Short-term loan reform expected
Bill limits to protect Ohioans from payday lending debt cycle
A bill awaiting Ohio Gov. John Kasich’s signature ought to level the playing field between short-term loan lenders and the Ohio consumers who use them — at the highest average interest rate in the nation, 591 percent — the bill’s proponents said.
It doesn’t take much of an emergency for someone living paycheck to paycheck to resort to a short-term loan, and the terms of the loans often leave borrowers already short on cash in a cycle of loan debt, especially in a place like Trumbull County, which has suffered rounds of layoffs in multiple industries. What happens when a borrower can’t make one of the monthly payments? The lender offers another loan.
Bob Jones of Warren resorted to short-term loans to make monthly obligations and support his wife and children after finding out he was laid off from a steel mill through a post on a social media website.
Jones was accustomed to living on $70,000 annually with all the obligations a paycheck of that amount could support. After being out of work for a year after the steel company closed and draining his retirement savings plan in order to get by, he found work at a different steel mill as a crane operator. After three years, he found out he was laid off in a social media post.
“We didn’t use them for anything extravagant, just to support our two kids and live, to make ends meet and pay our bills,” Jones said. “At the mill, I made really good money. But then the mill goes down and we were stuck on unemployment. We lost 90 percent of our income, but the bills were 100 percent.”
The U.S. Navy veteran who served in the Gulf War tried to go back to school. But the program he entered wasn’t accredited and the money he spent there was wasted.
That’s when the cycle began.
“Once you get into these things, you are always on the hook to pay back more — way more than you originally needed — to get through a rough spot,” Jones said.
He said of course lenders have to charge interest, but there must be common sense limits on it. He is on the hook for $1,600 and still in the cycle.
Changes to come
The new law will cap interest rates at 28 percent per year.
“It protects the consumer from being stuck in a vicious cycle of debt, while still giving them access to a quick loan,” said Rep. Michael O’Brien, D-Warren. “Prior to this, you were captured; you were a prisoner of the loan and just kept refinancing.”
Interest and fees cannot exceed 60 percent of the original loan amount and the payments can’t exceed 7 percent of the borrower’s monthly income.
Lenders will still make a profit, but “nowhere near the ridiculous profits they were making in the past,” O’Brien said.
Local Ohio lawmakers, Rep. Glenn Holmes, D-Girard, and Sen. Sean O’Brien, D-Bazetta, also voted to support the bill.
In Colorado, where short-term loan reform was passed in 2010, the amount of loans people take out has remained at pre-reform levels, but there are fewer stores around to process the loans, according to the Pew Charitable Trust.
“Seven years after reform, the amount of credit extended and used in the state has not decreased. Instead, in the several years after reform, half of stores closed and remaining stores doubled their customer count, covering their overhead by serving more customers. Revenue per store is higher now than before reform, although prices are far lower,” states testimony the trust provided in support of the Ohio bill.
The testimony states the short-term loan industry is a flooded market with high overhead costs. They crop up in high numbers in places with loose regulations because they can meet those costs with their high fees and interest rates, even though there is plenty of competition.
The bill also will prevent lenders from charging a borrower for paying back the loan early, imposes fines on lenders for violating the law, forces the lender to get renewed permission to debit a checking account if in two tries in a row a payment transaction does not go through, allows the borrower to remove access to his or her checking account at any time and caps monthly maintenance fees at $30.
Loans hurt already
The issue drew the support of many organizations, including the Catholic Conference of Ohio, the Ohio Poverty Law Center, Ashtabula County commissioners, community development organizations across the state, veterans service commissions, branches of the NAACP, fair housing centers and branches of United Way.
Joel Potts. executive director of the Ohio Job and Family Services Directors’ Association, said this issue made sense for his agency to rally around, even though it typically doesn’t endorse legislation.
“There are more working poor adults now than non-working poor. We have helped people get jobs, but how do we get them out of poverty?” Potts said. “We continually hear from people who get caught in payday lending traps. They have money from wages, but something comes up and they need immediate cash. They get it, but then they can never get caught up. They need loans to pay off the loans. They get deep into debt because they were short on the rent payment, or their car broke down, or got an unexpected bill.”
After hearing about a woman stuck in the cycle through her pastor, Rep. O’Brien decided to stop in one of the Warren short-term loan businesses himself.
“I went in wearing jeans, a Cleveland Cavaliers T-shirt and a baseball hat and asked for a $5,000 loan with no collateral or co-signer. In 15 minutes, they quoted me a loan where I would pay back $1,000 a month for four months, and then owe $11,000 in the fifth month. They said I could finance the $11,000 with them, too,” O’Brien said.
The lender wouldn’t let O’Brien take home the paperwork to “mull it over.”
“It was shocking,” Rep. O’Brien said. “But I can’t get this woman’s face out of my mind. She was sitting there, a young lady in her 20s with a frown on her face and a baby on her lap, signing loan papers.”
The loans don’t build up credit for the borrowers either, so they do nothing to help them establish the type of credit scores they need to use traditional lenders, Potts said.
And the profits the companies make from the loans take money out of the community and send it to corporate headquarters, often out of state, Potts said. The changes ought to put “tens of millions of dollars” back into local economies, Potts said.
The Pew Charitable Trust estimates $75 million.
The faith coalition
The bill, a result of a faith-based coalition a Springfield pastor built after learning the harm the loans often cause low-income people, passed the Ohio House and Senate with votes from Republicans and Democrats. The totals were 61-24 in the House and 21-9 in the Senate. All of the “no” votes were cast by Republicans in both chambers of the General Assembly
Carl Ruby, senior pastor at Central Christian Church in Springfield, the director of the coalition, first became concerned about the loans when he noticed how many of the stores were cropping up.
“I was afraid immigrants were being taken advantage of. So I did some research and when I saw what the interest rates were, I was shocked. At one point, there were more payday lending stores than McDonald’s in Ohio. I felt I had to do something,” Ruby said.
He held a forum at the 160-member church to educate the public about how the lenders operate.
“There was such a positive response to that. And then people started coming up to me and told me about their experiences of being trapped in debt. I got a group of pastor friends together and met with Kyle Koehler,” Ruby said.
Ohio Rep. J. Kyle Koehler, a Springfield Republican representing Ohio’s 79th District, introduced the first version of the bill in March 2017.
“My first instinct was to put all of the lenders out of business. (Koehler) wouldn’t do that. But he said he would work to regulate them because ‘what they are doing is wrong.’ He said, ‘Carl, this is going to cost me politically. I am going to make a lot of enemies by raising this issue.’ I admire his political courage,” Ruby said.
The process took “a lot” of trips to Columbus and the pace at which the change came was slow for Ruby’s tastes, he said. Ruby said he is satisfied with the bill and it is a “reasonable compromise” and a “great example of a bipartisan coalition.”
The bill may have made it to the Republican governor’s desk sooner if it hadn’t been for an investigation into Cliff Rosenberger, the former speaker of the house.
Rosenberger announced his resignation in April amid an investigation into his travel and ties to lobbyists for the payday lending industry. The FBI investigation and numerous representatives vying for the job clouded efforts to elect Rosenberger’s replacement in the House, which was unable to pass any new laws until Ryan Smith was selected June 6 after 11 rounds of voting.
“I give credit to this speaker of the house for bringing this bill to the floor. Before, this didn’t go to the floor because payday lending lobbyists were pressuring the former speaker not to bring it to the floor. We saw how that ended up,” Rep. O’Brien said.
Rep. Holmes, Sen. O’Brien and Rep. O’Brien criticized the opposing party for apparent ties to the short-term loan industry and delaying reforms that help consumers.
Technically, Ohio’s short-term loan industry should already have a 28 percent interest rate cap. In a 2008 referendum vote, Ohio voters approved legislation that capped interest rates at 28 percent. But, a loophole in the bill allowed the lenders to register under a different provision of Ohio law, avoiding the interest rate cap.
The new bill closes the loophole.