Loophole hurts payday loan borrowers in Ohio

Despite 2008 reforms, Ohioans continue to pay some of the most expensive loan rates in the country, Pew Charitable Trust study shows.

Thousands of financially vulnerable Ohioans take out high-cost, predatory loans each year. These loans have interest rates so high that borrowers may never be able to pay them back, trapping many borrowers in an unending cycle of debt.

Despite 2008 reforms in Ohio which placed a cap on payday loan interest rate at 28 percent, Ohioans continue to pay some of the most expensive loan rates in the country, a Pew Charitable Trust study shows.

The business of lending to the low-income is lucrative for companies and these businesses don’t plan to give up without a fight, consumer protection experts say.

Ohio has more than 1,300 payday-lending stores and an additional 600 title-loan companies, where people receive a short-term loan by using their vehicles as collateral. One in 10 Ohioans has used a payday loan, according to Pew research.

“The research is very clear. Payday loans are not helping people. They are actually making their budgets worse,” said Nick Bourke, director of the Pew Charitable Trust’s Safe Small Dollar Loans Research Project.

The annual percentage rate is 591 percent for a two week payday loan in Ohio, due to a loophole in the short term lending act, that all payday lenders in Ohio are taking advantage of, Bourke said.

“The payday lenders abandoned one type of license and they just started getting other types of licenses — mortgage licences, credit service organization licenses — that the law had not been written to apply to, and so they are making the same loan at the same high interest rate. They’ve avoided the interest rate cap,” Bourke said.

The Ohio Consumer Lender’s Association said in a statement that its members are short-term lenders regulated by the Ohio Department of Commerce and other state agencies that fully comply with Ohio’s Small Loan and Mortgage Loan acts.

“These laws are certainly not ‘loopholes.’ Regarding interest rates, short-term advances are two-week loans — not annual loans. Industry critics often cite payday advances as having an annual percentage rate of 400 percent to 500 percent which is misleading. The typical fee charged by payday lenders is $15 per $100 borrowed, or a simple 15 percent interest rate for a two-week duration,” said OCLA spokesman Pat Crowley.

The problem with these short term loans is that many borrowers can’t make the full payment when it comes due, so borrowers extend the loan for two more weeks, into several months, accruing more interest and fees, Bourke said.

“It’s a cycle that many borrowers can’t escape,” Bourke said.

The two week “churning” of existing borrowers’ loans accounts for three-fourths of all payday loan volume, according to the Center for Responsible Lending.

Charles Cline of Dayton said he’s been stuck in the payday lending trap. He said he took out a $1,000 loan and ended up paying $1,600, due to extensions, fees and interest.

“Trying to help yourself get out of a bad situation, you end up hurting yourself more. They are preying on people that are poor, that are less fortunate, that need to get by throughout the week,” said Cline, adding he won’t be taking another payday loan.

As the Consumer Financial Protection Bureau considers new federal rules to address predatory practices in payday and similar types of lending, U.S. Sen. Sherrod Brown, D-Ohio, joined a group of more than 30 senators early this month in expressing support for initial steps the agency has taken and urging the agency to issue strong rules to combat the “cascade of devastating financial consequences” that these high-priced loans often have on consumers.

“We support the CFPB’s initial steps towards releasing a proposed rule and urge you to issue the strongest possible rules to end the damaging effects of predatory lending,” the Senators wrote in a letter to CFPB Director Richard Cordray. “Small-dollar, short-term loans with astronomical interest rates that pull consumers into a cycle of debt are predatory. These loans have high default rates, including after the borrower has already paid hundreds or thousands of dollars because of triple-digit interest rates.”

Payday loans frequently trap borrowers in a predatory cycle of debt, with a 2014 CFPB study finding that 80 percent of payday loans are rolled over or renewed within two weeks.

“Even if consumers do not default on these loans, high interest rates, preauthorized payment methods and aggressive debt collection efforts often cause a cascade of devastating financial consequences that can include lost bank accounts, delinquencies on credit cards and other bills, and bankruptcy,” the Senators continued.

But, in spite of these concerns, the law has been on the side of payday lenders.

Early this month, the Ohio Supreme Court sided with payday lenders in a unanimous ruling that the state’s Short Term Lending Act did not bar payday lenders from using other lending licenses to issue payday loans.

The Associated Press contributed to this story.

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