Morning Must Reads: $250 Payday Loans With $2000 in Fees/Interest & Food Stamp Asset Test

The state legislature is back today, and this Thursday at 9 a.m. the House Consumer Affairs Committee will hold a hearing to discuss state Representative Chris Ross's bill to legalize payday loans charging upwards of 300% in annual percentage rates (APR).

Currently in Pennsylvania, APRs on small loans cannot exceed 24%, effectively banning firms like Advance America, now owned by Mexican billionaire Ricardo Salinas Pliego, from preying on vulnerable Pennsylvania consumers. Payday lenders profit by trapping working families with cash flow problems in debt. The Philadelphia Inquirer explains the predatory economics of these loans using an example from a period in Pennsylvania when some forms of payday lending were legal.

Pete Alfeche doesn’t recall exactly how he first encountered CashNetUSA, the online affiliate of the payday lender Cash America. He believes he got an e-mail pitching a quick loan.

But Alfeche, a Havertown insurance adjuster, is convinced of one thing: As much as he believed he needed the $250 he borrowed that day five years ago, taking the high-cost, short-term loan was a mistake he’d like to help protect others from making. Within a year, he had paid nearly $2,000 in finance charges, much of it to repeatedly roll over the initial loan.

The way that payday lending drives borrowers deeper into debt is demonstrated by the fact that payday borrowers are twice as likely to file for bankruptcy as applicants whose request for a payday loan was denied. Payday lenders catch a family in financial distress and profit by making multiple loans to them because, given the punitive interest and fees, the borrowers can't pay off their loans.

The lender, as the example above illustrates, makes thousands before a family is finally pushed into bankruptcy — in Alfeche's case the lender netted nearly eight times the size of the original loan! Excessive fees and rates don't just hurt struggling families, they also crowd out their spending on other goods and services in the local community, making it harder for them to pay their rent or buy groceries.

It is hard to take any of the industry lobbying on this issue seriously, but the arguments get more interesting as the hearing gets closer and closer. In addition to arguing that this is a jobs bill, some proponents of the bill now argue that allowing payday lenders to charge upwards of 300% interest rates is a way to better regulate payday lenders who now break the law by marketing and selling payday loans to Pennsylvanians. Does this mean we can soon look forward to a bill to legalize bank robbery? After all, we have laws against robbing banks and people still rob them. So let's legalize bank robbery so as to better regulate it!

In other news this week, the Corbett administration is moving forward with its asset test for food stamp benefits.

The Central Pennsylvania Food Bank anticipates demand for emergency food assistance will grow once the asset test takes effect. The food bank is drumming up donations to make sure they can handle it, Associate Director Joe Arthur said.

“It’s not the time to be putting more restrictions on the program. We feel now is the time to provide all the help we can,” Arthur said, adding that many are still recovering from the economic downturn.

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