Payday lending continues to thrive in the region and across Ohio despite statewide efforts to curb exorbitant interest rates on payday and car title loans, according to a new study from a Washington-based watchdog group.
A 2008 ballot initiative capped Ohio payday loan rates at 28 percent, but many payday lenders have used legislative loopholes to re-register as mortgage lenders or credit service organizations, thereby exempting them from the rate cap, according to a report from the Center for Responsible Lending (CRL).
As a result, there are still 836 storefronts in Ohio generating more than $500 million in fees each year by charging annual average rates of more than 300 percent for payday or car title loans, which use paychecks or vehicles as collateral, according to the CRL.
“The flourishing payday lending practices in Ohio are the ultimate case-in-point for why rules governing predatory practices must be airtight,” said Diane Standaert, director of state policy for CRL. “The Consumer Financial Protection Bureau should take note. Clearly, this is an industry that will find and exploit any possible angle to continue making predatory loans designed to trap Ohioans in an endless cycle of debt.”
The 2010 Dodd–Frank Act authorized the Consumer Financial Protection Bureau (CFPB) to impose new regulations on payday lenders, and the CRL supports proposals that would limit the ability of payday lenders to make short-term payday loans, used by about one in 100 Ohioans, according to a study from the Pew Research Center.
While payday loans are used by people from all walks of life, payday storefronts are most often found in poor neighborhoods, leading to widespread criticism that the loans target the most economically vulnerable consumers.
“They’re on every corner in some neighborhoods,” said Tim Brandon, a spokesman for Graceworks Lutheran Services Consumer Credit Counseling Service in Dayton. “They do target the least financially literate people, and, in my opinion, take advantage of those people.”
The Ohio Consumer Lenders Association, which represents lenders including LoanMax, Check into Cash and Advance America, was quick to point out that about a quarter of Ohio households are under-banked, according to the Federal Deposit Insurance Corporation, meaning they don’t have access to traditional credit and banking services.
The group also objected to the characterization that members were skirting the law to continue predatory lending practices.
“The suggestion that our members operate through ‘loopholes’ is inaccurate and misleading,” Patrick Crowley, a spokesman for the lenders association said in a statement. “OCLA members make loans under two existing laws — the Ohio Mortgage Act and the Ohio Small Loan Act — and under Ohio Department of Commerce regulations.
“We play by the rules, we operate out of storefronts in the communities we serve and we help families get through the tough times that so many people encounter,” Crowley said. “If our members didn’t exist, the need for credit would not go away.”
While payday loans are potentially dangerous, they can offer a short-term fix for someone facing a financial emergency, allowing individuals and families to put food on the table or keep the lights on when they’re short on cash.
But the combination of high interest rates and low incomes of most payday borrowers can quickly lead to a cycle of debt that’s worse than the financial problems that led them to seek out a loan in the first place, Brandon said.
“Rarely do we see someone come in with just one payday loan,” he said, noting that many of the counseling service’s clients have taken out as many as 10 loans in a row. “What happens is they get into these loans, then they can’t get the money to pay them back on time, so they end up going and borrowing from another (payday lender), and it just becomes a vicious cycle.”
At the very least, Brandon said, payday lenders should be required to do more due diligence about a borrower’s ability to repay a loan so they don’t get trapped in a cycle of debt.
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