Short-term lenders provide a vital service

5/9/2010

WHILE working families in Toledo and across Ohio face tough decisions to make ends meet, bank and credit card fees have surged. Many financial institutions have reduced lending to levels that cannot meet consumer demand. These harsh realities highlight the vital need for reliable access to short-term credit.

Yet short-term lending is undervalued by some state lawmakers and other critics of a free-market economy. They seek to take financial choices away from hard-working Ohioans who need them most.

Ohio's legislature is considering a bill that would effectively eliminate access to relatively small-dollar, short-term loans. The measure would shut down companies that previously offered payday loans, even though they serve a distinct need and operate legally and in full compliance with all state regulations.

This would have a detrimental impact on consumers and communities - jeopardizing jobs, reducing the supply of credit, and making borrowing more expensive.

Ohio arrived at this crossroads after the legislature approved a bill in 2008 that instituted a severely restrictive fee cap on payday loans. Ohioans voted to sustain the measure that year.

As a result, many lenders have closed. But the consumer need for short-term, small-dollar credit has not diminished, and that is the core issue today. Thousands of Ohioans continue to use regulated short-term loans to manage unexpected financial difficulties successfully.

Advocates of the 2008 law contended that other lenders would fill the void left by payday advance companies. They predicted that credit would be made available at lower rates.

Instead, more than 800 storefront lenders have closed in our state, about 2,500 jobs have been eliminated, and Ohio has lost roughly $69 million in tax revenue. And, critically, no new sources of consumer credit have been injected into the state's ailing economy.

During the debate on payday lending, lawmakers urged some payday loan providers to consider altering their services. Many lenders now offer loans under the state's Small Loan Act and Mortgage Loan Act. Loans under these laws are not new to Ohio. A large number of financial institutions, including auto lenders and retail finance companies, have operated under them for years.

These lenders operate in neighborhood locations, employing thousands of Ohioans, in retail centers that are anchored by nationally known stores and grocery chains. The companies are active members of the communities where their employees and customers live and work. They help support the communities they serve by providing access to credit, but also by hiring vendors, renting storefronts, and using local services.

My company, Checksmart, has three stores in and around Toledo that support 20 jobs. We have conducted a series of courses in the city that helped to explain basic personal-finance concepts such as budgeting, savings, and using credit wisely, as well as understanding financial disclosures and credit reports.

Independent research validates the consumer benefits of short-term credit. Studies by the Federal Deposit Insurance Corp. and George Washington University's business school conclude that consumers make measured decisions, weighing short-term loans against alternatives in the marketplace.

Customers choose our service because it can save them money - particularly compared with the costs of overdraft protection, unregulated offshore Internet loans, or fees associated with bounced checks or late bill payments.

Loans offered under Ohio's small-loan and mortgage-loan laws involve a lower fee than a traditional payday loan. Consumers would pay a $60 fee on a $400 loan under the payday loan law, but typically pay less than a $30 fee for the same amount through our current loan programs.

Short-term loans in Ohio bridge a much-needed gap in the credit market. They provide a vital financial service that hard-working people choose because it makes personal and economic sense.

Eliminating the short-term loan industry would not be a constructive undertaking. It would be unfortunate - and consumers would suffer - if Ohio lawmakers ignored the clear demand for these loans and took them away.

Ted Saunders is CEO of Checksmart Financial, a financial services company headquartered in Dublin, Ohio.