Predatory Lending

Reining in the Loan Sharks

Until June, payday lenders in Ohio were free to pursue their predatory business model: They made two-week loans, ranging from $100 to $800, that trapped borrowers into a revolving series of loans from which they had little chance of escaping.

In testimony to the Ohio general assembly, victim after victim stated that a typical initial loan of $300 ending up resulting in thousands of dollars in fees and interest. Ohio was second only to Texas as the largest market for the industry; some 328,000 Ohi­oans were trapped each year, with an average of 12 loans per customer. Payday lending stores took in more than $2 billion each year in the state.

But in June all that changed, and Ohio consumers celebrated a major public policy victory, when Gov. Ted Strickland signed HB 545 into law. The bill was the culmination of three years of tireless advocacy by the 246-member Ohio Coali­tion for Responsible Lending (OCRL). The coalition is comprised of faith-based groups, consumer and housing advocates, community action agencies, labor unions, and health and human service providers.

Ohio now has one of the toughest laws against predatory payday lending in the country. The law caps interest rates for small loans at 28 percent, down from the astronomical 391 percent that lenders were previously able to charge. In addition, a person cannot borrow more than $500. Loan terms must be at least 31 days, as opposed to the two weeks previously permitted, and a borrower is limited to four payday loans per year. The bill also bans Internet lending. As Strickland put it, “We will not tolerate individuals being exposed to exorbitant rates.”

Getting this law was an uphill battle for advocates. During May, the state house was swarming with lobbyists for the industry. Senate testimony featured CEOs from major national payday lending corporations, and their employees packed hearing rooms.

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Sojourners Magazine August 2008
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Detoothing the Loan Sharks

What happens to a dream deferred?” Langston Hughes asks in his classic poem “ Harlem.” Whether it is the dream of owning a home, paying for college, or making that final payment on a car, when the way of the world puts our dreams out of reach, what are the consequences? As the last line of Hughes’ poem suggests, those dreams may “explode.”

Today millions of American dreams are exploding into debt. Small-dollar, short-term payday loans—at outrageous annual percentage rates, as much as 1,000 percent in some cities—are offered to those experiencing a range of cash-flow problems. For larger expenses such as homes and cars, predatory lenders grant loans at higher-than-prime rates to borrowers whose credit history and financial status suggest that they are likely to default on loan repayments. Exorbitant interest rates are often coupled with hidden predatory charges that intentionally trap people in cycles of debt, forcing them to lean on lenders all the more. Pursuing the dream boils down to billions in losses for families, and billions in gross revenue for loan sharks.

Tom Allio, senior director of the Ohio Coalition for Responsible Lending (and social action director for the Catholic Diocese of Cleveland) says the lending debacle is like a “modern-day version of the story of David and Goliath.” The “Davids” are the faith-based groups, housing advocates, and community members organizing to go up against the “Goliath” of the lending industry. Here are the five stones they’re using—and that we can adopt—to slay this “Goliath.”

1. Develop an awareness campaign for your congregation focusing on the specifics of lending practices and how the industry targets people. It’s also important to inform your group about your city or state’s laws regarding basic protections for borrowers and restrictions for lenders.

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Sojourners Magazine May 2008
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