Ohioans spoke plainly five years ago, when they overwhelmingly voted for reforms that restricted payday lenders from charging exorbitant interest rates — nearly 400 percent — on so-called quickie loans. The Short-Term Lending Act capped annual interest rates on those loans at 28 percent.
Unfortunately, the law hasn’t worked. It has failed to curb the abuses of payday lenders, who have dodged the law by issuing alternative loan packages under other lending statutes, charging as much as or more than they had before for two-week loans. Payday lending businesses also began charging, in separate transactions, check-cashing fees of 6 to 10 percent, even for cashing their own checks.
A year after the reforms took effect, a survey of payday lenders by the liberal advocacy group Policy Matters Ohio found that triple-digit interest rates continued. Payday lenders shirked short-term loan licenses, registering instead as mortgage lenders or credit services organizations under different lending laws.
Meantime, low-income consumers who couldn’t get loans from traditional banks and credit unions continued to be exploited by hundreds of payday stores offering loans charging annual rates that far exceeded 300 percent. Payday lenders depend on repeat borrowing by people who are trapped by the loans’ high costs and rapid due dates.
Repaying the loans on time becomes increasingly difficult for strapped consumers, who go deeper into debt. Some take out 10, 20, or more loans a year.
It’s not the General Assembly’s job to put payday lenders out of business. Such lenders probably have a place in the smorgasbord of financial services.
They provide an option for people who don’t have access to traditional banks or credit unions, and don’t want to deal with even riskier Internet lending sites or illegal loan sharks. Consumers can get the quick cash they need for a car repair, for example, or to avoid even more costly late or bounced-check fees.
But consumers must have the minimal protection the 2008 law was designed to give them, and it must come from the legislature. A case before the Ohio Supreme Court, alleging that Cashland stores did not properly issue short-term, high-interest loans under the Mortgage Loan Act, could give consumers helpful clarification. Even so, payday lenders could find other ways to issue triple-digit-rate loans, including credit-service organizations, says analyst David Rothstein.
Nor can consumers expect much relief from the Ohio Department of Commerce, which has acted more like a facilitator than a regulator. The department has been so lax that Cashland is using its inaction as a legal argument to support lending practices that flout the law. Cashland’s appeal notes that the department never challenged its use of the Mortgage Loan Act to continue issuing payday-style loans.
Lawmakers must close the loopholes to make the Short-Term Lending Act work as it was designed to, including a ban on auto title loans secured by a consumer’s car. Essentially, any payday-style loan must be subject to the 28 percent cap.
As it stands, the industry, along with state bureaucrats and lawmakers, are thumbing their noses at the public by continuing to allow payday lenders to circumvent the law’s intent and to exploit sometimes desperate consumers.