Critics say high-price 'Choice' loan is still illegal

June 22, 2006 - Pittsburgh, Pennsylvania

Just three months after exiting the controversial payday lending business in Pennsylvania under pressure from state and federal regulators, payday titan Advance America is back with a new type of short-term, high-priced loan for people strapped for cash.

State banking department officials and consumer advocates were quick to criticize the product, which Advance America launched on Monday, saying it was designed to sidestep state usury laws and, like payday loans, takes advantage of people desperate for cash.

The Spartanburg, S.C.-based company, with more than two dozen locations in the Pittsburgh area and 101 statewide, was the largest payday lender in Pennsylvania until pulling the plug in March. The new product, called the "Choice" line of credit, allows customers to borrow up to $500 for a monthly "participation fee" of $150. At the end of the month, the customer also owes finance charges equal to an annual percentage rate of 5.98 percent plus a minimum $20 principal payment.

"This is just another cynical attempt to circumvent the Pennsylvania small-loan cap [on interest rates] that prevents companies like Advance America from fleecing state consumers," said Jim Swoyer, Harrisburg-based advocate for the Pennsylvania Public Interest Research Group (PennPIRG).

Mr. Swoyer said he believes the company will be forced to shut down again.

"We don't think [the new product] is legal," he said. "Even if it is legal, it should be banned because it is so exploitative of vulnerable consumers."

Advance America yesterday defended the new loans.

"This is an open-ended line of credit," spokesman Jamie Fulmer said. "As I understand it, the fees and charges are permitted under Pennsylvania law."

A spokeswoman for the banking department said the agency was rushing yesterday to determine if the company had run afoul of any rules.

"The industry has developed a legal rationale for the product. We are going through it line by line and examining it," the department's Heather Tyler said. "A whole lot of work has been set aside today. We are doing nothing but this."

She said the department would have a formal response, but probably not until next week.

She called the product "a really bad deal for consumers," just like the company's old payday loans, so-named because borrowers promise to repay the loans out of their next paycheck. If borrowers can't repay the loans, they must "flip" them for an additional term, triggering more fees that can quickly exceed the amount borrowed. Payday loans remain a big business for Advance America in other states.

Advance America's new loan product appears to have already caught on with Pennsylvania consumers. Company officials meeting with the banking department Tuesday claimed that more than 700 people statewide had signed up for them, according to Ms. Tyler. Advance America wouldn't confirm that number yesterday, saying it was proprietary.

Payday lenders have drawn fire for charging fees that translate into annual interest rates of 400 percent or more. Advance America's new fee structure would provide the company with similar returns.

Such high rates violate state usury laws, which generally limit the annual interest rate on small loans to 27 percent. But resourceful payday loan companies had been circumventing those rules by operating in partnership with out-of-state banks that are not subject to Pennsylvania regulations.

That strategy began falling apart last year when the Federal Deposit Insurance Corp. issued stricter rules for financial institutions engaged in payday lending.

The handful of banks that had been willing to partner with payday store operators in Pennsylvania began dropping out, cutting off Advance America's and other payday lenders' source of funds. Advance America stopped making new payday loans in the state March 27.

The new FDIC rules did not affect payday lending in the more than 30 states that have legalized standalone payday lenders and where Advance America has continued to operate.

The company has not found a new banking partner for Pennsylvania, Mr. Fulmer said yesterday, but will offer lines of credit through a subsidiary based in Delaware.

Like others in the payday loan business, Advance America says its prices reflect the cost of business in a high-risk industry, and that the company provides a needed service to people who have nowhere else to turn for cash to pay for medicines, car repairs or other essentials in an emergency.

"High-cost credit is not a way out for underserved consumers," PennPIRG Director Beth McConnell countered yesterday.

"It's a way into debt, and a way to strip resources out of Pennsylvania communities and into Advance America's pockets."

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Pittsburgh Post-Gazette, Patricia Sabatini, Staff Writer

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Critics say high-price 'Choice' loan is still illegal

June 22, 2006 - Pittsburgh, Pennsylvania

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