes, including Advance America and Cash America. But right now those same payday lenders are seeking to roll back Pennsylvania’s existing consumer protections.
As a result of its existing laws, Pennsylvania saves its citizens more than $200 million annually in money that would otherwise be paid in excessive payday loan fees.
Data from the Pew report also help separate fact from fiction regarding payday loans and the claims payday lenders have been making as they seek permission from legislators to bring their loans into Pennsylvania at rates over 300 percent annually.
• Payday lenders market their product as a quick financial fix to cover an unexpected expense, but most borrowers use the loan for regular, ongoing expenses and become trapped in debt for over 5 months of the year.
• The absence of storefront payday lending does not drive borrowers to seek payday loans online or elsewhere.
• Pennsylvania already has one of the strongest laws in the country that successfully curb abusive payday lending usage.
• Borrowers report having options other than payday loans to manage their financial needs.
See June 2105 post “A New Payday Bill Looms”
ELCA Lutheran Opposition to Payday Lending (from testimony given by Amy Reumann, LAMPa Director, before the House House Consumer Affairs Committee on HB 2191 on May 3, 2012)
The teachings of many faith traditions contain warnings against usury and the exploitation of others through charging excessive interest. The writings of Judaism, Christianity, Islam and Buddhism, to name a few, recognize that these practices are unjust, unethical and that the poorest among us are at greatest risk of being trapped in unmanageable debt. All these sources recognize that usurious practices neither serve the common good nor assist those seeking a pathway out of poverty.
The Hebrew Scriptures goes so far as to state that people in poverty should be exempt from interest, saying “If you lend money to my people, to the poor among you, you shall not deal with them as a creditor; you shall not exact interest from them.” (Exodus 22:25). In the Christian Gospels, Jesus drives money changers out of the Temple, branding them thieves because of their overcharging of the poor who came there to offer sacrifices.
Martin Luther had sharp words for those who earned excessive profits by charging high interest to the poor in his day. In his Large Catechism he commented on the fourth petition of the Lord’s Prayer (“Give us this day our daily bread”), saying, “How much trouble there now is in the world… on account of daily exploitation and usury in public business, trading, and labor on the part of those who wantonly oppress the poor and deprive them of their daily bread!” He took merchants and bankers in his day to task, commenting that usurers “forget Christ’s command to do unto others that you would have them to unto you”.
The Evangelical Lutheran Church in America has built upon this foundation in its own social policy on economic life, which demands respect for the dignity of others in our transactions and scrutiny of how specific policies and practices affect those who are the poorest. And when policies result in exploitation of the poor and hamper their efforts to move out of poverty (as this bill surely would) we look to government to limit or counter narrow economic interests and promoting the common good.
Our social services agencies around the country have encountered the devastating effects of payday loans on their communities.
In opposition to the recent expansion of usurious lending in Minnesota by two major banks now offering “paycheck advance” loans, Darryl Dahlheimer, program director at Lutheran Social Service Financial Counseling in Minnesota explained the dynamics of predatory payday lending in an interview with LAMPa, saying, “This product is a debt trap. That’s it. It’s designed for profit and we see the pain that it offers”. Dahlheimer said that for low-income consumers who receive financial counseling at Lutheran Social Service of Minnesota, cash advances are often the first step into a ruinous cycle of debt and bankruptcy. Customers receive quick cash up front, but when much of their next paycheck or Social Security check is used to pay back that debt, customers will often have trouble paying that month’s bills and will then request another cash advance for the next paycheck –and instead of a two-week loan at 400% APR interest or higher, it rolls over and over into an average of 150 days per year of indebtedness at that rate “, he explained. “In the long run, when customers have reached the limit for cash advances or cannot pay back the amount owed, they face bounced checks, overdraft fees, and poor credit. Payday lending is like throwing gasoline on the fire of indebtedness,” Dahlheimer said. “People who are fairly desperate, who have poor credit, don’t have access to traditional loans, it’s like having a product out there like an accelerant, which is what arsonists use, to make the problem much, much worse quicker.”
Likewise, congregations have dealt with the downward spiral caused by these loans among their members.
Pastor Charles Swadley of Richmond, Virginia has seen the impact of predatory lending firsthand and created a ministry program to assist people trapped in the debt cycle. He says, “Pastors of all denominations wanted to help people who had gotten into serious problems. People reach a certain point in their desperation when their credit is gone, and they are primary targets for payday lending.” One man in his congregation who was part of a group home for adults with mental incapacities got loans both online and in person at a nearby store. He didn’t understand the implications of what he was signing. Pastor Swadley points out that payday lending particularly affects people who are immigrants. “I had 12 different ethnic groups in my congregation. They fell into every single trap, either because they don’t understand credit, due to language barriers or both. Before you know it they fall through the cracks. They end up as victims very quickly. Anyone without financial savvy, people with ADHD who make decisions without thinking through consequences, those who don’t have financial background, fall into the trap and it digs the hole deeper.”
The Evangelical Lutheran Church in America has expressed particular concern that although Payday lenders provide cash advances and consumer credit, these companies make little effort to ensure that its product is suitable for customers and their ability to repay, unlike many other providers of financial services.
A federal cap on payday loans to military personnel has been in place since 2006. This action was deemed necessary due to the high number of military families caught in the payday debt trap. While this will protect service members in Pennsylvania, doesn’t the rest of the population deserve the same level of consumer protection? We look to your committee to take into account the many affected by the recession who continue to struggle, the many who stand to lose public benefits in the time to come, and the most vulnerable among us who will be dug deeply into unmanageable debt if this bill becomes law. Please keep in place the prohibitions on usurious lending that have been in place for over a century and reflect the broad consensus of the values of the faith community and the requirement of the common good.
News Coverage Opposing Payday Lending
- Letter: A Payday Loan Debt Trap,Pittsburgh Post-Gazette, 05/27/13
- Letter: False Claims by Lending Industry, PhillyBurbs.com, 05/24/13
- Letter: Stop Payday Lending Legislation, McKeesport Daily News, 05/20/13
- Another Payday Loan Debate on the Horizon, Morning Call, 5/18/13
- Editorial: Whose Payday?, Daily News, 4/12/13
- Editorial: Stand firm against payday loans, Erie Times-News, 03/20/13
- Letter: PA Residents: Oppose payday loans, DelCo News Network, 03/18/13
- Payday Loan Affordability Fast Facts, Patriot-News, 03/16/2013
- Letter: Payday loans are like financial quicksand, Morning Call, 03/07/2013