Last May, I wrote about the Ohio law that, the legislature intended, would put the screws to payday lenders in that state. The law limited payday loans to four short-term loans a year
and capped annual interest rates at 28 percent. The bill also limited
loan amounts to $500 per loan, or 25 percent of a consumer's base
monthly pay, whichever is less. I was skeptical about the law.
I'm all for treating adults like adults, and as long as the fees and other terms are disclosed prior to signing, I think people ought to be free to make what I might consider to be a bad loan deal. That's especially true when there are worse alternatives available. I also have a problem with legislators deciding that 28 percent is an appropriate APR for a payday loan when a pawn shop owner can charge ten times that or more, and when the federal limit for armed services personnel is 36 percent (although payday lenders contend even that's not enough). Also, why are only four loans a year allowed? Why not five? Six? Where do they get these figures, other than out of the gaping nether regions of some consumer advocate? I have an even bigger problem with the Ohio legislature micro-managing the debt-to-income ratios.
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I'm going to be interested to see if other payday lenders follow Cash America's lead [leaving Ohio] and what will be the experience of the borrowers who were using payday lenders in Ohio after their ready, willing, and able (if expensive) source of credit dries up.
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The law of unintended consequences often bites someone, but, unfortunately, very seldom Nanny State legislators.
A couple of days ago, word came from the Ohio business press that the law of unintended consequences was playing out.
Southwest Ohio has 87 fewer payday-lending stores than it did a year ago, but many of the stores still in business are charging consumers more for short-term loans than they did before Ohio capped interest rates at 28 percent.
So concludes a new report on the state of the payday-lending industry in Ohio by the the Housing Research & Advocacy Center, a Cleveland-based group that’s calling for a new legislative crackdown on the industry.
“Payday lenders have ignored the will of the legislature, the governor, and the people of Ohio, who voted overwhelmingly to cap the interest rate on short-term loans at 28 percent,” said Jeffrey Dillman, the center’s executive director and co-author of the report. “It is outrageous that payday lenders are now charging even higher rates for their products.”
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The report details several ways that short-term lenders are avoiding Ohio’s 28 percent rate cap, including check-cashing fees and loans authorized under different licensing rules than Ohio’s new Short-term Loan Act.
The report singles out Cincinnati-based payday lender Check 'n Go, which it says “will not make a loan for $500 but will make one for $505, because the Small Loan Act allows them to increase the origination fee by $15 on loans of more than $500. Increasing the loan amount by $5 increases the cost to the borrower by $15.22 and raises the APR from 107 percent to 185 percent.”
Check ’n Go spokesman Jeff Kursman said its lending rates are actually lower than comparable loans offered by Ohio’s largest banks.
“We are charging $35.40 for that $505 loan. Banks are charging $50 for a loan of up to 30 days,” Kursman said. “We’re actually $14 less expensive than the bank counterparts.”
Check ’n Go issues the loan in the form of a check, which it will cash for a 4 percent fee, or about $20. But even after the check-cashing fee, Check ‘n Go is charging less today for that $505 loan than the $75 it received before Ohio’s interest-rate cap took effect last year, Kursman said.
“Nobody has to cash their checks with us,” he said. “If a person wants to take that check and deposit it in their checking account, it’s actually cheaper to borrow from us.”
If the payday loan customers were the type of folks who had checking accounts in a commercial bank and could deposit their checks there, instead of having to use expensive check-cashing services, they likely wouldn't be payday loan borrowers, would they? Then again, the critics aren't saying that Check'n Go or its brethren are doing anything that is actually illegal. Instead, they're accusing lenders of "ignoring the will" of "the people" and other, less humanoid beings, like legislators. I'd like to respond to that, but I have to stop laughing, first.
OK, all better now.
The "will of the people" was embodied in a very detailed piece of legislative handiwork. When you "drill down" like the Ohio legislature did, sometimes you strike oil, and other times, like this one, you strike noxious-smelling gas. The legislature micromanaged payday lending terms. Smart people can read, and understand what they read. They understand exactly what is prohibited and, being intelligent, devise loan terms (and ancillary income sources) that get them to where they want to be within the letter of the law.
This is what sometimes happens when Solons screw with private enterprise. Private enterprise finds a way to become unscrewed. Amazing what working for profit, as opposed to the acquisition and retention of political power, can accomplish, isn't it?
No doubt, the Solons will be back for round two. I can't wait.
UPDATE MARCH 12, 2009:
Although he generally agreed with this post, Hilary B. Miller, President of the Payday Loan Bar Association, took issue with the following statement: "If the payday loan customers were the type of folks who had checking accounts in a commercial bank and could deposit their checks there, instead of having to use expensive check-cashing services, they likely wouldn't be payday loan borrowers, would they?"
Mr. Miller asserts that I've conflated the practices of check cashing businesses that make payday loans with the practices of payday lending businesses generally. From an e-mail Mr. Miller sent me today:
In order to be able to obtain a payday loan, the applicant must demonstrate that he or she has an existing checking account. The borrower writes a post-dated personal check (or authorizes an ACH) for the principal plus the finance charge. On the due date of the loan, the lender deposits the check (or initiates a debit entry). That's the essence of a payday loan.
While check cashers also often engage in payday lending, the two services are very distinct because the customers of the former business generally do not have demand deposit accounts, while those of the latter must have such accounts.
I'll defer to an expert on this issue, although, in my feeble defense, I'll point out that the article cited above also confuses check cashing and payday lending businesses. I should know better, at my advanced age, to believe what I read in the press.
As my real estate law professor told me when he changed a grade on a paper I'd written, after I convinced him that he'd misread a point I'd made: "These rare moments of justice disturb me greatly."
