News Column

Payday loans may help, but at what price?

June 23, 2014

By Eric Schwartzberg, Journal-News, Hamilton, Ohio

June 23--A recent decision by the Ohio Supreme Court scored a victory for payday lenders, allowing them to make high-interest, short-term loans.

The court unanimously ruled that payday lenders may keep on exploiting a loophole in a state law, 2008's Short-Term Lender Act, which limits interest and fees to 28 percent or less, imposed a $500 maximum loan limit and sets a minimum 31-day payback period to protect consumers from harder-to-pay two-week loans.

The loophole allows payday-style loans to continue as interest-bearing mortgage loans.

But Darren Traynor, general manager of ZipCash in Hamilton, said that kind of loan is part of the Ohio Mortgage Loan Act, "a law that's been on the books for a while" and one that he doesn't view as a loophole.

He said the Ohio Department of Commerce's Office of Finance directed lenders to make loans under the law, which allows lenders to earn about $27 for each $200 loaned in a 14 to 30 day period, Traynor said. Interest accrues about 18 cents a day after 14 days.

Linda Cook, a senior attorney at the Ohio Poverty Law Center, said she was disappointed on behalf of Ohio consumers that the court didn't interpret the Ohio statutory lending scheme the way that legal aides had argued on behalf of consumers.

"Instead, the effect of their decision is to endorse the current business model for payday lending in Ohio," she said.

But Traynor said the court's decision and was fair and meant that "obviously we were allowed to lend under that law, which made the loans legal that were doing."

"With the law that they had changed ... a $200 loan, the max you could make off of it was a little less than $2," said Traynor. "It just didn't make good business sense to stay in business if that was the law we had to operate under.

Ohio has about 1,100 businesses licensed under the Short Term Lender Act and the Ohio Mortgage Lending Act, 24 of which are in Butler County, according to data obtained by the Journal-News from the Ohio Department of Commerce.

There are also nearly 600 title-loan companies that make short-term loans to those who use their cars as collateral, Cook said.

The highest interest rate allowed by the Ohio Mortgage Loan Act is 25 percent, but interest is defined not to include loan origination fees and credit check fees permitted under that statute, she said.

"So then if you look at the fees plus the principle and the calculated annual percentage rate interest on a single-pay loan, then those loans are a triple-digit APR (annual percentage rate)," Cook said.

An APR, she said, reflects "the true cost of borrowing" because all of the fees, with a few exclusions, are calculated in the interest."

Payday loans: What's the issue?

Cook said the problem with a payday loan's short repayment period and balloon repayments is that people struggle to find the money to pay them back.

"If you didn't have $500 and you needed to borrow it because you have an expense you needed to pay or a bill that was outstanding, chances are very slim that you're going to have $545 extra the next time you get paid to pay that loan back," she said. "So you end up borrowing more money or rolling the loan over. You just basically keep paying the fee payments and rolling over the principle."

The vast majority of studies overwhelmingly find that borrowers are repeat borrowers that take out an average of eight loans and are indebted for half a year, Cook said.

"Almost half the borrowers are the people who are have fixed incomes, so they're never going to have any more than they had this month," Cook said. "Once they start down the payday loan route, they're really trapped."

But Traynor said payday loans are an "extremely important" service for people to have, especially in today's economy and when people are in-between paychecks.

"People need access to short-term cash and there's a huge void in that market," he said, noting that ZipCash provides cash instead of checks or money orders that need to be cashed for a fee. "We definitely are a cheaper alternative."

Studies show borrowers often are overly optimistic about repaying a loan, Cook said.

"Nobody goes into a payday loan thinking 'I can't possibly pay this back,'" she said. "They go in thinking ... 'I'll do X, Y, Z and I'll be able to pay this back' and then those things don't happen."

Diane Standaert, senior legislative counsel for the Center for Responsible Lending, called the court's ruling is "a devastating blow to Ohioans" that will cost residents $209 million a year in fees drained by predatory payday loans.

"Both the Ohio legislature and the Consumer Financial Protection Bureau have the power to affirm the will of millions of Ohio voters to end the debt trap caused by 300 percent APR payday loans," Standaert said.

Cook said the CFPB has been studying the issue for several years and is poised to issue regulations that can address some of the abusive loan practices in the small-dollar lending market, which includes payday loans.

But while the bureau can control many of the conditions on lending, it does not have the authority to do others, including imposing an interest rate cap.

Patrick Crowley, spokesman for the Ohio Consumer Lenders Association, said lenders are not charging their fees via loopholes, but laws on the books that provide "important legislative oversight" of the short-term lending industry.

"The market has spoken loud and clear on this issue," Crowley said. "Ohio residents want and need access to consumer loans. Customers visit our stores because they have determined that consumer loans are a viable and less-expensive alternative to bouncing checks, paying late charges or dealing with pawn shops."

Transparency is a hallmark practice of OCLA members, Crowley said. "Our customers are fully informed about the costs, regulations and payment due dates when taking a consumer loan," he said.

Cook disagreed, citing a Pew Charitable Trusts study that showed 37 percent of people who participated in the survey were so desperate for money that they would accept a loan under any terms.

"Disclosures are meaningless to people who are desperate for money," she said. "It doesn't matter if you tell them it's going to cost you 391 percent and you have to pay us back twice as much in two weeks."

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(c)2014 the Journal-News (Hamilton, Ohio)

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Source: Hamilton Journal News (OH)


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