COLUMBUS — In 2008, payday lenders suffered a major defeat when the Ohio legislature banned high-cost loans. That same year, they lost again when they dumped more than $20 million into an effort to roll back the law: The public voted against it nearly two-to-one.
But five years later, hundreds of payday loan stores operate in Ohio, charging annual rates that can approach 700 percent.
It’s just one example of the industry’s resilience. In states where lenders have confronted unwanted regulation, they have found ways to continue to deliver high-cost loans.
Sometimes, as in Ohio, lenders have exploited loopholes in the law. But more often, they have reacted to laws targeted at one type of high-cost loan by churning out other products that feature triple-digit annual rates.
Some states have successfully banned high-cost lenders. Arkansas’ constitution caps nonbank rates at 17 percent. But even there, the industry managed to operate for nearly a decade until the state Supreme Court finally declared those loans usurious in 2008.
The state-by-state skirmishes are crucial because high-cost lenders operate primarily under state law. On the federal level, the recently formed Consumer Financial Protection Bureau can address “unfair, deceptive, or abusive practices,” a spokesman said. But the agency is prohibited from capping interest rates.
In Ohio, the lenders still offer payday loans via loopholes in laws written to regulate far different companies: mortgage lenders and credit repair organizations.
The latter peddles services to people struggling with debt, but it can charge unrestricted fees for helping consumers obtain new loans into which borrowers can consolidate debt.
Today, Ohio lenders often charge even higher annual rates (for example, nearly 700 percent for a two-week loan) than before the reforms, according to Policy Matters Ohio rport.
In addition, other breeds of high-cost lending, such as auto title loans, have moved into the state.
Earlier this year, the Ohio Supreme Court agreed to hear a case on the use of the mortgage law by payday lender Cashland. Even if the court rules the tactic illegal, the companies might simply find a new loophole.
In its annual report, Cash America, Cashland’s parent firm, addressed the consequences of losing the case: “if the Company is unable to continue making short-term loans under this law, it will have to alter its short-term loan product in Ohio.”
Amy Cantu of the Community Financial Services Association, the trade group representing major payday lenders, said members are “regulated and licensed in every state where they conduct business and have worked with state regulators for more than two decades.”
When unrestrained by regulation, the typical two-week payday loan can be very profitable for lenders. The key to that profitability is for borrowers to take out loans over and over.
When the Consumer Financial Protection Bureau studied a sample of payday loans earlier this year, it found that three-quarters of loan fees came from borrowers who had more than 10 payday loans in a 12-month period.
But because those loans have come under scrutiny, many lenders have developed what payday lender EZCorp Chief Executive Paul Rothamel calls “second generation” products.
In early 2011, the traditional two-week payday loan accounted for 90 percent of the company’s loan balance, he said in a recent call with analysts. By 2013, it had dropped below 50 percent. Eventually, he said, it likely would drop to 25 percent.
But like payday loans, which have annual rates from 300 to 700 percent, the new products come at a high cost. Cash America, for example, offers a “line of credit” in at least four states that works like a credit card, but with a 299 percent annual percentage rate.
Many payday lenders have embraced auto title loans, which are secured by the borrower’s car and usually carry annual rates around 300 percent.
The most popular alternative to payday loans, however, are “longer-term, but still very high-cost, installment loans,” said Tom Feltner, director of financial services at the Consumer Federation of America.
Last year, Delaware passed a major payday lending reform bill. For consumer advocates, it was the culmination of more than a decade of effort and a badly needed measure to protect vulnerable borrowers. The bill limited the number of payday loans borrowers can take each year to five.
“It was probably the best we could get here,” said Rashmi Rangan of the Delaware Community Reinvestment Action Council.
But Cash America said in this year’s annual statement that the bill “only affects the company’s short-term loan product in Delaware [and does not affect its installment loan product in that state].”
The company offers a seven-month installment loan there at an annual rate of 398 percent.
Lenders can adapt their products with surprising alacrity. In Texas, where regulation is lax, lenders make more than eight times as many payday loans as installment loans, according to the most recent state data.
Contrast that with Illinois, where the legislature passed a bill that imposed restraints on payday loans. By 2012, triple-digit-rate installment loans in the state outnumbered payday loans almost three to one.
In New Mexico, QC Holdings’ payday loan stores dot that state, but just a year after the law, the company’s president told analysts that installment loans had “taken the place of payday loans.”
The attorney general cracked down, filing suits against two lenders, charging that their long-term products were “unconscionable.” One loan from Cash Loans Now in early 2008 carried an annual percentage rate of 1,147 percent; after borrowing $50, the customer owed nearly $600 in total payments to be paid over the course of a year.
FastBucks charged a 650 percent annual rate over two years for a $500 loan.
The products reflect a basic fact: Many low-income borrowers are desperate enough to accept any terms.
The loans were unconscionable for a reason beyond the extremely high rates, the suits alleged. Employees did everything they could to keep borrowers on the hook. As one FastBucks employee testified, “We just basically don’t let anybody pay off.”
“Inherent in the model is repeated lending to folks who do not have the financial means to repay the loan,” said Karen Meyers of the New Mexico attorney general’s consumer protection division. “Borrowers often end up paying off one loan by taking out another loan. The goal is keeping people in debt indefinitely.”
In both cases, the judges agreed the lenders had illegally preyed on unsophisticated borrowers.
Cash Loans Now’s parent company has appealed the decision.
FastBucks filed for bankruptcy after the judge ruled it owed restitution to its customers for illegally circumventing the state’s payday loan law. The attorney general’s office estimates the company owes $20 million.
Both companies declined to comment.
When states have laws prohibiting high-cost installment loans, the industry has tried to change them.
Texas has a law strictly limiting payday loans.
But since it limits lenders to a fraction of what they prefer to charge, for more than a decade they have ignored it.
To shirk the law, first they partnered with banks, since banks, which are regulated by the federal government, can legally offer loans exceeding state interest caps. But when federal regulators cracked down on the practice in 2005, the lenders had to find a new loophole.
Just as in Ohio, Texas lenders started defining themselves as credit repair organizations, which, under Texas law, can charge steep fees.
Texas has nearly 3,500 such businesses, almost all of which are, effectively, high-cost lenders. And the industry has successfully fought off all efforts to cap their rates.
“Texas is a prime state for these folks,” Dallas Councilman Jerry Allen said. “It’s a battleground. There’s a lot of money on the table.”