State Files Suit Against Payday Lender

Pennsylvania Governor Edward G. Rendell announced yesterday that the Department of Banking filed a complaint in Commonwealth Court against Advance America, the nation?s largest payday lender, for providing lines of credit to borrowers without a license and with interest and fees in excess of state law.

The company, which operates 100 offices in Pennsylvania, began offering the ?Choice Line of Credit? in June. For a $149.95 ?monthly participation fee,? customers can borrow up to $500 at 5.98 percent and minimum monthly payments of $20. The participation fee is charged each month regardless of whether a consumer borrows money.

?This suit was filed to protect Pennsylvania consumers. Under this outrageous product, a person who borrows $500 and makes minimum monthly payments ends up paying back more than $4,000 over about two years,? Governor Rendell said. ?Advance America may not be making payday loans in Pennsylvania anymore, but they are still trying to take advantage of hard-working, hard-pressed families.?

Payday loans are short-term, high-interest loans that borrowers promise to repay in one to two weeks. A borrower presents either a post-dated check or provides a debit authorization for the loan amount plus a fee, usually $10 to $30 per $100 borrowed. These fees, when expressed as annual percentage rates, can range from 300 to more than 600 percent. If a borrower cannot repay the loan at the agreed upon date, the loan is often refinanced for an additional fee. By repeatedly refinancing or ?rolling over? the loan, a borrower can pay more in fees than the original loan amount.

?Payday lenders prey on people who live paycheck to paycheck. These families have few options when faced with an unexpected emergency like a car breakdown or a child?s illness,? Governor Rendell said. ?It?s no coincidence that so many of these companies are found in working-class neighborhoods.?

Earlier this year, Advance America and other companies stopped offering typical payday loans in Pennsylvania after the Federal Deposit Insurance Corp. (FDIC) issued stricter rules for banks involved in the practice. The added pressure from federal regulators forced most banks out of the business, severing the partnerships that had allowed payday lenders to charge fees and rates much higher than those permitted under Pennsylvania law.

Nationally, the payday lending industry makes an estimated $40 billion in loans each year. In addition to increased scrutiny from state and federal regulators, the practice has also come under fire from the Pentagon. In a report released last month, the Defense Department estimated that 225,000 service members ? or 17 percent of the military ? use payday loans. Congress is considering a possible rate cap for payday loans to military personnel.

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You can read the company’s response here.