Payday Loans in Ohio? Only if You’re a Bank!

The common complaint by Ohio payday loan companies regarding the hotly contested state House Bill 545 is that it makes it impossible for them to conduct business. With an annual percentage rate cap of 28 percent, loan companies are able to charge customers only 1.08 percent interest per $100 of a four-week loan (previously two-week).

That amounts to a profit of $1.08 for every $100 loaned

Does it seem to you that paydayloan establishments will be able to pay their leases, staff or tiny fragments of their electric bills with that small amount of profit from their services? It’ll never happen.

Yet Ohio Gov. Ted Strickland signed House Bill 545 on June 2, 2008

This established strict regulations for pay day loan businesses in Ohio. In addition to capping the annual interest rate at 28 percent, the bill set a $500 borrowing limit for consumers and restricted borrowers to four loans per year. It also extended loan terms to 31 days from 14 days.

HB 545 went to a citizens’ vote. It was approved during the November 4 election, and will go into effect by the end of November. Strickland had this to say about the legislation:

The bipartisan legislation takes a major step toward protecting Ohio consumers who are already struggling with debt by strictly regulating payday lenders and lowering the maximum interest rate for short-term loans.

Yet it’s OK that banks offer what amounts to pay day loans?

Apparently, select Ohio banks and credit unions have been offering these loans under other state lending statutes that allow them to charge interest and fees that add up to triple-digit annual interest rates.

Here again, the concept of an annual percentage rate shouldn’t apply. Now under HB 545, we’re talking about 31-day loans, not annual loans. This applies to paydayloans from a traditional short-term consumer lending organization, a bank or a credit union.

If banks and credit unions can do it, so should the smaller lenders

Are they afraid of competition? Perhaps they are. But the banks also know that offering unsecured short-term loans at 28 percent APR isn’t a sustainable model. It will lead their clientele swiftly into the arms of overdraft protection when emergency expenses pop up. As has been documented in places like this and many others, overdraft protection is a much more expensive proposition.

In the meantime…

While the banks are sopping the biscuit, many short-term lenders have begun closing their stores and leaving Ohio. Some are seeking licenses under the Ohio Small Loan Act and the Ohio Mortgage Loan Act that allows them to charge APRs that can reach 223 percent on a two-week $200 loan. That proves to be sufficiently profitable for the lender and easier to pay off for customers.

Because those acts are on the books in Ohio, it is unlikely banks will offer short-term consumer loans at interest rates close to what consumer advocates had envisioned when HB 545 was proposed, said Marc Kilmer, a policy analyst at the Buckeye Institute for Public Policy Solutions. They are critical of the bill.

Also in the meantime, Gov. Strickland says no to short-term consumer lending, but apparently has little problem with his employees who engage in pedophilia:

No fax payday loans are in demand and beneficial

In the study “An Experimental Analysis of the Demand for Payday Loans” by collegiate professors and researchers Bart J. Wilson, David W. Findlay, James W. Meehan, Jr., Charissa P. Wellford, and Karl Schurter, the researchers conducted a laboratory experiment to examine the extent to which the existence and use of payday loans affects individuals’ welfare in an economic environment in which individuals with limited income and financial resources encounter uncertain expenditures. (p. 14)

After analyzing the pros and cons of research that has been compiled over the past 10 years regarding payday loans, they conclude on p. 33 as follows:

We found that the majority of subjects in our experiment benefited from the existence of and their subsequent use of payday loans.

Further studies like those by Dartmouth economics professor Johnathan Zinman suggest that the absence of payday loan companies from Oregon has a negative correlation with the overall financial health of citizens. Studies regarding this useful short-term consumer loan product are appearing more frequently as we come to understand that offering consumers choice when it comes to money is beneficial.

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