Payday Loans: Mayday Loans Punishing Rates Make Them Dangerous As Crack

Posted: March 24, 2005

PAYDAY LOAN interest rates can rival those of Mob loansharks - ranging from 400 annual percentage rate to well over 1,000 percent.

Because it is addictive, and destructive to individuals and communities, payday loans more nearly resemble another Mob enterprise: drug dealing.

The Pennsylvania Legislature should reject a bill legalizing the practice in the state - even with regulations that attempt to protect consumers from being permanently hooked into crushing debt.

As Dave Davies reported in yesterday's Daily News, the payday lending industry has hired Sharif Street, a lawyer with Wolf, Block Solis Cohen (and the mayor's son), to lobby for legislation that would allow payday lenders to operate here on their own. Now, the companies partner with small out-of-state banks in order to claim they are loan "brokers" rather than lenders - and so charge exponentially more in interest than the state's 28 percent limit.

Payday loans are advertised - and, say consumer advocates, targeted to minority communities - as one-time infusions of cash for a couple weeks for people in a bind. The borrower supplies a post-dated check or deduction authorization as collateral. Industry profits are based on borrowers who can't pay back the loans and so must take out another loan and then another. The average: 8 to 13 loans per year. The borrower gets caught up in a seemingly bottomless pit of debt.

The proposed legislation, to be introduced by Rep. Chris Ross, R-Chester, does contain some consumer "protections." It limits the number of loan rollovers and also mandates payment plans.

But if Pennsylvania really wants to protect consumers, it will force payday lenders out of the state and educate borrowers about alternatives: Overdraft protection on a checking account, credit card loans, even credit card cash advances which, even at high rates, is less than a payday loan.

Recently, the Federal Deposit Insurance Corporation, which regulates state banks, expressed concern about payday lending. If FDIC were to outlaw the practice of partnering with out-of-state banks, payday lending couldn't operate here at all.

Meanwhile, the proposed legislation could be a lifeline for an industry Pennsylvania legislators - especially those from minority communities - shouldn't want to save. *

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