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Ohio has leashed payday lending. Now what?
Published on Tuesday, May 20, 2008
Read any number of reports on consumer finances and you catch the drift that times are tough. The theme is that the net worth of the average American household is not growing as fast as its debt load. In the past decade or so, the average household has accumulated debt faster than its income has grown and has made up for shortfalls with combinations of cash advances, home equity loans and credit cards.
Many borrowers in a pinch have also found a source for quick loans in businesses that for a fee will cash checks or make advances against a borrower's paycheck.
A major rap against these lenders is that together, the business model (high interest rates, currently at 390 percent APR on a $100, two-week loan) and weak state regulations created a perfect vehicle for trapping clients in debt.
A three-year effort led by a coalition of social agencies, churches and consumer advocates to change the laws on payday loans came to a head in recent weeks at the Ohio Statehouse.
In a dramatic shift of support, first legislators in the House in April and then in the Senate last week, overwhelmingly approved the legislation for tighter regulations. Among other changes, the bill would put a 28 percent limit on the interest rate on payday loans.
The lenders argued strenuously that House Bill 545 will surely kill the payday business in Ohio. The pitched battle, waged on the airwaves, by mail, phone and a rally at the Statehouse, is just about over. The bill is awaiting final clearance from the House. Gov. Ted Strickland is expected to sign it.
Ohio will soon have one of the tightest leashes on the industry in the nation. The lenders insist Ohio is cutting its nose to spite its face, that borrowers who find themselves short before payday will have few options to replace the convenience and reasonable cost of payday loans.
To make that point and perhaps to make Ohio an object lesson for other states that might want to follow suit, the cash-advance lenders may well shutter their stores immediately.
The measures to rein in the quick loan industry were long overdue. The question now, especially if the big operators carry through the threat to leave Ohio altogether, is: What next? Who will get the last laugh?
Many Ohioans will still need small loans for emergency expenses and to bridge gaps in their paychecks. The payday business grew fast over a decade, spread into all counties across Ohio and are fixtures in many urban neighborhoods. If the lenders demonstrated anything with their spectacular growth, it is that many households need some kind of help to make it from payday to payday. Most people don't have a generous relative who can hand out soft loans for the asking.
Describing the situation last week after the Senate vote, Rep. William Batchelder, a Medina Republican whose own reform bill was sidelined in the House, said: ''The first part of the battle is over, but not the war.''
The ''war'' as he sees it — and correctly, too — is a two-prong challenge. One is to make sure that viable options for small loans open up quickly to fill the void that may be created when payday lenders pull up stakes. The other is to raise the levels of financial literacy in the general population, improving the capacity of borrowers to manage their personal finances to avoid the need for frequent emergency loans.
The new bill will be an empty victory if little effort is made to increase the alternatives, particularly in hard-pressed, lower-income neighborhoods that have been inundated with payday storefronts.
One result of the intense and noisy battle over payday lending is the renewed focus in the legislature on how local institutions, primarily credit unions and community action agencies, can be positioned to help fill the gaps.
A program such as the ''grace loans'' offered by the Faith Community United Credit Union in Cleveland, has proved an attractive option in low-income neighborhoods in Cleveland. Membership in the credit union is open, with a one-time fee of $1, to anyone who lives, worships or works in Cuyahoga County. The grace loan has been available to members since 1999, comes with a 17 percent interest rate on a $500 loan and is payable within a month. Borrowers are given literature on how to manage personal finances and are required also to contribute $10 a month into a savings account to help them build up reserves.
The ultimate triumph of the new legislation will lie in multiplying products such as Faith Community United's grace loans across the state.
Ofobike is the Beacon Journal chief editorial writer. She can be reached at 330-996-3513 or by e-mail at lofobike@thebeaconjournal.com
Read any number of reports on consumer finances and you catch the drift that times are tough. The theme is that the net worth of the average American household is not growing as fast as its debt load. In the past decade or so, the average household has accumulated debt faster than its income has grown and has made up for shortfalls with combinations of cash advances, home equity loans and credit cards.
Get the full article here.
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