Predatory Payday Loans

We tend to think of the parasites in our society as skinny little weasels with hollow cheeks and pencil moustaches. But greed is not solely the domain of con artists, drug dealers, pickpockets, and other felons. The worst parasites probably look more like corporate executives in expensive suits. Whether they are offering payday loans at usurious interest or enticing us into sub-prime mortgages, they take the mantel of solid citizens.

Payday loan outlets have sprung-up exponentially. I have counted at least 11 in Xenia alone. In Ohio, the number of lender locations jumped from 107 in 1996 to 1,562 ten years later. Payday loans are small short-term loans offered in storefront shops to people who need cash in a hurry. The loans are easy to get regardless of credit history. All the borrower needs to show is a bank account, proof of a steady income, a simple form of identification, and references. It takes about 20 minutes to secure a loan. They do not check credit, except to make sure borrowers haven't defaulted on previous payday loans.

The customers are required to pay the principal, interest, and fees in full when the loan is due, generally in two weeks. The fees and interest on these loans are huge, and can amount to a staggering annual percentage rate of 391 percent. If it sounds like loan-sharking, it's not. "Loan sharks are actually cheaper," said Bill Faith, a leader of the Ohio Coalition for Responsible Lending.

The biggest problem is that many people cannot repay the loans on their due dates and have to roll them over at additional interest and fees. People often take out loans for a large part of their weekly pay. If they repay the loans when they get their salaries, they will not have enough money to live on until the next paycheck. The average payday loan is rolled over at least thirteen times a year. Borrowers go from owing small amounts into overwhelming debt. One military borrower reported that he took out a $300 loan from a payday lender near his base. On paydays he would go from store to store borrowing money from one lender to pay off another. He ended up having to pay back $15,000.

When I first noticed the proliferation of payday loan outlets in Greene County, I wondered where all this money was coming from. The dirty little secret is that many of the outlets are supported by major banks. Big banks are restricted by law on how much interest they can charge on regular personal and commercial loans, but in most states there is no limit on the interest that they can charge in the payday loan business. Because of the unsavory nature of the payday loan business, the big banks fund the payday loan outlets under other names.
For some time now there has been a movement to restrict the amount of interest and fees that can be charged on payday loans. Under Governor Taft, nothing was done. Now, Ohio Attorney General Marc Dann has come out in strong opposition to such loans and has held a series of hearings to expose the scam. A number of consumer’s groups have supported legislation to limit the amount of interest and fees that can be charged by the loan shops.

Three bills have been introduced in the Ohio General Assembly to reform the payday loan industry. HB 333, introduced by Republican Bill Batchelder and Democrat Bobby Hagan, would cap payday loan interest rates at 36 percent APR and limit the number of loans borrowed per year. HB 358, introduced by Rep. Tyrone K. Yates, D-Cincinnati, sets an interest rate cap of 25 percent APR and requires all loans to be made in accordance with criminal usury laws. Then there is HB 337 backed by the payday loan industry. It focuses on borrower education and extended loan plans, but does not cap interest rates. Rep. Ross McGregor, a Springfield Republican, and Rep. Matt Lundy, an Elyria Democrat, are sponsoring the HB 337. Thirteen members of the House Financial Institutions Committee are co-sponsoring the McGregor-Lundy bill. One has to wonder why anybody would support HB 337. Is there something improper going on?

The payday industry claims that if interest on the loans is capped at 36 percent or 25 percent, instead of the current 391 percent, they will go out of business. Good! If they can’t do business without gouging their customers, they should go out of business. What appears to be a convenience for working people is actually a deadly trap that makes the credit card industry look positively benign.