In a previous post, I suggested that the Ohio Supreme Court may or may not decide the future of payday lending in Ohio. On Thursday, June 12, the Court did issue a decision. Unfortunately for Ohio consumers and voters, the Court validated the current industry business model, deciding that these short term, small dollar predatory loans can be made under statutes that were never designed or intended to regulate payday loans.
So now we move on. Today, Senator Sherrod Brown came to the Ohio Poverty Law Center and held a press conference. His remarks focused on abuses in the industry, and called upon the Consumer Financial Protection Bureau to pass strong regulations to rein in industry abuses. I was invited to participate in that press conference, and what follows are the remarks I prepared for that press conference. Where we go from here is back to the Ohio legislature, and forward to urge and support the CFPB as they begin the process of enacting regulations.
Payday and Small Dollar Lending
My name is Linda Cook, and I am a senior attorney with the Ohio Poverty Law Center. The Ohio Poverty Law Center is a nonprofit law office that pursues statewide policy and systemic advocacy to expand, protect, and enforce the legal rights of low-income Ohioans.
I, and many other consumer advocates around the state, for years have waged a campaign, first in the legislature, and then in the courts, to rein in the abusive practices of the small dollar lending industry in Ohio. When I joined the campaign in 2006, we targeted the short term loans commonly called payday loans because that was the most common short term loan product trapping Ohio borrowers in a cycle of debt. After the passage of reform legislation in 2008, the industry immediately migrated to other loan licensing statutes that pre-dated payday lending and continued offering the same predatory loans. Legal aid lawyers looked to the court system to interpret Ohio’s small loan lending statutes and to confirm the intent of the legislature and the will of Ohio’s voters to regulate payday loans.
On Thursday of last week, our Ohio Supreme Court told the legislature it had not accomplished what it set out to do. Ohio voters do not have the protections they overwhelmingly endorsed. I hope our legislators are energized by the decision in Cashland v. Scott to step forward in a bi-partisan effort to give Ohio consumers the protections they want and deserve.
Small dollar lending exploded in Ohio during the economic downturn from which we are all still struggling to recover. Just to give you an idea, as of last Friday, the Ohio Department of Commerce’s website shows 1,347 mortgage loan or small loan branch licensees. These are the two licenses under which former payday lenders are now doing business. No lenders are licensed under the Short Term Loan Act, the statute passed to reform payday lending.
In addition, auto title lending has moved into Ohio. These business sought licenses as Credit Services Organizations; currently Commerce has 45 active CSO licensees. Twenty-seven (27) of these licensees advertise that they make title loans. A quick internet check reveals that six of these 27 title loan companies have a total of 585 store front locations throughout Ohio. Yet, these companies are not really lenders. They act basically as brokers, arranging loans with out-of-state lenders and collecting fees that range from 20% to 80% of the principal. These fees are in addition to loan origination fees, credit check fees, lien recording fees, and interest paid to the lender.
As this information demonstrates, the small dollar lending market is very nimble. When regulators or legislators close one door, this industry finds a way to open another to get into the pockets of cash strapped consumers. The industry stresses that these loans are helping many consumers pay their bills. The main industry group says: “Given the recession and the economy that we are in, many Americans have depleted their savings and there is no cushion, many are living paycheck to paycheck and must turn to short-term credit options to manage their financial obligations.” Sadly, many Ohioans have been very hard hit by the recession, and are struggling to meet financial obligations. Knowing that your pay check will not stretch far enough to cover your bills is stressful and makes consumers vulnerable to payday and auto title loans, deposit advances, personal installment loans, and other small dollar predatory loans.
These loans are predatory because they are not based on the borrower’s ability to repay. As Senator Brown has already told you, the CFPB found that borrowers are using these loans to meet basic expenses, and paying back much more in fees that they pay in principal. According to another study, 37% of borrowers surveyed reported being so desperate for cash that they would accept a loan under any terms.
These loans are predatory because industry profitability depends on repeat borrowing. Many lenders offer incentives to encourage repeat borrowing. Borrowers can achieve Silver, Gold or Platinum status for repeat borrowing, and receive discounts or bonuses for referring new customers. According to industry analysts, in a state that permits $15 in fees for $100 borrowed, an operator needs a new customer to take out 4 to 5 loans before that customer becomes profitable.
This industry is creative, and very sophisticated, involving loan brokers and lead generators, partnerships with out-of- state companies and entities that exist only on the internet – all designed to maximize fees and profit for an industry that targets those least able to repay the principle, thus keeping borrowers in a cycle of debt.
Payday and other short term small dollar loan products hurt borrowers and their families by trapping them in a cycle of debt, draining money away from the household.
Payday also hurts our communities and our economy. A 2013 study from the Insight Center for Community Economic Development examined the net impact of payday lending in terms of value added to the national economy and jobs. Insight’s study found that the payday lending industry had a negative impact of $774 million in 2011, resulting in the estimated loss of more than 14,000 jobs. U.S. households lost an additional $169 million as a result of an increase in Chapter 13 bankruptcies linked to payday lending usage, bringing the total loss to nearly $1 billion. These findings of net economic loss were confirmed most recently by the Louisiana Office of Financial Institutions, whose study showed the impact of payday lending resulted in a net economic loss of $42 million in economic activity for Louisiana.
Now, more than ever, we need strong regulations. The Consumer Financial Protection Bureau has carefully and thoroughly studied the small dollar loan market. It is now situated to enact regulations that protect consumers from the current array of small dollar loan products, and anticipate future abusive products. Consumers need access to credit that is reasonable and affordable, grounded in sound lending practices.
But the CFPB is not the sole regulator of the small dollar lending marketplace. Ohio has control over who does business with Ohio citizens, and how they do business. CPFB and state action are complementary. Ohio can set interest rate caps, require a minimum number of payments and minimum loan terms, and eliminate fee harvesting middle men. Our legislators need to act now. Ohio borrowers deserve a fair marketplace.