David vs. Goliath's Loan Shark
A modern-day version of the story of David and Goliath is quickly unfolding at Ohio's State House. The "Davids" of this story are the faith-based groups, housing advocates, consumer, community action, and other anti-poverty organizations around the state. "Goliath" is the powerful payday lending industry that has grown to more than 1,600 stores and has gross revenues of $2 billion annually. The issue in question is whether Ohio's 12-year-old law on payday lending should be changed to provide basic protections for some 500,000 borrowers. The current law is so weak that it could be best titled, "Ohio's Loan Shark Protection Act."
Ohio is ground zero in a battle for the industry's survival. The industry has a privileged position in the marketplace due to special-interest legislation passed in 1995. During that time, the industry received an exemption from Ohio's usury laws that permits them to charge 391% interest on a typical $300 two-week loan. They use a postdated check as security and are not interested in a borrower's ability to repay. When the loan comes due, borrowers are more often than not forced to seek another cash advance to pay off the first one. This starts them down the path of multiple loans, which places them into a debt trap by which they end up owing their soul to the neighborhood payday lending store. A report by the Ohio Coalition for Responsible Lending, titled "Trapped by Design: Ohio Payday Lending by the Numbers," found that the average Ohio payday borrower takes out 12.6 loans per year. More than 300,000 borrowers find themselves ensnared in a debt trap from which they cannot easily escape.
Three payday lending bills are currently pending in the Financial Institutions, Real Estate and Securities (FIRES) Committee of the Ohio House. Two bills, H.B. 333 and H.B. 358 represent real reform for Ohio consumers, while H.B. 338 is an industry-supported bill that would allow them to conduct business as usual. Early signs in the committee do not seem favorable for consumers. The vast majority of the committee seemed unimpressed when a "whistle-blower" who had worked four years in the industry testified on January 22, 2008. Terrence Jent told the committee how the business model involves preying on the financially uneducated customer and those in significant financial trouble. According to Jent, "Nearly one half of the payday loan customers at both of the companies I've worked for were individuals that were drawing some form of Social Security or other retirement benefit." He described harassing collection procedures and how employees were instructed to encourage customers to go to another payday store if they were unable to pay their loan. Jent also stated that the lender has the ability to electronically debit the borrower's bank account to collect the loan.
Many are closely watching whether the 127th Ohio General Assembly ends up standing with David or Goliath. After all, Goliath has a lot of muscle and consumers did not fare too well last year during the debacle of the consumer sales practice act.
The Ohio Coalition for Responsible Lending strongly supports H.B. 333, sponsored by Representatives Bill Batchelder (R-69) and Bob Hagan (D-60). Among other things, the bill would cap interest rates at 36%, limit to one the number of loans a borrower can have at any one time, and create a linked deposit program to provide an incentive to banks to make small loans. Advocates are also encouraged by the growth of alternatives to payday lending, such as those offered by the stretch loan program of many credit unions.
It is imperative, however, that the playing field in Ohio be leveled so that a viable small-loan industry can evolve. In this time of economic hardship and recession, payday loans are counterproductive to a healthy Ohio economy. They enrich the corporations who operate them while stripping wealth from low- and moderate-income borrowers who use them. Ohioans deserve better.
Thomas J. Allio Jr., is chair of the Ohio Coalition for Responsible Lending