Here is how the payday-lending business works: A consumer borrows a small amount of money, say, $500. The need may be pressing: a broken radiator or a gas-shutoff notice. All the consumer has to produce to get the loan is income verification (such as a pay stub or Social Security letter) and a bank account. In return for $500 in quick cash, the consumer gives the business a postdated check for $587.50, or, more commonly now, signs a debit authorization allowing the payday lender to take the money directly from the bank account on the next payday, hence the name of the product.
The extra $87.50 is interest, or, from the standpoint of the business making the loan, its revenue. Translated into an annual percentage rate, as required by federal law, loans like this will yield APRs in the range of 350 to 900 percent, depending on the amount borrowed and the length of time to the next payday. If this starts looking and sounding like classic loan-sharking, that's because it is, transformed into a "respectable" storefront business.
Those in the payday-loan business argue that, despite federal law, APR disclosures are misleading. Why, they argue, should a mere $87.50 charge be associated with three-digit interest numbers? After all, aren't those dreaded bank overdraft charges just as costly? But this argument masks the dirty truth about the payday-lending business: Its intended and typical customer is the repeat, chronic borrower, not the one-time borrower facing an unexpected emergency.
Indeed, the product is structured to make this happen. Because of the requirement of repayment of the entire obligation in only one or two weeks, the cash-strapped borrower is set up to "need" another loan quickly. This happens because the payday lender, literally sitting inside the borrower's bank account, gets paid ahead of everyone else, likely leaving insufficient funds to pay the next rent or gas bill.
Available data corroborate this picture of chronic, repeat borrowing. The nation's largest payday lender, Advance America, reported to its shareholders that in 2003 it made, on average, close to nine loans per year to its customers, with its 2004 figures even higher. States that have measured payday-lending patterns have discovered average customers going back for 8 to 12 loans per year. North Carolina, which for several years allowed payday lending and then decided to let its law expire, found that only 1 percent of payday loans were to one-time customers.
Nothing could be worse for a debt-drowning family than to get caught in the payday-lending trap. Even the American military has joined the call for banning payday lending because, as it turns out, low-wage military families are one of the primary targets of this bloodsucking industry. Being overwhelmed with debt, the Army recognizes, is not conducive to maintaining morale and focus among its enlisted ranks.
Some states, particularly those with large military installations, have tried to do something about the problem. Georgia banned payday lending outright, and recently a federal appeals court in Atlanta dismissed the industry's challenge to that law.
So why would Pennsylvania consider going in the opposite direction? Money. It demolishes values and common sense through the lobbyist-legislator partnerships it buys.
As I walked the halls of the state Capitol, trying to talk to legislators about the dangers of payday lending, I was amazed at the extent to which the lobbyists had left their footprints. All of their prepackaged rationales for legalization were repeated to me, like a memorized script: how families need a place to borrow money in an emergency, why the industry needs to be "regulated," how the one positive aspect of the pending bill - a state-run online database that would enforce lending limits, which the House ultimately stripped from the bill - would be "an invasion of borrowers' privacy."
These are, indeed, scary times. We seem to have lost our way. But traditional values are still alive. Some politicians in Harrisburg, such as Rep. Kathy Manderino (D., Phila.) and Rep. W. Curtis Thomas (D., Phila.), have been talking common sense on payday lending. Indeed, Manderino's amendment to adopt the Georgia approach and kick the payday lenders out of Pennsylvania nearly passed.
The rest of the delegation needs to know we citizens care about this, and that we are watching them. Who knows, maybe banning payday lending might score us some points with the Defense Department as it reconsiders its decision to close the Willow Grove base.
And we might even take the Governor's Task Force report off the shelf, where, despite its fresh ink, it seems to have been cast, and start legislating as if we actually believe what it says.
Irv Ackelsberg is a longtime consumer advocate with Community Legal Services, where he is a managing attorney.