Consumer 12.0: Online payday loan firms openly flout Pa. laws

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.

Alfeche agreed to tell his story last week to help fight proposed legislation, sponsored by State Rep. Chris Ross (R., Chester County), that would bring payday lenders back to the cities, towns, and strip malls of Pennsylvania after a six-year absence.

Alfeche, now 51, compares getting his CashNet loan to jumping onto a treadmill without an off-button. He was going through a divorce, raising three teenage sons, and stressed by some unexpected medical expenses. The quick cash was a salve, but just for a moment.

"It may have helped for the first few days," he says. "But when it became due, I didn't have the money. I just kept on paying the fees — refinancing the loan, and paying the fees."

Ross has nearly 50 cosponsors for House Bill 2191, about a third of them Democrats, and has been trying to nail down support from Gov. Corbett before a hearing scheduled for 9 a.m. Thursday by the House Consumer Affairs Committee. He plans to offer an amendment to address some complaints from the bill's critics, led by a coalition, Stop Predatory Payday Loans in Pennsylvania, that includes religious and labor groups, credit-counseling organizations, AARP, and United Way of Southeastern Pennsylvania.

Ross says the legislation is needed because Pennsylvania has been unable to vanquish online payday lending, despite a 2010 state Supreme Court ruling that said the high-cost loans were barred by state laws whether they were made in a storefront or by an out-of-state Internet lender.

"What we have now is a totally unregulated industry, with no rules, and tremendous opportunity for the consumer to be taken advantage of," Ross told me last week.

Ross says he would prefer to allow payday lenders into the state so that the loans could be regulated.

Kerry Smith, a lawyer at Philadelphia's Community Legal Services, has helped lead the fight against Ross' bill, arguing that it "authorizes a product that we know from other states causes long-term harm."

Smith says she doesn't doubt the sincerity of Ross, a former business owner from East Marlborough Township — just the logic of his arguments and those of his supporters.

"What they're doing is saying, 'Look, a few people are finding Internet payday loans at 300 percent or higher, so to protect them we should legalize these loans in Pennsylvania,'?" Smith says. "The only thing this bill does is legalize loan-sharking. It is not a consumer-protection bill."

Ross said Friday that his amendment would cut the cost of a payday loan to less than in most other states that allow payday lending, drop provisions permitting rollovers, and enable borrowers who can't repay to enter a "no-cost extended-payment plan at least once per year" — an option that John Rabenold, lobbyist for the Ohio-based Cash 'n Go payday-loan chain, likens to "a once-a-year, get-out-of-jail-free card."

Smith and other opponents, such as Philadelphia lawyer Irv Ackelsberg, say the changes would do little to limit the harm from making payday loans more widely available. Smith says that under the amendments, for instance, the cost of a two-week $300 loan would drop from about $46 to $42.50. In terms of annual percentage rates — a standard for comparing loans that payday lenders call misleading for their product — Ross' amendment would cut the $300 loan's APR from 419 percent to 369 percent, Smith says.

Nor would the amendments stop a borrower from paying off a loan on payday — a process that's almost automatic, since payday lenders require a postdated check or preauthorization to directly debit your checking account — and taking a new loan the next day, she says.

One oddity of this fight is that payday lenders, despite their appearance across the state about a decade ago, gained a toehold here only because of a scheme, known as "rent-a-bank," that federal regulators finally stopped.

Under rent-a-bank, payday lenders openly ignored a Pennsylvania law that limits small-loan finance charges to an annual percentage rate of about 24 percent, far below the triple-digit APRs common to payday loans. The lenders' stance was that they were simply serving as middlemen for out-of-state banks that, under federal law, only had to worry about the laws in their own home states.

Since 2006, when the last federal bank regulator finally barred rent-a-bank schemes, Pennsylvanians who wanted payday loans had to cross the border into states that allow them, such as Delaware and Ohio, or turn to Internet lenders. But since the Supreme Court's 2010 ruling, Internet lenders who do business with Pennsylvanians are openly defying state law.

There's unquestionably market demand for short-term loans. Consumers with decent credit have other options, such as a line of credit or a cash advance on a credit card, but others face a dismal list of options when too many bills come due. Even large national banks are trying to capitalize on the need through payday-loan-like products such as Wells Fargo's "Direct Deposit Advance."

But for now, Smith says, there's ample evidence from other states that the payday-loan model is harmful at least to some customers, and especially to the repeat borrowers who generate the bulk of the industry's revenue.

Pennsylvania doesn't have to give in to Internet lawlessness — a point the state Banking Department emphasized in February when it fined a Delaware company, East Side Lenders, $150,000 for making Internet payday loans.

"The payday-loan industry is marketing a product that we know is explosive," Smith says.

Why invite it back?

Contact Jeff Gelles at 215-854-2776 or jgelles@phillynews.com. Read his blog at www.philly.com/consumer.