On 16/04/2024, Ohioans for Payday Loan Reform, group of faith leaders, AARP Ohio, the Ohio Poverty Law Center, and others, celebrated the fifth anniversary of the full-fledged implementation of House Bill 123 in Ohio at the Ohio Statehouse.
Looking For a Payday Loan in Ohio?
The Ohio Fairness in Lending Act is drafted by two former Representatives, Kyle Koehler, a Springfield Republican, and Michael Ashford, a Toledo Democrat. It restricts interest rate exceeding 28% and charging $30 as a monthly fee.
According to a report based upon a review of data provided by the Ohio Department of Commerce by the Ohio CDC Association mentioned that Ohio households have saved around $300 million in interest and fees since the last part of the law became effective on April 27, 2019.
The bill was presented in 2018 when the lenders found a loophole in the 2008 law that also capped short-term loans at 28%. After the 2008 law came in force, payday lenders started applying Mortage Lending Act to offer loans at higher interest rates. The Ohio Supreme Court upheld this procedure.
However, House Bill 123 now applies the $1,000-limit to short-term loans. Loans can’t be secured by auto titles. Lenders can’t demand more than 60% of the loan amount as interest or fees. Loans must be repaid in a 90-day period, unless payments exceed 6% of a borrower’s gross income.
According to Carl Ruby, senior pastor of Central Christian Church in Springfield, borrowers were mostly taking loans to cover their monthly bills. Consequently, they were paying back from a big portion of their income, which led them to financial troubles. The enactment of a limit on monthly payments at 6% was a huge relief for borrowers.
Under the new Act, payday lenders can’t have unlimited access to borrowers’ checking accounts. Moreover, if the loan maturity terms are more than 90 days, the interest or fees charged can’t be more than 60% of the loan principal.
Ohio followed the example of Colorado law to reform payday lending. Ohio’s law was mirrored by Virginia in 2020 and Hawaii also formed law following Ohio’s in 2021. The coalition has a watchful eye on any new regulations or store policies that could potentially let lenders evade the reforms introduced by HB 123.
A judge from Franklin County identified the lines of credit afforded through CheckSmart stores that approached the $1,000 limit as an attempt to get around the law. CheckSmart had the loans in partnership with Green Bear and declared that it stopped offering them in 2019 after many customers had filed complaints to the Ohio Attorney General office under Dave Yost’s leadership.
CheckSmarts’ parent firm, Community Choice Financial, which is located in Ohio, declines to comment on the issue. The organization together with other payday lenders was opposing the bill.
A Brief History of Payday Lending Law
Over a century ago, when there was no mass market for consumer credit, informal providers of consumer credit started to appear. This led to lots of problems. These ‘salary lenders’ offered one-week loans with APRs (annual percentage rates) ranging from 120% to 500%, the same as some of today’s payday lenders charge. And to ensure the repayment, these dishonest lenders used wage garnishment, public shame, blackmail, and especially the threat of job loss.
The legislators of the state tried to prevent salary lending at the same time as they promoted consumer loans from licensed lenders. Another change involved an exception to the standard usury interest rate cap for small loans (interest rates could go as high as around 6% annually in all original countries and states).
In 1916, the first Uniform Small Loan Law appeared, permitting up to 3.5% monthly interest on loans up to $300. This law was somewhat adopted by approx. two-thirds of states with annualized interest rates from 18% to 42 %. This was followed by an increased demand from consumers seeking the small dollar credit, which led to emergence of a market for installment lenders and personal finance companies order to meet this need.
During the mid-20th century a financial industry began to emerge for mass-consumer market, providing access to many credit products like credit cards and mortgages for purchasing homes to facilitate household consumption. During this time, the effectiveness of state laws in regulating national lenders was on inadequate.
The 1970s and 80s witnessed a series of federal banking laws that relaxed regulations on federally insured depositories, mortgage lenders, credit card lenders and other financial companies, granting them rights to disregard the state’s usury laws. Consequently, some state legislatures approved deferred presentment transactions (loan against post-dated check) and triple-digit APRs in an attempt to act in kind of state-based lenders.
Such innovations set the stage for the proliferation of state-licensed payday loan storefronts. The number of payday lending businesses grew more than any other kind of financial services from early 1990s until first part of the 21st century.
Small-dollar credit landscape is undergoing transformations, and some of the federally chartered banks, which did not lend in the past, now offer the ‘deposit advance’ loans. These products don’t differ from traditional payday loans in that they bear a triple-digit APR and an obligation to pay the stipulated amount on the next payday.
Besides that, online lending is also booming and this raises the problem for state regulators. The national banks are normally exempted from state lending laws and online providers usually outsmart the authorities through formation of companies in states with unsury caps.
Even though payday lending is not one of the key elements of federal legislation, this situation is changing gradually. The Talent Amendment, which was incorporated in the 2007 defense authorization bill, aimed to preserve military families from predatory payday lending. This law posed the first of its kind, 36% interest rate limitation on military service members and their immediate relatives.
Lastly, the Consumer Financial Protection Bureau (CFPB) was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which empowered this new organization to regulate all payday loans in general.
