Pennsylvania and New Jersey don't allow payday lending. And state consumer groups want it to stay that way, as a federal agency proposes sweeping new rules to address payday lenders around the country.
The Consumer Financial Protection Bureau proposed federal laws this week aimed at ending payday debt traps.
"Too many borrowers seeking a short-term cash fix are saddled with loans they cannot afford and sink into long-term debt," CFPB director Richard Cordray said. "Our proposal would prevent lenders from succeeding by setting up borrowers to fail."
But consumer advocates say the proposed rules contain loopholes that could undermine state laws. For example, a borrower could take out a short-term loan (less than one year) of up to $500 without showing an ability to pay it back, as long as he or she did not have such a loan in the previous 90 days.
Payday loans often charge triple-digit interest, often more than 100 percent. Lower-interest short-term loans - with a total borrowing cost of 36 percent interest or less - would be permitted in certain circumstances under the proposed CFPB rules. In 14 states that have banned payday lending, the rules could open the door to abuse, consumer advocates argue.
Pennsylvania has caps on interest-rates and fees in place already, said Kerry Smith, senior staff attorney with Community Legal Services in Center City. New Jersey also has rate caps. But CFPB has no authority to impose rate caps nationally.
In addition, payday lenders are pitching new products with a term of one year, yet still with high interest rates.
"Payday lenders are trying to legalize one-year loans, rather than short-term loans, all over the country, migrating to longer-term products," Smith said.
About two dozen organizations signed joint letters urging the CFPB to issue a strong rule that does not weaken state statutes.
"We understand that a national CPFB rule would not preempt our stronger state-interest rate cap," the April 5 letters said.
"Any loophole in the rule that would allow unaffordable, abusive loans to continue to be made in states where they are legal would threaten Pennsylvania's law by providing unwarranted legitimacy to predatory practices," the letter sent by Pennsylvania consumer advocates read. "A weak CFPB rule could open the floodgates to predatory payday lending in Pennsylvania."
Said Bruce Davis of the New Jersey NAACP, a signatory to the letter: "How can anyone of conscience support an industry that preys on the poor, especially communities of color? The payday or short-term loan industry promotes products that create financial servitude. Is predatory lending . . . racism? Anti-age population? Anti-military? Yes."
Bill Harris, of the Pennsylvania chapter of the Military Officers Association of America, said payday loans lead to divorce and mortgage defaults among veterans.
"We are 100 percent opposed to payday lending in our state," he said. "If we can't get the CFPB to put in stronger language, to maintain caps as they exist, just don't do anything. We like it the way we have it in Pennsylvania."