Even though Ohioans voted in 2008 to cap payday loan rates at 28 percent, lenders sidestep those limits and charge up to 591 annual percentage rates on the short term loans in Ohio — the highest rates in the nation. But a handful of lawmakers are now pushing to close legal loopholes and set stricter limits.
Backing the effort is the Rev. Carl Ruby, of the Central Christian Church in Springfield, who is building a statewide coalition of faith leaders to support new legislation sponsored by state Reps. Marlene Anielski, R-Walton Hills, and Michael Ashford, D-Toledo.
Anielski and Ashford, who have yet to introduce the bill, want to ban high-cost short-term loans that often trap borrowers in a cycle of debt and fees. “What we have is a financial epidemic going on, not only in Ohio but across the country,” Ashford said. Rates should be cut back to the 28 percent APR approved in 2008 by lawmakers and voters, he said.
Ruby said he was stunned to learn Springfield has more payday lending stores than McDonald’s. “We have six McDonald’s and 12 to 15 payday lending centers. I see this as an issue of standing with the working poor,” he said. “To me, the entire industry is based on trapping people in a cycle of debt, not helping people in an emergency.”
The Small-Dollar Loan Project of The Pew Charitable Trusts reported recently that one in 10 Ohioans have taken out a payday loan, Ohio borrowers are charged up to four times more than borrowers in other states and two-thirds of the 650 payday loan stores are operated by out-of-state companies. Alex Horowitz, senior researcher on the project, said Ohioans borrowing $300 through a payday loan on average pay $680 in fees.
Patrick Crowley, spokesman for the Ohio Consumer Lenders Association, said his organization will oppose efforts to “drastically” cut rates, saying lenders won’t be able to stay in business. “We don’t think anything that reduces access to short term credit is a good idea. It’s not good for consumers,” he said.
Horowitz, though, says it’s a false choice to say that it’s either 591 percent APR loans or no credit. He points to Colorado as a model for Ohio and other states to follow. Pew research shows that consumers in states that limit interest rates on payday loans pay lower rates than in states without limits.
In 2010, Colorado lawmakers ditched conventional two-week payday loans with six-month installment payday loans at lower costs for borrowers. Pew research found that access to credit is still widely available, the average loan takes up 4 percent of a borrower’s upcoming paycheck and three-quarters of loans are repaid early.
The same $300 loan over five months that costs an Ohioan $680 in fees costs a Coloradan $172 in fees, the Pew researchers found.
Ohio’s history of embracing payday lending is relatively recent
Ohio law banned payday loans for more than 50 years but in 1995 the Legislature approved the Pay Day Loan Act, which requires state licensing and exempts payday lenders from the state’s usury laws. By 2008, lawmakers passed bipartisan legislation to curb payday loan rates and cap them at 28 percent APR. The industry put the legislation up for a referendum and 63.6 percent of voters decided to keep the new limits.
Lenders then sidestepped the law by getting licenses to operate as credit service organizations, which don’t face fee limits, and issue loans under the Ohio Mortgage Lending Act and the Ohio Small Loan Act. There are no lenders licensed under the Short Term Loan Act, which was intended to regulate payday loans.
For the past eight years, lawmakers have declined to close the legal loophole.
Ruby attributes the inaction to industry lobbying and campaign contributions.
“It is a very lucrative business and they spend a lot of money on protecting it and lobbying for it,” he said. Ruby added, “We are relying on the moral argument that this is unethical and it’s just plain wrong.”
Supporters of new restrictions on payday lending will have to win over state leaders, who are willing to listen but aren’t yet convinced changes are imperative.
Statehouse may take action
“I need to grasp the information a little bit more and talk to Rep. Anielski a little more about her bill. But we’ll probably have that conversation in the caucus and see something forthcoming,” said Ohio House Speaker Cliff Rosenberger, R-Clarksville. “I need to dive into it but clearly there are some areas that we must need to show some attention to and I’m willing to do that.”
Ohio Gov. John Kasich said it’s always a balance between setting a rate high enough to keep lenders in business but reasonable for consumers.
“I don’t like those high rates but let’s see what the Legislature does,” Kasich said. He added, “You want to make sure you’re looking at this from all different angles and if the rates have crept up beyond what the people thought they wanted then it needs to be reviewed. I have to see what comes and what makes sense.”
When told that the Pew report shows Ohio has the highest rates and the average APR is 591 percent, the governor said “Yeah, you know what, that may be true and I don’t like that. But you know I can put together a lot of statistics that can tell you a whole lot of things. I just have to take a look at it.”
A short history of payday lending in Ohio
Early 1900s: Ohio Supreme Court upholds municipalities authority to regulate “salary loans,” which are the precursor to payday loans.
1943: Ohio outlaws short-term, lump sum, paycheck-based loans and allows longer-term installment loans.
1995: Ohio General Assembly approves the Pay Day Loan Act, which requires state licensing and exempts payday lenders from the state’s usury laws. Within 10 years, payday lending stores in Ohio ballon from 107 to 1,562.
2008: Ohio General Assembly approves the Short Term Loan Act, which puts a 28 percent APR interest cap on loans, requires terms to be no less than 31 days and limits loan amounts to no more than 25 percent of the borrower’s gross monthly income.November 2008: The industry tries to block the law but 64 percent of Ohio voters say yes to the Short Term Loan Act in a statewide referendum.
2009 to current: Lenders sidestepped the law by getting licenses to operate as credit service organizations, which don’t face fee limits, and issue loans under the Ohio Mortgage Lending Act and the Ohio Small Loan Act. There are no lenders licensed under the Short Term Loan Act, which was intended to regulate payday loans.
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