In 2008, Ohio’s legislature banned high-cost loans, but the industry has since found ways to continue offering the same services. Despite the public voting against the industry’s efforts to roll back the law by a two-to-one margin, hundreds of payday loan stores still operate in the state, charging annual rates of up to 700 percent.
The state-by-state skirmishes are crucial, as the federal Consumer Financial Protection Bureau is prohibited from capping interest rates. In Ohio, lenders have exploited loopholes in laws written to regulate mortgage lenders and credit repair organizations.
The Ohio Supreme Court recently agreed to hear a case challenging the use of the mortgage law by a payday lender named Cashland. If the court rules the tactic illegal, the companies may simply find a new loophole.
Amy Cantu, a spokeswoman for the Community Financial Services Association, the trade group representing the major payday lenders, said members are “regulated and licensed in every state where they conduct business and have worked with state regulators for more than two decades.”
“Second generation” products
Payday lenders have come under intense scrutiny in recent years, leading many to develop “second generation” products that are just as profitable, if not more so. The typical two-week payday loan can be immensely profitable for lenders, as three-quarters of loan fees come from borrowers taking out more than 10 loans in a 12-month period. Companies such as EZCorp and Cash America have shifted their focus to high-cost installment loans, auto-title loans, and lines of credit with annual rates ranging from 300 to 780 percent.
Delaware passed a major payday lending reform bill in 2011, limiting borrowers to five loans per year. However, companies such as Cash America have circumvented the law by offering seven-month installment loans with an APR of 398 percent. Similarly, in Texas and Illinois, lenders have adapted their products to offer high-cost installment loans that are triple-digit-rate.
In New Mexico, the attorney general has taken legal action against two lenders for offering unconscionable loans with annual rates of 1,147 and 650 percent, respectively. Despite the attorney general’s successes, similar types of loans are still widely available in New Mexico, with the Cash Store offering loans with APRs ranging from 520 to 780 percent.
The high-cost of these loans reflects the desperation of low-income borrowers, with 37 percent of payday loan borrowers stating they would pay any price for a loan. These loans are often designed to keep borrowers in debt indefinitely, with employees instructed to not let anyone pay off. It is clear that more needs to be done to protect vulnerable borrowers from these predatory practices.
“Playing Cat and Mouse”
In Washington, New York, New Hampshire, Georgia, Arizona, Ohio, and Texas, high-cost lenders have been pushing for laws that would allow them to charge exorbitant interest rates. In response, local governments have been enacting ordinances to limit the number of times a borrower can take out a loan. Moneytree, a Seattle-based payday lender, introduced a bill in Washington’s state senate that proposed allowing “small consumer installment loans” with annual rates of more than 200 percent. Despite passing the senate, the bill stalled in the house. In New Hampshire, the governor vetoed a bill last year that would have allowed installment loans with annual rates above 400 percent. In Texas, lenders have been able to skirt the law by defining themselves as credit repair organizations, which can charge steep fees. In response, cities such as Dallas, San Antonio, and Austin have passed local ordinances to break the cycle of payday debt. Despite the industry’s efforts to pre-empt local rules with a statewide law, Dallas Councilman Jerry Allen, a political independent, is hopeful that more cities will join the effort and force the state legislature’s hand.
