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« Opinion News
Ohio should re-establish control of high-interest loans
Ohio should re-establish control of high-interest loans
The Ohio House passed a tough bill aimed at breaking the cycle of high-interest loans that payday lending storefronts have used to build a lucrative industry in the state in little over a decade.
The support the legislation received from even some of the most conservative legislators in Columbus was surprising. State representatives came to realize that the “let the buyer beware” attitude that drove enabling legislation in the 1990s had created an industry in which cash-strapped people were being trapped.
Now there is a move in the Senate to amend the House bill, a move that would do little more than cut the annual percentage rate of payday loans from 391 percent a year to 367 percent.
Instead of being charged $15 for every $100 borrowed for a period of two weeks, the borrowers would be charged the annual interest rate contained in the House bill — 28 percent — and an additional $13 fee on every $100.
Payday loans are a relatively recent development (or phenomenon or industry — whatever you choose to call it). They are a product of a laissez fair attitude that is supposed to be viewed as an enlightened recognition that we should all be free to make our own economic decisions, free to succeed or fail on our own. The House bill is more in keeping with a societal prejudice against usury that predates such enlightenment by a couple of thousand years.
It will be interesting to watch the payday loan industry’s lobbyists and the collection of religious activists and advocates for the poor battle for the votes that will be needed in the Senate to defeat or uphold the strong bill that the House approved and that Gov. Ted Strickland was prepared to sign.
Not an easy change
Would passage of the House bill carry some pain for the state? Yes. Payday loan shops that have sprung up by the hundreds in recent years will close. Without interest and fees exceeding an annual rate of 300 percent, short-term loans simply aren’t profitable. People who have fallen into a cycle of making ends meet by resorting to exorbitantly expensive small, short-term loans will have to find another way.
In the process, it is likely that many will default on some of their obligations. Some, as payday industry advocates like to point out, will bounce checks or have to pay utility reconnection fees that are actually higher than payday loan rates.
But about a quarter of the states in the United States — Pennsylvania among them — get by with prohibitions against the high rates and fees of payday loans.
Federal law prohibits charging members of the armed services more than 36 percent interest. If Congress determined that the nation’s soldiers, sailors and Marines needed legislative protection against predatory lenders, it is not unreasonable for Ohio to do the same for its citizens.
It’s easy to say government should stay out of people’s lives.
Yet, we expect government to play a role in making sure that the doctors we go to are certified and that our hospitals are safe. We expect government to inspect restaurants for cleanliness.
The middle class certainly expects government to protect it against run-away natural gas or electricity bills, yet as many in the middle class are perfectly willing to let the working poor be drawn into a cycle of high-interest, short-term loans that will be just as damaging to them as high energy bills are to others.
If payday loans were truly rare events in the lives of payday lending customers, that would be one thing. The idea that all those storefronts — there are about 80 in Mahoning and Trumbull counties — are just lending the occasional helping hand is a fiction. Far too many people go from shop to shop spending more and more in interest and handling charges, getting less and less value for their money. Some payday shops even encourage such behavior with incentives: borrow eight times and your ninth loan is free.
In the long run, these high-cost loans take a toll on society that Ohio’s legislators — in both the House and the Senate — should recognize and act upon.
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Comments
Excuse me, but just when did we in this country go from being "Free to make our own economic decisions...free to succeed or fail..." to having some self-serving legislator decide what's good for us? Did payday loan customers ask to have this financial option abolished? No, it is the banks and large so-called "consumer" groups like CRL who stand to reap huge gains if payday lending goes away. Watch out, McDonalds and Burger King, you could be next. After all, we have to protect those who can't stop themselves from eating too much!
It’s easy for people who have nothing to lose to call for a ban. Their jobs aren’t on the line and they have likely never used (or even needed) a payday advance. Employees are very concerned. Their income and benefits are at risk. Hundreds of employees have attended legislative hearings; thousands have reached out to their representatives through emails, letters and phone calls. Nearly 30,000 customers have written letters, urging legislators not to take away a personal credit choice. Unfortunately, the voices of employees and customers, the people that matter most, landed on deaf years in Ohio’s House of Representatives. We hope Senators will listen.
The critics of payday lending have presented no credible evidence that the service, on average, does more harm than good. To the contrary, researchers from George Mason University and Colby College recently found that “access to payday loans in their environment, all else fixed, increases a borrower’s probability of financial survival by 31%.” See http://news.findlaw.com/prnewswire/20080...
Similar results were reported in two studies by a research officer with the Federal Reserve Bank of NY. See http://www.newyorkfed.org/research/staff... and http://www.newyorkfed.org/research/staff...
Usury is a religious concept which originally meant the "sin" of charging any interest whatsoever on a loan. If we want a democracy and not a theocracy then we need to keep this concept out of government and abolish the tradition of usury laws just as we abolished the tradition of slavery - which also dated back thousands of years. There is no legitimate reason why a lawyer or grocer should be allowed to set his own price, but a lender should not. Freedom of commerce is just as important as freedom of speech.
In fact the APR of a payday loan tells you nothing about how profitable the loan is for the lender, because it ignores his cost in making the loan, or how wise the transaction is for the consumer, because it ignores his other alternatives. The APR is a statistical tool which only has value for comparing loans which a consumer has access to; if all other factors are the same, his wisest choice is the one with the lowest APR. But most payday loan borrowers do not have access to any other type of credit, so comparing the APR of payday loans to that of personal loans or home loans is irrelevant.
If a 365% APR was inherently outrageous then the statement "I will lend you $100 today if you will pay me back $101 tomorrow" would be an outrageous statement, but it obviously isn't. In fact most people would not make that statement, because they wouldn't want to risk losing $100 for just $1 in profit - and that doesn't even consider any cost whatsoever in making the loan!
I'm sure our soldiers now feel wonderful knowing that they may be asked to sacrifice their life for a country which doesn't even trust them to borrow a few dollars until their next payday because such loans have been regulated out of existence for them.
The figure released by the Center for Responsible Lending and widely quoted in the media, that the average payday loan borrower pays back $793 for a $325 loan, is false. Veritec Solutions, the company whose figures CRL used as the basis for that assertion, subsequently released an analysis stating that CRL misinterpreted the data. It can be seen at http://www.veritecs.com/CRL_Whitepaper_A...
The Consumers Rights League has issued its own report on the Center for Responsible Lending. See http://www.consumersrightsleague.org/New...
The first link in my post above has expired. A summary of the George Mason University and Colby College study can be seen at http://www.reuters.com/article/pressRele... with the actual report at http://papers.ssrn.com/sol3/papers.cfm?a...