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?