The common criticism of payday lending is that it traps low-income households in a never-ending cycle of onerous debt. But payday lending harms small business, too, lawyer Kerry Smith said.
Every dollar paid in excessive fees to a payday lender is a dollar that's not going to a local landlord, car dealer, grocer or other business, said Smith, a staff attorney with Philadelphia-based Community Legal Services Inc.
Payday lenders' storefronts are a "red flag" that scare other businesses away from the Main Streets that need them, she said.
Indeed, payday lenders are less desirable as business district tenants than other stores, Highspire borough manager and police Chief John McHale said.
"It's not really bringing any commerce to the area," he said. "It's not going to grow my downtown. People are going to come, get their money and leave."
Pennsylvania has one of the strongest laws in the country against payday lending, according to the Keystone Research Center. It caps interest rates at 24 percent, and the state Supreme Court has ruled that applies to lenders based out of state.
A bill under consideration in the state Legislature, however, would overturn those protections, allowing fees and interest that work out to 369 percent per year.
House Bill 2191 passed the state House on Wednesday by a vote of 102-90. It will provide "a legal safe way for people to address their legal short-term money needs," said its sponsor, state Rep. Chris Ross, a Chester County Republican.
"We know the industry is here. It is widely present," Ross said. "It's my feeling we ought to provide a regulated, safe alternative to what is currently being done on the Internet."
Nationwide, more than 20,000 payday loan outlets make more than $38.5 billion in loans annually, according to the Consumer Financial Services Association of America, a Washington, D.C.-based trade group.
On the Internet, many of the pitches target small businesses, as a quick Google search will attest. Sites such as www.paydaycashadvanceloans.biz and www.fastupfront.com tout business cash advances as "a financial lifeline" and "a great alternative to traditional loans and small business financing."
The typical consumer payday loan is about $200 to $500 borrowed for two weeks and carries a fee of $15 to $17 per $100, according to the Keystone Research Center.
Frequently, borrowers' finances don't improve over two weeks, and they must roll over the loan.
On average, borrowers pay back $834 for $339 in loans, according to a 2006 U.S. Department of Defense study.
Opponents allege the industry's business model depends on just that pattern. The Center for Responsible Lending quotes Daniel Feehan, CEO of Cash America, who told investors: "The theory in the business is you've got to get that customer in, work to turn him into a repetitive customer, long-term customer, because that's really where the profitability is."
The payday industry says its high fees are necessary to counterbalance the high risks and transaction costs associated with small, unsecured loans. Some independent analysts concede the point.
The profits of payday lenders "are close to the typical returns of other financial companies," economist Robert Shapiro concluded in a 2011 review of previous research.
Though Pennsylvania law bans payday lending, Internet-based lenders operate here with impunity, Ross contended. Storefront lenders regulated under H.B. 2191 would be safer for consumers, he said.
The American Bankers' Association has called translating payday loan fees into annual rates "meaningless, and actually a distortion," Ross said.
Simply banning short-term lending isn't realistic, he said. Consumers with bad credit need somewhere to turn — banks won't lend to them, and friends and family can only go so far. Payday opponents haven't come to terms with that basic point, he said.
"They don't have an alternative they can credibly offer," he said.
Ross said the state Department of Banking helped craft the lender regulations and consumer protections in H.B. 2191, a point corroborated by state Banking Secretary Glenn Moyer.
"We believe these to be among the strongest provisions in the various state laws which regulate the short term lending business," Moyer said in a May 2 letter to the House Consumer Affairs Committee.
Opponents, however, rejected those arguments.
Internet lending "is not a significant problem," Smith said. Because the practice is illegal, contracts made with Internet lenders are null and void, and that gives legal aid services like hers all the leverage they need to get borrowers out of their loans, she said.
Pennsylvania's existing anti-payday laws save consumers $234 million a year, enough spending power to sustain 1,800 additional middle-class jobs in the real economy, she said, citing an analysis by the Keystone Research Center.
"The only thing this bill is going to do is increase the prevalence of the harms," she said.
Plenty of alternatives to payday lending exist, lenders said. If a borrower is creditworthy, most banks offer unsecured personal lines of credit at interest rates below credit card rates, said Barry Miller, Susquehanna Bank's Lancaster region president.
Business borrowers can obtain a business line of credit to cover cash flow gaps, while business counseling or refinancing can help if cash flow problems are chronic, he said.
"Before you take a payday loan, come see your banker," he said.
Banks also can refer consumers to reputable nonprofit credit counseling, such as Tabor Community Services in Lancaster, or provide it themselves, he said.
Dozens of Pennsylvania credit unions offer Better Choice, a short-term loan product marketed specifically as "the smart alternative to payday loans," said Diane Powell, spokeswoman for the Pennsylvania Credit Union Association.
In 2011, the commonwealth's credit unions made more than 5,000 Better Choice loans totaling $2.3 million, according to the association.
H.B. 2191 has been put "on the fastest of fast tracks," Smith complained: "It flew out of the committee hearing."
That prompted a deluge of negative news articles last month, and at least 23 legislators withdrew their sponsorship. Still, the bill's remaining supporters continue their push to help out-of-state lenders, despite polls showing 80 percent of Pennsylvanians support existing law, Smith said.
"It really defies logic," she said. "There's no one in Pennsylvania clamoring for legalizing payday lending."