Federal rules are needed to fight predatory lenders
A report by the Center for Responsible Lending makes it clear that the state of Ohio is losing its long battle to rein in payday and car-title lenders, and that intervention by the federal government is overdue. The need to clamp down on the predatory practices of the industry has never been greater.
In the seven years that Ohio’s law has been in effect, 836 loan outlets have sprung up, generating more than $500 million in loan fees each year – twice as much as was collected in 2005.
U.S. Sen. Sherrod Brown, D-Ohio, long an advocate of strict regulations to govern the industry, is using the study by the Center for Responsible Lending to bolster his call for intervention by the federal Consumer Financial Protection Bureau.
“Ohio payday lenders have stayed one step ahead of the sheriff,” the state’s senior senator said last week. “The Center for Responsible Lending report shows how payday and car-title lenders have exploited loopholes in Ohio law to continue to saddle low-income borrowers with triple-digit interest rates. Ohioans shouldn’t be trapped with a lifetime of debt from predatory loans. It’s time for the CFPB to act.”
Not surprisingly, the argument put forth by the industry has not changed over the years: Payday and car-title lenders are providing a valuable service to a segment of the population that has no options when it comes to getting money on an emergency basis. And, industry officials say, the money is a short-term fix to get a borrower from paycheck to paycheck.
However, analyses of the financial transactions show that the average borrower ends up in debt for more than 200 days, paying exorbitantly high interest rates.
‘Harmful debt trap’
“Payday and car-title loans create a harmful debt trap and lead to a host of financial consequences such as increased likelihood of overdraft fees and bankruptcy,” said Diane Standaert, co-author of the study and director of state policy for the center. “These high-cost loans are draining twice as much from Ohioans than a decade ago. The findings underscore the urgency of enforcing the voter-affirmed 28 percent rate cap, and for the CFPB rules that require lenders to determine a borrower’s ability to repay the loan without refinancing or defaulting on other expenses, and establish an outer limit of 90 days in these loans to stop the debt trap.”
It should be noted that when the Ohio General Assembly passed a law in 2008 to impose restrictions on the industry, legislators were of one mind that financially vulnerable Ohioans needed to be protected from the predators. Thus, the law placed a 28 percent cap on the annual percentage rate that payday lenders could charge borrowers. The industry reacted by pushing a statewide ballot initiative to repeal the law, thereby lifting the restrictions.
But the voters of Ohio weren’t buying what the payday lenders were selling. The repeal effort went down in flames. More than 65 percent of the voters made known their support for the 28 percent annual rate cap.
But, it should come as no surprise that the industry’s defeat at the polls wasn’t the final word. The lenders found a way of skirting the law – they switched their state licenses to operate as either mortgage lenders or credit-service organizations. According to the Center for Responsible Lending report, fees charged on loans cost Ohioans $184 million a year; fees charged on car- title loans, which also carry triple-digit interest rates, cost Ohioans a whopping $318 million annually.
The report is not to be taken lightly by the federal or state governments. While Sen. Brown works on getting the Consumer Financial Protection Bureau to enact national rules and regulations, Ohio legislators should conduct hearings to determine how to reapply the 28 percent annual rate cap on loans issued by payday and car-title entities.
There’s a reason for urgent action: The lenders are now offering loans with multiple payments and longer terms, which end up costing consumers even more money. In August, more than 100 Ohio groups sent a letter to Richard Cordray, director of the CFPB, expressing concern about this trend. Cordray, former Ohio attorney general and treasurer, should pay attention to them.