Law of lending


Four years ago, Ohio voters said it wasn’t right to charge exorbitant interest rates on short-term loans. This month, an Ohio court told payday lenders that it’s time they paid attention.

In 2008, the General Assembly approved a law that caps the annual interest rate on payday loans at 28 percent. The cash-advance industry collected enough signatures to put the new law on hold and let voters decide its fate.

Ohioans said yes to reasonable interest charges, approving the law by nearly a 2-to-1 margin. But instead of bowing to the will of the people, payday lenders skirted the law by offering the same short-term, high-rate loans under their mortgage lending licenses.

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In 2009, the payday lender Cashland sued a customer for the outstanding balance and fees on his overdue loan. The company claimed an interest rate of 25 percent on the $500 short-term loan, which worked out to an annual percentage rate of 235 percent.

A magistrate said that loans issued under mortgage-lending licenses were slick attempts to evade the interest-rate cap. The magistrate ruled the company was entitled to only 8 percent interest on the loan.

Cashland appealed the decision. This month, the 9th District Court of Appeals in Akron agreed with the magistrate that the lender had ignored the clear intent of the legislature.

“The General Assembly clearly intended the Short-Term Lender Law to proscribe the type of loan issued here, i.e., a loan that would be repaid in full in two weeks,” the judges said in a 2-1 decision.

The appeals court decision likely will be appealed to the Ohio Supreme Court. But Cash America, whose 120 or so Cashland and Cash America stores in Ohio had clear sailing for four years while they ignored state law, may have concluded that the wind has turned against it.

Cash America announced this month that it will reimburse some 14,000 Ohio customers it sued since 2008 — the year the payday lending cap became law — to collect overdue loans. The company expects the reimbursements to total as much as $13.4 million.

Cash America said court documents had been improperly prepared in some cases. But the company also is going to reimburse customers whose cases were not affected by faulty paperwork. Cash America said it also will drop all cases that are still moving through the courts.

Payday lenders provide a useful service to people who need short-term emergency cash but don’t qualify for a bank loan. But when borrowers can’t pay back the money right away, it doesn’t take long for annual interest rates of as much as 390 percent to turn a small debt into a big financial hole.

The Ohio law was not intended to put payday lenders out of business. Rather, it is designed to protect borrowers who live from paycheck to paycheck from incurring ruinous long-term debt because of supposedly short-term loans. It’s time that lenders followed the law.