Ohio Passes Strong Payday Lending Protection

mousetrap loan

Showing the frustration over abusive lending practices by even many right-leaning legislators, the Ohio legislature has taken a huge step to protect its citizens against predatory lenders by passing HB 545.  The bill slashes the payday-lending interest rate from a sky-high 391 annual percentage rate to 28 percent.  In real terms, instead of having to pay $15 interest for every $100 loaned, borrowers will now pay no more than $1.08 per $100 borrowed. The bill also limits borrowers to four loans per year, requires that loan terms be at least 31 days (instead of the current average of 14 days), and bans internet payday lending.  HB 545 is now before Governor Strickland, who is expected to sign the bill into law.

Payday lending is the practice of providing short term loans, usually $500 or less, in exchange for a post-dated check or automatic withdrawal authorization that the lender waits between 1-2 weeks before cashing in.  Instead of providing short-term relief, payday lending creates a debt trap for borrowers.  For example, with a $300 payday loan, a consumer may pay $45 in fees and receive $255 in cash.  After a short period, usually until the borrower's next payday, the borrower has the option of paying back the $300 in exchange for the original post-dated check, letting the lender deposit the check, or renewing the loan if they are unable to repay it.  When the loan is renewed, the borrower does not get further funds, but instead pays another $45 in fees.  A recent Center for Responsible Lending report found that borrowers pay $4.2 billion every year in excessive payday lending fees.  

In Ohio, the number of payday lending shops increased from 107 locations in 1996 to a staggering 1562 locations in 2006.  Nationwide, there are 22,000 loan shops, disproportionately located near military bases and in communities of color.  

States have been scrambling to enact protections for their citizens.  A few recent examples:

  • In South Carolina, State Sen. Robert Ford has personally vowed to block all House-passed legislation in the Senate until lawmakers find a way to pass payday lending reform.  
  • Recently, Virginia passed HB 12/SB 588, which imposes an annual interest rate of 36 percent, a loan fee of no more than 20 percent of the loan process, and a $5 verification fee.
  • The Illinois legislature is working to close a loophole in their 2005 payday lending law that imposes a cap on short-term payday loans but none on loans longer than four months.
  • The Arkansas Attorney General, citing recent state Supreme Court decisions, has shut down payday lenders in the state as violating the state constitution and the state's Deceptive Trade Practices Act.

These state actions are a critical step in helping working families deceptively trapped into escalating debt.