Bet that title got your attention!
This is of course a policy blog so wealth stripping refers to financial services offered to working families which, thanks to high fees and extended use, leave families poorer for having used them. The classic example is the neon lite storefront of a payday lender usually with a catchy title like Ca$h Now or Quick Ca$h (for our hip readers to the best of our knowledge there is no relationship between payday lenders and the artist formerly known as ke$ha)!
These firms offer small dollar loans to consumers with a cash flow problem but they carry high fees and more often than not working families end up taking out multiple loans. With each additional loan the lenders business model becomes more profitable while families sink themselves further and further into debt. We don’t have payday lending storefronts all over Pennsylvania because the Commonwealth has strong consumer protections which limit the fees that payday lenders can charge.
For years now the financial companies that operate these stores in other states have been lobbying to weaken consumer protections in Pennsylvania so they can operate profitably in the Commonwealth. Pennsylvania state Senator John Yudichak (D-Luzerne/Carbon) is circulating draft legislation to bring the payday lenders’ fee-laden, high-cost installment loans into our state.
Unlike a traditional payday loan which is paid back in 14 days an installment loan is as the name implies paid back in installments over a longer period of time. But that doesn’t make them any safer. What Senator Yudichak is proposing has no maximum cap on fees. Based on what payday lenders charge in other states, we know the fees could push the annual interest rate on these loans to 200-300%. The financial disclosure listed below is for an installment loan offered in California by the payday lender Check ‘n Go (read more about Check ‘n Go), the leader of continuing efforts to bring predatory lending to Pennsylvania. Note the high annual percentage rate over 200% and finance charges that exceed the amount borrowed. Looking at the terms below you have to ask yourself in what financial universe other than the fictional world of the Sopranos is it good for working families to pay fees of $4,654 for the privledge of borrowing 3,000 for a year?
The reason for the our alarm is the General Assembly is in the middle of budget negotiations the perfect time for industry lobbyists to attempt to sneak through this kind of change. Veteran budget watchers (a hardy group given this year’s never ending saga) will remember the payday lending lobbyists nearly derailed a budget agreement in July 2013 when the House inserted language favored by the payday lenders into the fiscal code in the hopes nobody would notice. An additional concern this year, the Majority Leader of the Senate Jake Corman (R-Centre) was the leader of a failed attempt in 2014 to advance legislation favorable to the interests of the payday lenders.
As ever we will keep you posted about further developments regarding this worrying proposal. The Pennsylvania legislature should be working to boost earnings for working families by raising the minimum wage rather than opening the door to financial products that promise to trap people in debt with high fees.