Payday Lenders Use Loopholes to Continue High-Interest Loans

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Tuesday, February 02, 2010 at 6:00 am
A customer applies for a payday loan in Sacramento. (The Sacramento Bee/ZUMA Press)

A customer applies for a payday loan in Sacramento. (The Sacramento Bee/ZUMA Press)

When states from New Mexico to Illinois passed payday reform laws over the past few years, it seemed as if the movement to curb short-term loans with interest rates that sometimes reached 400 percent or more was gaining steam. In Ohio and Arizona, voters even took to the polls to approve the rate caps on payday lenders, regardless of threats that the industry would close its doors if it had to lend money at 36 percent interest or less.

But instead of shutting down, payday lenders in some of the same states that passed reforms continue making payday loans – and sometimes at higher rates than before the laws were enacted, according to public policy experts and consumer advocates who follow the payday industry. Most major payday lenders still are in business, using loopholes in existing small loan laws or circumventing new laws entirely to continue charging triple-digit annual interest rates, in some cases as high as nearly 700 percent, advocates contend. Lenders issue loans in the form of a check, then charge the borrower to cash it. They roll into the loan a $10 credit investigation fee — then never do a credit check. Or they simply change lending licenses and transform themselves into car title companies, or small installment loan firms, while still making payday loans.

[Economy1]“In Ohio, New Mexico, Illinois and Virginia, every major payday lender is violating the intent of the law,” said Uriah King, senior policy associate with the Center for Responsible Lending. “I’ve been involved in public policy issues for a long time, and I’ve never seen anything like this.”

“It is kind of astonishing. The more I look into it, the more brazen the practices are. Payday lenders, as a trade association, have consistently circumvented the intent of legislative efforts to address their practices.”

Payday lenders strongly refute that contention. Steven Schlein, a spokesman for the Community Financial Services Association of America, a payday lending trade group, said it’s simply untrue that payday lenders are circumventing the law in Ohio, or in any other state. “That argument is untenable,” he said. “It just shows you that our critics are really just anti-business.”

The dispute over Ohio’s payday lending practices began after voters upheld a 28 percent interest rate cap on payday loans in November of 2008, and many payday lenders began operating under several small loan laws already on the books. The legislature approved the cap in the spring of 2008, and payday lenders fought back with the voter referendum, but failed.

The small loan laws, which have been in existence for decades, are intended to govern installment loans, not single-payment, two-week payday loans. Payday lending opponents say the lenders are exploiting those laws to avoid the 28 percent rate cap. Lenders contend they are legitimately licensed by the state to make the small loans.

Some 800 of the Ohio’s 1,600 payday lending stores have shut down since rates were capped – and the rest are “trying to make a go of it” by adhering to the small loan laws, said Ted Saunders, CEO of CheckSmart Financial Co., a national payday lender with more than 200 stores in 10 states. “We’re lending money for far less than we did when all this started,” he said. “This is not business as usual. The activists just want to put us out of business entirely.”

Those activists are pushing the Ohio legislature to move once again, to close the loopholes in the loan laws by placing them all under the 28 percent cap. More than 1,000 payday lenders already have gotten licenses to make short-term loans under the old small loan laws, which allow for high origination fees and other charges, according to a report by the Housing Research & Advocacy Center in Cleveland.

Under those laws, for a 14-day loan of $100, lenders can charge an origination fee of $15, interest charges of $1.10, and a $10 credit investigation fee, for a total amount of $126.10, or a 680 percent annual interest rate.

David Rothstein, a researcher with Policy Matters Ohio, an advocacy group that pushed for payday lending limits, said testers for his group found that lenders sometimes told borrowers certain loan amounts, such as $400, were not allowed. But they could borrow $505. Loans over $500, according to the small loan laws, allow lenders to double origination fees to $30. Lenders also often issued the check for the loan from an out of state bank, but said borrowers could cash it immediately if they did so at their store – for another fee, often 3 to 6 percent of the loan total. Testers contended employees at some of the stores laughed as they explained the procedures, saying they were only trying to get around the new law.

In other cases, lenders directed borrowers to go get payday loans online, where rates can be higher.

“The General Assembly, in a bipartisan manner, passed a strong law on these loans and the governor signed it,” Rothstein said. “Then, the industry took it directly to the voters, who reaffirmed support for the law by some 60% despite the millions of dollars spent by the industry to overturn the law. This is a slap in the face. They are absolutely disregarding the spirit of the law that was passed.”

Saunders, however, said consumer advocacy groups promised that low-cost payday lending alternatives would pop up once the law was passed – but that hasn’t happened. Instead, there’s been an increasing demand for payday lending services by strapped consumers. “Should we be further eliminating access to credit in a bad economy?” Saunders asked. “We exist because we’re still the least expensive option for a lot of people.”

People hit by high overdraft fees from banks or faced with late charges on multiple bills sometimes decide that taking out a payday loan can be a cheaper alternative, he said.

Based on those kinds of arguments, the debate in Ohio now has shifted from how to best enforce the new law to arguing again over the merits of payday lending. Payday lenders are contending that curbing payday lending in a recession hurts low-income borrowers, and results in job losses. Lawmakers have yet to move on the latest bill to end the loopholes. King, of the Center for Responsible Lending, said that while payday reform advocates have fought in the past to make sure new laws were followed, Ohio marks the first time where the payday lending debate seems to have started over entirely.

“I haven’t seen that elsewhere,” he said. “Ohio is something new. I think there is some degree of frustration as to why we are redeliberating every aspect of this issue. It’s made a tough issue even tougher.”

Ohio isn’t alone in dealing with pushback from payday lenders, even after laws are passed.

In Virginia, payday lenders responded to laws passed last year to limit their fees by reinventing themselves as car title lenders, while still essentially making payday loans, said Jean Ann Fox, director of financial services for the Consumer Federation of America. Car title loans are high-rate loans usually secured by the borrower’s car.

State officials ordered payday lenders in December to stop making car title loans to borrowers who already had a car title loan outstanding, and to start filing liens on borrowers’ vehicles, as is the usual practice with car title loans.

In New Mexico, the state attorney general sued two small installment lenders, contending they used a legal loophole to continue charging extremely high rates on short term loans – in some cases, more than 1,000 percent. In both New Mexico and Illinois, the payday lending lobby supported reform laws, but then began using the small loan laws once the new limits took effect, CRL’s King said.

For other states, such as North Carolina, Pennsylvania, Georgia, and Oregon, state lawmakers or the attorney general had to go back and tighten laws or ramp up enforcement after initial payday reform legislation failed to rein in high fees. In Arkansas, an effort to end payday lending wound up involving the state Supreme Court and an aggressive campaign by the attorney general.

In Ohio, Saunders said payday lenders will be gone entirely if lawmakers move to limit their use of the small loan laws. The additional fees allowed by those laws, he said, are “the cost of doing business,” and companies like his can’t realistically operate without them. His solution is to launch a statewide financial literacy campaign, in which CheckSmart will provide an expert to train nonprofit groups and churches and provide them with a variety of resources to help consumers with budgeting and saving issues. The campaign won’t involve marketing payday loans or pushing any products. Saunders said he took on the idea after several lawmakers during the 2008 debate told him his firm needed to have a higher community profile. Providing financial literacy help, he said, will highlight CheckSmart’s good corporate citizenship.

“In 2010, financial literacy is a big part of what we’ll do going forward,” he said. “It’s not a conflict of interest. We’re going to be giving good, sound financial advice for free. I have nothing to hide. Look, no amount of financial literacy would solve every person’s financial shortfalls. If consumers were being served by other sectors, we wouldn’t be here. This is a way of saying, ‘We’re the good guys.’”

While consumer advocates may not see it that way, attempts in Ohio to limit charges on short-term loans also have been hampered by confusion over who should take the lead – the governor, lawmakers, the attorney general, or state agencies, Rothstein said. As that fight goes on, the question of how much people in financial peril should have to pay for a short-term loan remains as unresolved as ever, in Ohio and in many other states.

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23 Comments

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When consumer groups such as CRL argue that they are trying to protect consumers, it is easy to believe that they are being honest. When they argue for longer term, lower interest loans, they sound honest. When they attack payday lenders that changed their business model to meet those demands, they seem dishonest. To think that they think legislators and consumers do not realize their intent is to completely put anyone who ever worked in this industry out of business is insulting and offensive. Their negligent approach limits access to credit for consumers and is getting hundreds if not thousands of people laid off when these businesses shut down. Shame on them! It seems clear that these business are not circumventing the law but trying to remain in business on other products. It's how business works in America.


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To think that they think legislators and consumers do not realize their intent is to completely put anyone who ever worked in this industry out of business is insulting and offensive. Their negligent approach limits access to credit for consumers and is getting hundreds if not thousands of people laid off when these businesses shut down. Shame on them! It seems clear that these business are not circumventing the law but trying to remain in business on other products. It's how business works in America.


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