PhillyDeals: No more online 'payday loans,' for now

Texas-based Cash America International Inc. last weekend stopped lending money, at least for now, to hard-pressed Pennsylvanians at high rates of interest from a Web site, www.cashnetusa.com, it thought was beyond the reach of state restrictions.

That's after Commonwealth Court ruled 4-3 that the Pennsylvania Department of Banking acted legally in forcing Cash America and other online lenders to get a license that would bring them under state law limiting charges to around 24 percent a year. Cash America will appeal to the Pennsylvania Supreme Court, its Philadelphia lawyer, Alan Kaplinsky of Ballard Spahr, said last night.

Cash America charges 25 percent fees on one- to five-week "payday loans," usually under $1,000. Pay on time, or they get your paycheck. That works out to as much as 1,141 percent interest on an annual basis, the court said.

The company told the court it earned $20 million from Pennsylvania loans in 2007 and 2008. Profits from across the United States and Mexico totaled $81 million last year, $79 million the year before.

Lawyer Robert L. Byer, a partner at Duane Morris L.L.P., represented Pennsylvania in last week's case, with associates Robert Palumbos and Jennifer Diesing-Falcey.

A different group of Duane Morris lawyers represents some payday-lender defendants in a separate federal class-action lawsuit, Yulon Clerk v. Cash America. The state's not worried about the firm working both sides of the street, says banking department spokesman Dan Egan.

Delaware banks are boosting funds to the "Loan Plus" short-term loan program run by nonprofit West End Neighborhood House Inc. of Wilmington at YMCA and Catholic Charities offices.

Wilmington Trust Co., TD Bank, Barclaycard, ING Direct, and United Way back Loan Plus, which has lent $160,000 to nearly 400 borrowers, up to three months each, at 15 percent annualized interest, since 2007.

Seven percent of borrowers have defaulted; the rest paid off or are on schedule, says West End spokeswoman Molly Keresztury. So far that beats the recent 10 percent loss rate at credit-card lenders like Bank of America.

But expenses are high, given the program's size: $137,000 this year. Loan Plus hopes to leverage its costs by more than doubling loan volume this year, says Keresztury.

Pro lenders watch the loans. "We look over their shoulder, and pick up the phone when we need to say something," Wilmington Trust vice president Beryl Barmore told me. "There hasn't been much need."

The Federal Reserve under Alan Greenspan let banks run amok, so we can't trust Ben Bernanke or his successors to regulate financial-system risk, as Obama proposes, said yesterday's report from the Investors' Working Group chaired by ex-Securities and Exchange Commission chiefs William Donaldson and Arthur Levitt.

"The Fed has other, potentially competing responsibilities - from guiding monetary policy to managing the vast U.S. payments system," IWG wrote. "Its credibility has been tarnished by the easy-credit policies it pursued and the lax regulatory oversight that let institutions ratchet higher their balance sheet leverage and amass huge concentrations of risky, complex securitized products.

"Other serious concerns stem from the Fed's regulatory failures - its refusal to police mortgage underwriting or to impose suitability standards on mortgage lenders - and the heavy influence that banks have on the Fed's governance."

Instead, IWG wants "an independent Systemic Risk Oversight Board" reporting to "Congress and the Administration."

The group also wants banks to stick to lending and savings, not compete with Wall Street traders; to merge the SEC with the Commodities Futures Trading Commission; and "a federal role in the oversight of insurance companies," since "state-based regulation makes for patchwork supervision that has proven inadequate to the task."

IWG's criticism of the Greenspan-era Fed is spot-on. Still, IWG represents the investment business, which pressured and formed the SEC as banks influenced bank regulators. Can we trust them on financial risk?