A Pennsylvania lawmaker has introduced legislation to legalize high-cost, short-term loans in the state.

Unlike similar legislation that fizzled in the Pennsylvania senate last year after passing the House, the plan brings with it a way for borrowers to earn their way to longer-term, cheaper loan products. Sen. Pat Browne, R-Lehigh County, who introduced the legislation on Friday, believes it responds to criticisms raised about the earlier proposal.

The bill would cap the maximum loan amount for the two-week loans to 25% of the consumer’s gross monthly income. Interest rates for each loan would be capped at 28%, and fees restricted to 5% of the loan amount. The bill allows loans to be rescinded the next day without penalty or fee and provides for an extended repayment option.

It would not permit any borrower to obtain another short-term loan on the same day they pay off another. It further creates a three-tiered short term credit structure that allows families to earn their way to more affordable, longer term credit options that start with eight successfully paid back "micro loans," the term Browne uses for the two-week loans.

Opponents to the revised bill believe there is little difference between it and the earlier proposal. Supporters of the bill say they agree with opponents on one thing: predatory payday lending going on now in Pennsylvania must be stopped. The problems include illegal Internet loans, black market loans and offshore creditors that offer no protections for borrowers and are difficult for law enforcement officials to locate and thus prosecute.

A demand for short-term loan options apparently exists in the state. A Pew Charitable Trusts study found that an estimated 300,000 Pennsylvania adults took out a payday loan in the past year. A 2008 study by economists Paige Marta Skiba, a professor at Vanderbilt University, and Jeremy Tobacman, a University of Pennsylvania professor, revealed payday borrowers are twice as likely to file for bankruptcy a similarly situated people who do not use payday loans.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.