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Pay Day Lending: Does it help or hinder? Pay Day Lending FAQ’s…You be the Judge!

Pay Day Lending: Does it help or hinder? Pay Day Lending FAQ’s…You be the Judge!

July 19, 2010
By Willis, Willis & Rizzi, Personal Injury Attorneys Akron

A referendum backed by the payday-lending industry was presented as Issue 5 on the ballot during the 2009 elections.

The payday lending industry sought to overturn the rate cap portion of House Bill 545, the payday lending reform law signed by Governor Strickland in June.

Among other reforms, House Bill 545 reduces interest rates payday lenders can charge from 391 percent annual interest to 28 percent.

A majority NO vote on Issue 5 would allow payday lenders to continue charging a 391 percent annual interest rate. The fee for a $300, two-week loan would be $45.

A majority YES vote on Issue 5 would reduce interest rate charges to 28 percent. The fee for a $300, two-week loan would be $18.

Consumer protection advocates say the high-interest and short repayment business model traps borrowers in a debt cycle, requiring them to take out new loans to pay off old ones. They support a YES vote on Issue 5.

Here are some frequently asked questions and answers regarding this issue:

What does House Bill 545 do?

The most important provision caps the annual

interest that lenders can charge at 28%, down from the 391% allowed under the old law.

What prompted the Ohio General Assembly to pass the reform package?

There was growing evidence that payday loans did not solve short-term financial problems for Ohio borrowers. Instead, payday loans caused long-term financial entrapment.

Because of the deception employed by many lenders, and the structure of the loans, customers often found themselves in a long-term cycle of repeat borrowing and constant debt.

How many people in Ohio use payday lenders?

More than 300,000 Ohio payday borrowers were trapped in an unending debt cycle last year, according to the Ohio Coalition for Responsible Lending.

Has Ohio always allowed 391% interest?

No. In 1995, the Ohio legislature gave the payday lending industry a special deal on a product that was described as a two-week loan used for the occasional emergency. The interest rate and fees needed to be higher, lenders argued, because it was just a two-week loan. So the product was exempted from the state’s usury and small loan laws and was allowed to charge fees and interests which usually amount to a 391% APR.

What impact did the 1995 change have on the payday loan industry in Ohio?

The 1995 law allowed lenders to create their own demand. Borrowers moved from payday lender to payday lender to keep their loans from defaulting. Feeding on this pool of trapped borrowers, the number of lenders skyrocketed, going from 100 payday loan storefronts in 1996, to more than 1,600 today.

If the reform law stays in place, will the payday lenders disappear from Ohio?

The reform law does not eliminate jobs or force payday lenders to close their doors. The bill simply prevents lenders from charging 391% APR. Multiple product lenders, such as pawnshops, check cashers and Rent-a-Centers will continue regular operations. According to the Ohio Department of Commerce, hundreds of payday lenders are taking the legal steps to continue operating under the new law, suggesting many think they still can make money in Ohio without trapping their clients.

The District of Columbia recently capped payday loan rates at 24%, where more people turned to credit unions that offer short-term loans at much lower rates than payday lenders, according to a July 26 report in the Washington Post.

Who wants to repeal the new law?

To date, the national payday lender trade association is the only donor supporting the repeal effort.

Do most people use the payday loan for an emergency, then get their financial house in order?

The typical payday borrower takes out 11 to 12 loans per year when accounting for multi-shop borrowing. Once borrowers begin the payday lending process, it’s often hard to close out the original loan, and they typically wind up involved in the product repeatedly for up 18 to 24 months.

An expert hired by the payday loan industry, Pat Cirillo of the Cypress Research Group, confirmed the statistic when she testified on behalf of the payday lending industry.