Payday lending as Ohio has known it is over — but short-term lending is not going away.
A new law takes effect Saturday with stricter limits on interest and fees, plus installment payment requirements, all designed to avoid getting desperate borrowers stuck in a debt trap.
When signed by then-Gov. John Kasich on July 30, the payday industry warned it would put them out of business, leaving those without traditional banking options nowhere to turn for emergency credit.
Ohio definitely will have fewer stores offering payday loans, and none is expected to offer vehicle title loans. More than 650 stores were operating under the old law, but beginning Saturday, that number is expected to drop to about 220 physical or virtual stores, according to license filings with the Ohio Department of Commerce.
“The criticisms we had was that we were going to shut down all payday lending. Obviously that’s not the case,” said Rep. Kyle Koehler, R-Springfield, who sponsored the law, House Bill 123. “There is going to be credit available, and we’re very pleased with that.”
Payday lenders were able to offer small-dollar loans and require borrowers to pay off the full amount, plus interest, within two to four weeks. This, critics argued, forced many lower- and middle-class borrowers to take out repeated loans, paying additional fees and interest each time.
The new law imposes a host of new restrictions, including:
• A maximum 28 percent interest rate plus a monthly maintenance fee of 10 percent, capped at $30.
• Limiting total fees and interest to 60 percent of the original amount.
• No longer allowing lenders to act as consumer service organizations, effectively ending vehicle title loans.
• Giving borrowers at least 90 days to repay the loan. If payments are limited to 7 percent of a borrower’s net income, the limit can be 30 days.
• Caps loans at $1,000 and 12-month repayments.
“Borrowers will save millions annually that can instead be spent on basic family expenses such as food, shelter and transportation, in turn helping local economies throughout Ohio,” said Danielle Sydnor, president of the Cleveland branch of the NAACP.
More than half of stores licensed under the new law will be Advance America branches, while Ace Cash Express has 39 locations and Check ‘n Go has 34.
The new law "will dramatically impact Advance America’s operations in Ohio and make significant changes to the way Ohioans borrow and repay small-dollar credit," said company spokesman Jamie Fulmer. "Time will tell what the impact of these regulations will be on the market, our ability to operate, and Ohioans’ access to credit."
Doug Clark, President of Axcess Financial and Check ‘n Go, said lenders “will have a difficult time competing in this market.”
“Big government solutions rarely benefit consumer or commercial interests but we will see how the market responds to this solution,” he said. “We believe large gaps remain in the state-regulated credit market and more credit-challenged consumers will have the most difficult time moving forward with HB 123 products.”
Koehler said some title lenders, which use a person’s vehicle as collateral, were telling borrowers in recent weeks they have to stop payments and pay off their full loans, or else their car will be taken. Koehler knows this, he said, because those borrowers were told if they have a complaint to call his office.
“That’s just shocking that someone would operate in that manner,” he said.
The new law is designed to fix a payday law passed and upheld by Ohio voters in 2008. Payday lenders were able to easily avoid the rate caps in that prior law.
Gov. Mike DeWine said state regulators will be "looking for abuses and distortions in the market" in case any changes are needed to the law.
"The majority of Ohioans want to see reform in this area, felt that what we were doing, the loopholes in the previous law, simply were not right, not fair,” he said.
The new law has attracted three new players to Ohio’s market, including Seattle-based Possible Finance, a young venture-capital-backed software company that offers short-term installment loans through a mobile app.
Possible Finance CEO Tony Huang says his loans, with fees of $15 to $23 per $100 borrowed, are paid in installments over two months and, unlike traditional payday loans, each payment is reported to the credit bureaus to help a borrower establish credit history.
The company does not roll over loans or lend to people who already have a payday loan, Huang said, and also allows borrowers to shift a repayment date by a few days, if needed.
Possible Finance uses technology that analyzes a person’s bank account data to determine if they qualify, looking at factors including income, rate of spending and other debt.
“We see the real need for affordable short-term credit as the gateway to financial well-being,” Huang said. “If you’re stuck spending a fourth of your paycheck on payday loans, overdraft fees and check cashing, you’re not ever going to be able to improve your standing.”
Huang said 5,000 Ohioans already had created a mobile account in anticipation of Saturday’s change in law. He said he hopes Ohio's new law "is a model that’s followed nationally.”
Dispatch reporter Randy Ludlow contributed to this story. Reach Jim Siegel at firstname.lastname@example.org or @phrontpage.