Jeff Gelles: Growing debate over whether to let payday lending back into Pa.

Should Pennsylvanians roll out a welcome mat for the payday-loan industry, a business that targets people on the financial fringe with high-cost, short-term loans that plow many borrowers into deeper debt?

That's the question underlying a growing battle in Harrisburg over Senate Bill 975, the latest in a long effort to bring payday lenders back to Pennsylvania, though we never actually invited them in the first place.

It's an oddly timed fight, to say the least. Lenders have long pitched payday loans as quick cash to tide borrowers over till the next paycheck, a friendly advance of a few hundred dollars secured by a postdated check or preauthorized debit.

But critics have pushed back with growing success, arguing that the classic pitch is especially dubious for the loans' target market: borrowers so close to the financial edge, they've lost access to cheaper forms of credit.

Thirty-five states now authorize some form of storefront payday lending, where borrowers pay an annual percentage rate (APR) of 300 percent or more for a typical two-week loan. But no state has done so since Michigan in 2005.

Since 2001, in fact, a half-dozen states have reversed course by reimposing traditional caps on usury - legal limits on interest that lost much of their bite in an era of interstate banking and financial deregulation.

And since July, the risks of payday loans have been documented in studies by the Pew Charitable Trusts and the Consumer Financial Protection Bureau - an agency with authority to impose national rules on an industry that has so far escaped most federal oversight.

So why are we having this fight here and now? The simple explanation is that the payday-loan industry has never stopped itching to return since it was effectively banished in 2006. That was when federal regulators closed the "rent-a-bank" loophole, which had enabled storefront lenders here to issue loans while claiming to be agents for banks in other states with more permissive laws.

Not surprisingly, the real answer is more complicated. Yes, payday lenders are eager to regain a foothold, and they plainly see a Republican-dominated government as fertile ground for arguments to loosen the rules. But the payday-loan industry also can argue accurately that some borrowers welcome the loans, and that their high costs are often no more onerous than alternatives such as paying for a checking-account overdraft.

Al Bowman, executive director of the Pennsylvania Consumer Credit Association, has lobbied for S.B. 975 by contending that it "kills the old payday model." The bill presents itself as "micro-loan reform" - shameless spin on the programs popular in developing countries - and would also authorize longer-term installment loans that could last as much as a year.

"There's a need for it and a demand for it, so it becomes a question of how do we provide short-term loans without the harm of the old payday model," Bowman told me. "This business model puts a lot of emphasis on getting borrowers to the next level of credit."

Critics say the longer loans also would come at high cost, with no evaluation of borrowers' ability to repay, and with the lender having first dibs on any money that comes into borrowers' bank accounts. That's the basic problem with the payday-loan concept: It preys on desperation with the promise of a quick, often unrealistic, fix.

"There's a common misperception that people are really in need of more credit, or are out shopping for more credit," said Nick Bourke, coauthor of Pew's studies. "The reality is that people are looking for a solution to the fact that they don't have enough income to meet their expenses."

Pew's research debunks one of the key arguments for the Senate bill - that storefront lenders would spare Pennsylvanians from the risks of unregulated online lenders. Pew found that about 1.5 percent of those surveyed used online lenders no matter what state they lived in.

What do other people do when payday loans are unavailable? Bourke says a majority do the obvious: get help from family or friends, change their budgets, sell belongings, take a second job.

"They're not necessarily pretty options, but they're the things people do to manage the fact that they don't have enough income."

How people use payday loans, according to a study by the federal Consumer Financial Protection Bureau.

$350

Median loan amount

10

Median transactions per year

$458

Median loan fees

Higher

than 300%

Typical APR on $350 loan

199

Median length of indebtedness in days per yearEndText

The controversial service is no longer available in Pa., but

a Senate bill seeks to bring the lenders back. Consumer 13.0, D3.