Payday lenders, critics debate legislation

Waiting for the unveiling of Senate changes to a payday lending regulation bill, industry critics continued to pick apart those ideas Monday, while lenders worried that the current bill would shut them down.

House Bill 123 is modeled after a law in Colorado that pushed about half of the payday stores out of business but allowed others to continue operating under tighter restrictions and longer repayment periods.

Ohio’s bill is an improvement on Colorado’s law, said Nick Bourke, director of consumer finance for the Pew Charitable Trusts, a key advocate for payday lending restrictions.

But a handful of smaller payday lending operators disagree, arguing that the fees are more restrictive.

The bill would “absolutely” cause his six stores to close, said Daniel McCabe, president of Advance Pay USA. “My customers are smart people who understand the loan product and are aware of the cost.”

Sen. Bill Coley, R-West Chester, the most ardent payday industry defender on the Senate Finance Committee, said House Bill 123 misses the mark, noting that “lenders are crying to us that they can’t do business” under the proposal, which is not being used in any other state.

Coley asked why Ohio doesn’t just enact what Colorado passed in 2010.

“With due respect, I haven’t heard anybody give a single reason why HB 123 misses the mark,” Bourke said, arguing that the proposal is more flexible than Colorado’s law, meaning it would hold up better into the future.

Payday lenders say they couldn’t make enough money under the bill, which would cap rates at 28 percent annual interest plus a maximum fee of $20 per month. Bourke said he would not object to raising the fee to $30.

The bill also would not allow loan payments larger than 5 percent of a borrower’s monthly income and would cap total interest and fees at 50 percent of the loan amount.

Under the current bill, Bourke said, a typical borrower getting a $500 loan would pay about $125 a month for six months, roughly $750 total. Under a proposal from Sen. Matt Huffman, R-Lima, the borrower would repay $650 within 30 days — likely not affordable — or as much as $1,135 if the loan was stretched out to six months.

Roughly 1 million Ohioans have taken out a payday loan at some point, using the short-term, high-cost credit available to those who need fast money but might not qualify for a traditional loan.

Critics say that the short loan terms, often two to four weeks, combined with high fees and interest rates, force too many desperate, lower-income borrowers into a debt cycle, where they repeatedly re-borrow money, with new fees, to pay off a prior loan.

Huffman was expected to have an alternative payday proposal ready late last week, but it was still being written Monday.

He outlined a number of his ideas last week. Lenders on Monday called them reasonable compromises, but Bourke said the industry wants them “as the cost of avoiding true reform.” He criticized the proposal point-by-point:

• Providing six no-interest payments to pay off the loan.

This sounds like a good idea, Bourke said, but it does not solve the underlying problem when a loan requires a borrower to pay one-third or more of his next paycheck to make a payment.

“Besides, few borrowers become aware of these plans, and lenders discourage their use,” Bourke said, noting that in Florida and Michigan, the no-cost payments are used in less than 1 percent of loans.

• Creating a database of loans and ensuring that a borrower doesn’t have more than $2,500 in payday loans at one time.

That does not give borrowers a more reasonable time to repay the loan or protection against upfront fees, Bourke said.

• Requiring lenders to disclose that counseling or bankruptcy may be better options.

This can be a component of reform, but it’s not a solution, Bourke said.

• Allows third parties to pay off the loan for the borrower.

“The best way to protect borrowers is to make it unlikely that they will need a bailout in the first place,” Bourke said.