State Sen. Louis Terhar, R-Cincinnati, pitches the new “Consumer Installment Loan Act” as a way to modernize Ohio’s banking and lending laws and give borrowers and lenders alike more clarity.
But Kalitha Williams of Policy Matters Ohio, a liberal leaning think tank, sounds a warning bell, telling lawmakers that the act will lead to higher fees, exploitation and a loss of legal protections for consumers.
Senate Bill 24 sailed through the Ohio Senate on Tuesday, receiving a unanimous vote and not a peep of debate.
“It’s troubling that a piece of legislation that leaves Ohio consumers vulnerable could pass through with little to no opposition,” Williams told this newspaper.
In her testimony, Williams said the act would remove protections against abusive debt collection practices and permit a $25 fee for credit investigations — well above the $10 fee for the same service under another state statute.
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. That led to explosive growth in storefront lenders issuing high-cost payday loans.
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.
Williams said payday loan companies are starting to offer installment loans that “are designed to appear less harmful, but are still exploitative to financially vulnerable families.”
But Dayna Baird, executive vice president of the Ohio Financial Services Association, argued in written testimony that installment loans are different than payday loans and the industry should have its own set of regulations.
“We believe this type of lending is a legitimate and needed option to serve our communities,” said Matthew Marsh of Guardian Finance Co. and president of the Ohio Financial Services Association.
In practice, installment and payday loans are issued under the Ohio Mortgage Loan Act, even though they don’t resemble mortgages. Both types of loans are used by borrowers with poor credit who may not have access to other sources.
Payday Loans: Consumers borrow $100 to about $1,500 and must pay it back within 30 days, either through a postdated check or automatic withdrawal. Borrowers pay interest and fees that can jack the annual percentage rate up to 390 percent or higher.
Installment Loans: Consumers borrow several hundred dollars to $10,000 for six months to five-years and pay it back in equal monthly installments over the term of the loan. Borrowers pay fees and interest.
Meanwhile, state Reps. Kyle Koehler, R-Springfield, and Mike Ashford, D-Toledo, recently introduced a bill to crackdown on high-cost payday loans. Monthly payments on the loans would be restricted to no more than 5 percent of a borrower’s gross monthly income, cap annual interest rates at 28 percent and limit fees to $20.
“We are not trying to shut down payday lenders. There are folks who need this kind of credit and need this kind of cash. We’re just trying to bring them under the same kind of regulation that we passed in 2008 that the voters supported,” Koehler said.
Central Christian Church Pastor Carl Ruby said the practice steals from families.
“Now is the time for us to end practices that prey upon the most vulnerable members of our communities. I, and many other faith leaders from across Ohio, strongly support this bill because it ends practices that price-gouge families, trapping them in long cycles of debt,” the Springfield pastor said.