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Lenders Thwart Ohio Law Intended to Limit High Interest on Payday Loans

An Ohio law intended to cap interest rates on payday loans at 28 percent has been thwarted by lenders who have found ways to charge up to 680 percent interest, according to lawmakers who are preparing a second round of legislation.

The law, the Short-Term Loan Act, was enacted last spring and upheld in a statewide referendum in November. It decreased the maximum annual interest rate to 28 percent, from the previous 391 percent. Loans typically had terms of two weeks and were secured by a postdated check and proof of employment.

But more than 1,000 stores have obtained licenses to issue short-term loans under different laws that permit higher rates, according to a report by the Housing Research and Advocacy Center in Cleveland, which has worked to lower interest rates.



Using one of those laws, the Mortgage Loan Act, some lenders charge interest and fees of $26.10 on a 14-day $100 loan, which amounts to a 680 percent annual interest rate, the center said. Others used another law, the Small Loan Act, to charge up to 423 percent on a $100 loan. Some of the more creative approaches included issuing the loan in the form of a check and charging to cash it in the same store and charging for credit checks.

This is just more deceptive gouging behavior from an industry that is known all too well for getting people into a cycle of debt, said Bill Faith, executive director of the Coalition on Homelessness and Housing in Ohio, which is working with state officials to lower interest rates and eliminate fees on short-term loans. Mr. Faith’s group, which is based in Columbus, found that the average customer got 13 loans a year and was continually saddled with high interest payments.

It is not unusual for lenders to find ways to avoid new state regulations, said Uriah King, a spokesman for the Center for Responsible Lending in Durham, N.C., which supports rate caps. Georgia, New Hampshire, North Carolina, Oregon and Pennsylvania had to pass a second round of legislation or aggressively enforce regulations after their initial reform efforts, Mr. King said.

Payday lenders are very aggressive about circumventing the law, Mr. King said. It takes real will of the regulators to ensure that the will of the legislatures are met.

Representative Matt Lundy, a Democrat and chairman of the consumer affairs and economic protection committee in the Ohio House, has studied other states experiences, and he said he was preparing a bill aimed at plugging the loopholes. The bill would create a minimum six-month term for loans of $1,000 or less and eliminate all fees that would effectively push interest rates above 28 percent.

We have a clear mandate from the voters to make sure that their will is enforced, Mr. Lundy said. They wanted the payday lenders reined in.

Community Financial Services Association of America, a Washington group that represents lenders, said most businesses were charging less than 628 percent interest. More typically, it said, they are charging 159 percent for a $300 or $600 loan. More...

Some States Set Caps to Control Payday Loans

Tracey Minda needed cash to buy clothes and school supplies for her 6-year-old son before the 2006 school year. A preschool teacher and single mother, she was broke after making her mortgage and car payments.

The quick and easy answer was a $400 loan from a payday lender. When payment was due two weeks later, she needed another loan to keep afloat. Nine months and 18 loans later, she was hundreds of dollars in debt and paying the lender about $120 in monthly fees from her $1,300 in wages.

Once I was in the cycle for a few months, I couldn’t get out of it, said Ms. Minda, who was on the brink of losing her car and her home in Washington Courthouse, Ohio, before turning to family members to pay off her debt.

Ohio lawmakers sought last spring to aid borrowers like Ms. Minda by capping annual interest rates for payday lenders at 28 percent, a sharp reduction from 391 percent. But lenders are fighting back in a novel way, collecting enough signatures, once certified, to force a vote in November on a ballot measure that could overturn legislation that established the rate cap.

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You can’t make a payday loan cheaper than the industry does, said Steven Schlein, a spokesman for the Washington-based Community Financial Services Association of America, which represents lenders.

Mr. Schlein said lenders had left other states that had recently capped rates at 36 percent or lower. Consumer choice has always worked best, he said. That’s what drives prices down, not eliminating competition.

In Arizona, an exemption allowing payday lenders to charge 400 percent interest will expire in 2010, with the cap reverting to 36 percent. Lenders there are supporting a ballot measure in November to extend the exemption permanently. The payday loan industry has grown fivefold this decade, from lending $10 billion in 2000 to $50 billion in 2007, according to Stephens Inc., a brokerage in Little Rock, Ark., which said lenders collected $8.6 billion in fees last year.

In 2006, Congress capped rates for payday loans at 36 percent for military personnel. Following that example, Arkansas, the District of Columbia, New Hampshire and Oregon, as well as Ohio, have capped rates at 36 percent or lower.

The business model is a debt trap, said Uriah King, a spokesman for the Center for Responsible Lending in Durham, N.C., which supports rate caps. More than 90 percent of customers are repeat borrowers, he said, and two-thirds of lenders revenue comes from borrowers who take out a dozen loans annually.

Mr. King said state lawmakers had been emboldened by Congress’s move to protect military personnel.

People are finding ways to cope without payday lending, and it’s at a fraction of the cost, he said, including using consumer finance companies and credit unions. But the best way to avoid cash crunches that drive consumers to payday lenders, he said, is to build up savings of as little as $500 for rainy days.

In Ohio, payday borrowers paid more than $318 million in fees annually and an average yearly interest rate of 391 percent before the new restrictions, according to a study released by the Ohio Coalition for Responsible Lending. More...