Ohio Cash Advance Stores Skirting Law with “Payday Clones”

Everybody who pays attention to the payday loan industry knows about Ohio House Bill 545. House Bill 545, which became law in Ohio last year, caps the interest rate a payday loan company may charge at 28%. The law also limits the amount a person can borrower at one time to no more than $500 or 25% of the consumer’s base monthly pay, limits the number of loans a borrower can take out each year, and gives consumers at least 30 days to repay the loan.

Payday lenders universally believe that the short term loan business is not profitable when interest rates are capped at 28% or even 36%. The costs involved in processing the loans, collections, and defaults exceed the interest revenue earned, according to the industry. This appears to be true, given that (1) payday loan companies exit states that cap interest rates, and (2) for the most part no other cash advance companies fill the gap in these capped states. Salary Advance Loan Program–A Low Cost Payday Loan Alternative  => Salary Advance Loan Programs may be one exception to the rule.

So in Ohio, payday loan companies have figured out a way to get around House Bill 545. They do it by issuing what some are calling “Payday Clones.” Using the Ohio Small Loan Act, payday lenders realized that the could issue loans for $500, charge a $75 fee, and not violate House Bill 545. The lender accomplishes this, by among other things, charging $10 for a credit check, and then issuing the money in the form of a check rather than a wire transfer. The lender than charges the consumer to cash the check, as reported in the Columbus Dispatch.

Some in Ohio are obviously outraged by what the payday lenders are doing. State Senator John Carey recently wrote an editorial for the Chillicothe Gazette urging Governor Strickland to use his rulemaking authority to shut down this new practice:

While the General Assembly considers changes to the law, I would urge the Strickland administration to immediately use their rulemaking authority under existing statute to ensure these lenders are not exploiting Ohio consumers. The Ohio Revised Code requires the superintendent of financial institutions, who works at the Department of Commerce, to adopt rules for the administration and enforcement of state laws regulating check cashers. In addition, Ohio law says these rules shall include, but not be limited to, “reasonable business practices of persons licensed” under the relevant provisions of the Revised Code. In other words, existing state law allows the Department of Commerce to write rules that would place a cap on check cashing fees in Ohio.

Payday loan advocates respond by arguing that overdraft fees that banks legally charge costs consumers more than the cost of a payday loan. Ted Saunders, the CEO of CheckSmart who is behind the Payday Clones, articulated this view in response to Senator Carey’s letter:

The landscape in Ohio is largely one controlled by traditional banks — banks that extract significantly higher fees than state-licensed lenders. The Federal Deposit Insurance Corp.’s Study of Bank Overdraft Programs (November 2008) noted that “overdraft per-transaction usage fees ranged from $10 to $38, and the median fee charged was $27. . . . In this context, a $27 fee charged for a single advance of $60 that was repaid in two weeks roughly translated into an APR of 1,173 percent.”

Saunders also pointed out that many of checkSmart’s customers do not pay to cash their cash advance check, but take the check to their own bank and cash it for free. The result is a short term loan that costs half of what it did before the enactment of House Bill 545:

The simple fact, one that your article failed to accurately note, is that borrowers under the Mortgage Loan Act are paying far less for their loans than they were under the former payday loan laws. When a borrower takes a check or money order as proceeds of a loan, the borrower may (and many do) take that instrument to his or her bank and deposit it free of charge. For the borrowers who deposit or cash their checks at their own bank, their real cost for a two-week $400 loan is under $30, which is less than the $60 paid by them under the former payday loan law and less, according to the FDIC, than the cost of an overdraft at an FDIC bank.

You can read Saunder’s letter here.

So what do you think? Are Payday Clones a violation of HB545, or a potentially lower cost reasonable alternative for consumers?

Stupid Advice from a Payday Lender Courtesy of Google News

I’m not sure what I disdain more, the payday loan industry when it spews outrageous financial advice in a transparent attempt to snare more victims (a.k.a. clients). Or the consumer advocacy groups that rail against the payday loan industry, but utterly fail to propose workable alternatives to help people in financial need. But today I’m going to rail on the payday loan industry, and even throw Google News under the bus.

I subscribe to a number of Google News feeds, including those related to the payday loan industry. Every day I see “news” item after “news” item in the Google feed from a site called, Personal Money Store Money Blog. The blog is connected to the Personal Money Store, which is a conduit between folks need a cash advance and lenders that provide them. The site undoubtedly makes an affiliate fee or commission for each borrower it sends to a lender. So far, I’ve got no problem with it. But why are articles like, “Payday loans can help clear your credit card payment issue” ending up in a Google News feed? It ain’t news, not to mention horrible, horrible advice.

Google of course isn’t really in the business of deciding what content is “good” or “bad.” In fact, just about any site can get listed in Google News, so long as it has multiple authors. Whether the Personal Money Store Money Blog does or not is an open question. Regardless when it comes to Google News, Google should be in the business of making sure it’s news. Everyday I see a ton of articles coming through the feed from this site, and it’s nothing but crap. Here’s the advice it’s giving related to using payday loans to pay off credit card debt. First, this payday loan site talks about the evils of credit cards:

Credit card companies hurt us in the long run

Most credit card companies give an option to its customers to not pay the total amount of their credit card debt on the payment due date; this makes the customer feel happy and sometimes they eventually end up in a worse situation.

Cycle of debt

When customers choose the option of delaying payments, they may start accumulating more debt. Credit companies take advantage of this situation and take money from the customer in the form of interest. This will never help you in managing your finances. The only way to tackle it is to stop using this option and make every effort to stay away from credit card debt.

Now some might actually agree in part with this. But let’s face it, the problem isn’t that credit card companies allow extended payments. The problem is how we use that option. But the real kicker was what followed next:

Take charge of your finances

First of all, let’s start off by taking an oath that before the credit card payment day comes, you will pay your entire credit card balance in full. You might feel, how can I pay the credit card bill when I don’t have enough money? Who will lend me this money? The answer to your question is quite simple. Do you know that payday loans will help you to get out of this mess?

Really? Payday loans to the rescue! It is true that a payday loan is typically due on your next payday. But guess what? The payday lenders will be more than happy to extend your loan out again (for another fee, of course).

The point here is not that payday loans are always bad. If used properly, they can be a reasonable option in a difficult situation. But arguing that credit cards are bad and that payday loans should be used to pay off credit cards is absurd.

Salary Advance Loan Program–A Low Cost Payday Loan Alternative

The high cost of payday loans is well known. In fact, the cost is so high that some states have set interest rate caps (usually around 36%) on payday and other cash advance loans. The Center for Responsible Borrowing, which lobbies in favor of consumers against the payday loan industry, recently published a study on the payday loan industry. In that study they cited a Salary Advance Loan Program as a low cost short term loan alternative to payday loans. In this article we will review this program, which is also called a SALO program or StretchPay.

What is the Salary Advance Loan Program

The Salary Advance Loan Program (SALO) was first instituted by the State Employees Credit Union in North Carolina. The program was instituted specifically to break the payday lending cycle. Study after study shows that repeat payday loan borrowers are the most harmed by the high cost of these loans. As a result, the credit union developed the SALO program in an effort to break the costly cycle. Here is how they describe the program:

Brief Description of program
: State Employees Credit Union in North Carolina offers an alternative to payday lending. The Salary Advance Loan Program (SALO) fulfills the credit union’s desire to serve members and helps to break the payday lending cycle. The program allows members to take out salary advance loans without having to pay the fees and annual percentage rates between 200% and 900% required at most payday lenders. With the SALO program loans have a maximum ceiling of $500 and a minimum of $50 with an interest rate below 18% and no fees. The loan plus accrued interest must be repaid by an automatic debit from an SECU account on the member’s next pay date. This program is available only to those members whose paycheck is already on direct deposit with SECU. The application and underwriting requirements are minimized to make these loans convenient and accessible. Advances are available up to the credit ceiling and may be called in by phone. Basically, all anyone needs to get the loan is to be a member with a checking account, use direct deposit and not be in bankruptcy.

Help with savings

The salary advance loan program also has a savings component. Five percent of the amount borrowed is placed into a SALO Cash Account that earnings interest at the prevailing rate. This 5% savings acts as a pledge against the advance and helps to teach consumers about the importance of savings. Here’s the description of the program:

In addition SECU has implemented a cash account aimed at breaking the payday loan cycle altogether and helping the member build personal savings. The SALO Cash Account is a pledge against the salary advance loan. Each time a SALO loan is granted 5% of the advance is deposited into the SALO Cash Account and accumulates interest at the prevailing passbook rate. The cash is used to partially securitize the loan and encourages the member to save. If the member receives numerous advances the savings account grows by 5% of each loan advance and increases the amount of security pledged against the loan.

As part of the SALO loan and cash account programs the credit union has also implemented a way for the members to obtain financial education. The credit union has partnered with BALANCE, a consumer credit counseling service that is available free to members. The service can help with debt restructuring, budgeting and education so members can better understand their finances. The credit union usually recommends the member works with BALANCE after receiving three consecutive payday loans.

Other credit unions offer similar programs

Other credit unions have followed suit and are offering similar programs. Here are a few examples:

Wright-Patt Credit Union: StretchPay

Day Air Credit Union: StretchPay

First Freedom Credit Union: Payday Alternative Loan (PAL)

Payday Loan Flipping–Are Interest Rate Caps the Answer?

A 2007 Payday Loan study issued by the Center for Responsible Lending uncovered the darker side of short-term lending–repeat borrowers. Like chain smokers, repeat borrowers go from one payday loan to another. It’s not uncommon for a borrower in financial difficulty to use one short term loan to pay off an older one. Sometimes referred to as payday loan flipping, these repeat borrowers find themselves in dire circumstances that often lead to bankruptcy.

As part of the study (called Springing the Debt Trap), the Center noted the following data:

  • 90 percent of payday lending business is still generated by trapped borrowers with five or more loans, even in states that have attempted reform;
  • 60 percent of payday loans go to borrowers with 12 or more transactions per year;
  • 24 percent of loans go to borrowers with 21 or more transactions per year;
  • One of seven Colorado borrowers have been in payday debt every day of the past six months;
  • Nearly 90 percent of repeat payday loans are made shortly after a previous loan was paid off.

What causes payday loan flipping

According to the study, only 2% of payday loan borrowers pay off the loan when initially due without obtaining another loan sometime the same year. In other words, 98% of borrowers access payday loans more than once each year. The reason, according to the study, is simply that the borrowers cannot afford to pay off the loan in two weeks (the average term for a cash advance) and still pay for the basic necessities of life.

Specifically, the study found that:

The inability to repay their payday loans and meet basic needs drives consumers to continue to take out loans over the course of multiple pay periods. In fact, regulator data collected in several states shows that the average payday borrower has more than eight transactions per year.

The study further found that the majority of a payday lenders business comes from repeat borrowers. “If these borrowers only took out an occasional payday loan, lenders would be faced with sharp reductions in revenue that would threaten the viability of their business model.” Alternatively, lenders might be forced to charge more for the loans to offset the decline in demand.

Do current state law limitations address payday loan flipping?

According to the study, current state laws do not successfully address payday loan flipping. The study noted the following legislative attempts to limit payday lending:

  • Renewal bans/cooling-off periods
  • Limits on number of loans outstanding
  • Payment plans
  • Loan amount caps based on a borrower’s income
  • Databases which enforce ineffective provisions
  • Regulations that narrowly target payday loans

The study concludes that none of these measures effectively addresses the repeat borrower issuer. In fact, the study argues that such provision can make matters worse, as they tend to legitimize the payday loan industry.

Spring the Debt Trap–Is its conclusion meaningful?

The conclusion from its study is best expressed in the following, taking verbatim from the study:

Those states which enforce a comprehensive interest rate cap at or around 36 percent for small loans have solved their debt trap problem; realizing a savings of $1.5 billion for their citizens while preserving a more responsible small loan market.

This conclusion raises a very significant question, however. Where do borrowers turn if they do not have access to payday loans? One option may simply be to incur bounced check fees, late payment penalties, and other fees that often exceed the cost of a payday loan. The study concluded, however, that such consequences were limited:

While payday lenders predict doomsday scenarios for their borrowers if they are no longer allowed to charge triple-digit interest rates, former payday borrowers who no longer have access to payday loans tell a much different story. A recent study from the North Carolina Commissioner of Banks found
that “three-quarters of low- and middle-income people were unaffected by the ban on payday lending…of those that were affected by the end of storefront payday lending, more than twice as many reported that the absence of payday lenders had a positive impact on their lives.” The report
also shows that North Carolina families have a myriad of credit and other options for dealing with financial crises.

This is consistent with the industry’s own survey findings that less than 10 percent of payday borrowers took out a payday loan because they had no other credit alternatives. In addition, payday borrowers and the general public also overwhelmingly support an interest rate cap, even if it results
in less credit.