The Attorney General of Pennsylvania announced Feb. 12 that state residents who took out payday loans from Delaware-based Advance America can have their outstanding loans forgiven as well as refunds on a $149.95 “monthly participation fee” that the state alleges was a way to get around state interest rate caps on short-term loans, according to the settlement.
Advance America’s short-term program carried a stated interest rate of 5.98 percent, which would be below the state-imposed ceiling of 24 percent, but because customers had to pay the monthly fee as well as the interest, it was deduced that the company was offering an interest rate much higher than the legal limit. The company admits no wrongdoing in local newspaper The Morning Call, and stated that the settlement was to stem legal costs in an area of business it was no longer participating in.
“We maintain that this company disguised its outrageous interest rates as fees, misleading consumers and violating the law,” Attorney General Kathleen Kane stated. “Payday lending practices adversely impact vulnerable consumers and often force them into a cycle of debt from which many cannot recover.”
The settlement will cost the company $8 million in restitution payments, as well as $2 million in legal fees owed to the state. The company is also forgiving $12 million in owed loan balances for those that took out a credit line between 2006 and 2007.
In the aftermath of the recent recession, payday lending has come under fresh scrutiny from federal and state governments looking to clamp down on the high interest rate, high default short-term loans. On Jan. 16, the Federal Trade Commission reached a historic $21 million settlement with two major payday lenders in Nevada, citing deceptive practices and inflated fees. Existing payday outfits are also dealing with possible disruption from startup companies like SimpleFi, which underwrites short-term loans through the borrowers’ businesses to keep interest rates affordable due to the much lower probability of default.