Darrell Sapp, Post-Gazette ACE Cash Advance on Stanwix Street Downtown. Click photo for larger image.

Payday lenders, the providers of high-priced short-term loans for people desperate for cash, are on the ropes in Pennsylvania.

In recent weeks, two of the biggest payday lenders have said they are exiting the business in the state. Advance America, which has more than two dozen locations in this region and is the largest payday lender in Pennsylvania, plans to stop making new payday loans after tomorrow. Ace Cash Express, with almost two dozen stores in the area, has set June 30 as the deadline for halting payday loans, so-called because borrowers promise to repay the money out of their next paycheck.

The news is a victory for consumer advocates, long critical of the industry. Still, some see it as a loss for cash-strapped consumers who have nowhere else to turn in a pinch.

Consumer groups and others accuse payday lenders of preying on low-income and vulnerable people by trapping them in a revolving door of debt with flat fees that amount to annual interest rates ranging from about 400 percent to 700 percent or more.

"It's textbook predatory lending," said Jim Swoyer, a Harrisburg-based advocate for the Pennsylvania Public Interest Research Group, a leading critic of the industry.

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 have circumvented those rules by operating in partnership with out-of-state banks that are not subject to Pennsylvania regulations.

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

Since then, the handful of banks that had been willing to partner with payday store operators in Pennsylvania began dropping out. As a result, both Ace and Advance America lost their source of funds.

Other payday lenders in the state are, or apparently soon will be, in the same fix.

"We've heard from reputable sources that all the banks will be out of the business," said Paul Wentzel, a spokesman for the Pennsylvania Department of Banking.

The new FDIC rules don't affect payday lenders in the more than 30 states that have legalized standalone payday lenders, where Ace and Advance America continue to operate.

To get a payday loan, borrowers generally must have proof of employment, a checking account and identification. The loans normally are advanced in $100 increments, up to about $500. Fees generally range from $15 to $30 on each $100 advanced. Because of the short duration of the loans, typically two weeks, the fees translate into triple-digit and sometimes quadruple-digit annual interest rates.

If borrowers can't repay the loans, they must "flip" them for an additional term. The fees can quickly exceed the amount borrowed and "pull people into a cycle of indebtedness they can't get out of," said Heather Tyler, spokeswoman at the banking department.

According to the Center for Responsible Lending in Washington, D.C., the typical loan is flipped eight times.

The new FDIC guidelines essentially place limits on flipping.

"We are troubled when we see banks extending these very high-cost loans to customers who really need an alternative longer-term credit product," the FDIC, which regulates certain state-chartered banks, said in a news release when issuing the new rules last March. The practice "is not responsible lending," the agency said.

Supporters of the industry, including customers who rely on the short-term cash advances to pay for medicines, car repairs or other essentials in an emergency, defend payday loans.

"We believe our product is a cost competitive alternative to other short-term financial options, such as the bounced check and credit card late fees," said Advance America spokesman Jamie Fulmer.

Although the industry appears dead for the moment in Pennsylvania, it could find new life.

"If you look at the history of this industry, they are pretty adaptable," the banking department's Ms. Tyler said. "The industry may find another way to meet the demand."

Spartanburg, S.C.-based Advance America, whose services are limited to payday loans, said it is "exploring other options and product lines to meet customer demand in Pennsylvania." Existing loans will continue to be serviced through Aug. 31, the company said.

Ace Cash Express of Irving, Texas, also said it is reviewing alternatives and will continue offering its other financial services in Pennsylvania, including check cashing, bill payment, wire transfers and money orders.

PennPIRG's Mr. Swoyer said he suspects the industry will continue lobbying state legislators for an exemption to state interest rate caps.

Under current law, the maximum fee for an initial two-week, $100 payday loan would be roughly $4. The maximum drops if the loan were to be flipped. Payday lenders say they would lose money at those rates.

Until a few weeks ago, Pennsylvania lawmakers had been considering two payday loan bills. Both are expected to die in committee now that the results of the FDIC crackdown have become evident.

In the meantime, the industry will look for ways to regroup.

"The real issue here is how are consumers in Pennsylvania going to be served because the need for a short-term, small loan is still in place," said Ace Cash spokesman Eric Norrington.

"Some people have relatives or an employer [to turn to] but you can't go to a bank. The alternative is to write a hot check."