Payday loans are an abusive form of lending that traps cash-strapped borrowers into a long-term cycle of debt, which leads to significant harms. Pennsylvania has one of the strongest laws in the country to guard against predatory payday lending, but the law is at risk.
The payday lenders are lobbying legislators in Harrisburg to weaken our state law. Just as in prior sessions, they claim their legislation would create a responsible credit product, but at the core of their business model and their proposal is a debt-trap loan. This year, the payday lenders have a new strategy: they are using the federal Consumer Financial Protection Bureau (CFPB) as a Trojan horse to bring their predatory loans into Pennsylvania.
A memorandum is being circulated in the Pennsylvania Senate to garner support for legislation to legalize a new loan product in Pennsylvania, called the “Pennsylvania Financial Services Credit Ladder.” The memo cites CFPB proposals as a model for the legislation, but fails to mention that, unlike Pennsylvania, the CFPB cannot set a limit on the cost of credit. Changing our state law by adopting the CFPB proposals in Pennsylvania will legalize high-cost payday loans.
The CFPB is working to combat the worst payday lending abuses nationwide, but it has one hand tied behind its back because it does not have the authority to issue a rate cap on interest and fees, the most effective way to curtail predatory lending. The CFPB has released a working draft of proposals it is considering for a forthcoming national rule. While the preliminary proposals have some strong provisions, they also contain loopholes that would allow payday lenders to continue making unaffordable, predatory loans in states where they are legal. The rule remains in development, and the CFPB should craft regulations that are broad and strong enough to put an end to debt-trap lending across the country.
Importantly, the national CFPB rule would not preempt or supersede Pennsylvania’s stronger state interest rate cap. Unless the payday lenders convince state legislators to use the CFPB rule as cover for significantly increasing the costs of credit in our state, our critical protection against predatory lending will remain.
Replacing Pennsylvania’s rate cap with the CFPB proposal would weaken our state law. That’s why the payday lenders, who oppose the CFPB rulemaking at the national level, appear to be supporting its implementation in Pennsylvania. State legislators should reject the payday lenders’ Trojan horse.