Forward Observer — Pending Payday Lending Legislation: A Debt Trap for Military Veterans

Published by LVMAC on

Kerry Smith, Community Legal Services Warns of the Danger

LVMAC Poster Art 2005Kerry Smith, Staff Attorney, Community Legal Services of Philadelphia, a leading advocate for low income residents in the Philadelphia area, spoke to the Council at its 20 March business meeting as a member of a coalition of over 90 organizations – including the Community Action Committee of Lehigh Valley, MOAA of Pennsylvania, the Navy Marine Corps Relief Society, the Veterans Leadership Program of Western Pennsylvania; and the Council of Churches, AFL-CIO and AARP of Pennsylvania – who have concerns about the recent lobbying to allow payday lending in Pennsylvania, which is currently illegal.

They deem this type of lending a predatory practice and Ms. Smith explained why: a $300 loan, for example, is made for $42 in fees and interest and the requirement to electronically pay on the next payday (typically in two weeks). In other words, the individual loses control of the distribution of his earnings as the lender gets paid first from the individual’s bank and he pays an exorbitant rate of interest (300% APR) without considering the fee. “This is usury,” Ms. Smith stated.

Since one must have an income stream and a bank for a payday loan, the Wall Street Journal has noted these lenders naturally target veterans who receive disability compensation from the VA or Department of Defense and seniors with fixed income streams.

For the Active Duty forces, payday loans became such a problem that the Department of Defense felt, after an investigation, it was affecting military readiness. Subsequently, it pushed on the Congress to act. Federal legislation, passed during the G.W. Bush Administration, now limits fees and interest to 36%. However, this law only protects those in the military on active duty.

“What about the Reservist and National Guardsmen on inactive status after returning home, the veterans unable to work, the aging on limited incomes, and those who recently lost a job and are trying to make ends meet?” she queried the audience, “We must look to the State in such matters.”

“We are fortunate,” she said. “Since the 1930’s Pennsylvania, unlike many other states, has had one of the strongest anti-usury laws in the nation. Its law has been held up as a model to other states in protecting the most vulnerable.” In fact, the Department of Defense had cited Pennsylvania’s law as an example of what was necessary for its service members and their families. Under our law, fees and interest are currently capped at approximately 24% for a loan – and it also applies to loans made over the Internet to Pennsylvania residents. Despite legal suits, the Pennsylvania Supreme Court has upheld it at least twice – implying it is a good, sound law.

“This is all well and good, but another tack has been sought by payday lenders: change the law,” Ms. Smith went on to add. In the last legislative session, lobbyists from the Pennsylvania Consumer Credit Association [an alliance of payday lenders] tried to finesse state legislators – with surprising success – into believing they were advancing a consumer protection bill if they supported House Bill 2191. The bill narrowly passed the House by 102-90 [201 votes available] last June, but fortunately died in the Senate’s Banking and Insurance Committee.

Coalition’s Stop Payday Lending Flyer

However, the Consumer Credit Association is expected to try again and with the ploy that loans will be limited to eight in a year, which is what happens anyway on average, as the loanee slides further and further into debt until cut off by the loaner.

Ms. Smith then sought to enlist the support of the Council and asked it help spread word of the issue. She concluded by saying no state since 2005 has passed a payday lending law and several states which did now regret their actions and have reinstated their interest rate caps. “Payday lenders market their loans as a “short-term” credit option, but the loans are designed to trap borrowers into a long-term cycle of repeat borrowing. Pennsylvanians can bridge the gaps in better ways.”

She recommended Credit Unions as one alternative source of loans. Their rates are typically 18% APR with a $20 fee. She also mentioned Homeowner Emergency Mortgage Assistance Program (HEMAP) loans from the Pennsylvania Housing Finance Agency. A broader discussion then ensued with the Council, which asked her if she would put together a listing of alternative resources which it could distribute.

The Council was supportive of her coalition’s position and dismayed only a few legislators have stood up outright against usury, such as Senators Boscola and Mensch and Representatives Emrick, Freeman, Hahn and Samuelson who voted against HB 2191 in the House. Why any legislator would support a payday lending law is nearly unfathomable – and requires a phenomenal ability to rationalize. There are better alternatives for obtaining loans. Consequently, there is greater concern if a bill is introduced a second time, it might actually pass.

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As of 12 April 2013