Ohio Politicians Pummel Payday Lenders

Ohio Could Suffer $270 million Hit to Economy, Industry Says

Payday Payback Could Haunt Anti-Industry Politicians in November

ePluribus Media OhioNews Bureau

[UPDATED]

COLUMBUS, OHIO: With a unanimous vote by members of an Ohio Senate committee that passed a bill Wednesday morning designed to severely hobble the payday lending industry here, victory went to proponents of the bill who said such lending practices entrap unsuspecting borrowers in a cycle of debt while bill opponents said the overly strict bill will lead to the loss of thousands of jobs, the shuttering of thousands of short-term lending store fronts and will result in a major revenue hit to Ohio’s already beleaguered economy.

Acting in a speedy manner to tighten up an already strict House bill that imposed business-changing reforms on the fast-growing industry of payday lending that arrived in the Senate last week, the Senate Finance and Financial Institutions, chaired by Republican Sen. John Carey of Wellston, accepted a substitute bill that incorporated a dozen amendments that funneled into the chairman’s office yesterday afternoon. None of the amendments adjusted the interest rate cap of 28 percent contained in the House version of the bill, a change bill opponents said was critical for the industry to survive.

The bill, known as House Bill 545, held the interest rate steady. It prohibits loan terms of less than 31 days, limits borrowing to four loans per year, bans Internet payday lending and provides a path for traditional lenders like banks and thrifts to make small loans.

On a vote of 29-4, the bill passed the Senate. The House will consider concurrence next week. Gov. Ted Strickland is expected to sign it into law.

In a media release received by ePluribus Media OhioNews Bureau, Danield R. Feehan, Cash America's President and Chief Executive Officer, said the company will cease store operations in Ohio as a result of the payday lender legislation passed this week by the Ohio General Assembly.

“It is indeed a sad day when state legislators decide to end a small loan alternative that has proven to be widely accepted by customers and supported by independent academic studies. Until the law becomes effective, we will continue to serve our Ohio customers’ needs for short term loans in this difficult economic environment. In the meantime, we will also be evaluating the viability of offering alternative financial services in Ohio in an effort to mitigate the impact we currently expect this new law will have on our customers, coworkers and lending locations.” Assuming no suitable alternative product is developed, Cash America expects that it will begin ceasing operations in virtually all of its locations in Ohio sometime between now and when the new law becomes effective, which could be as early as mid-August, 2008."

The debate over payday lending has been building for months. Spurred by a coalition representing about 250 advocacy, civic and religious groups that pushed for stricter regulation of the payday industry by arguing the industry’s current practices are built on luring borrowers in need of small loans into a cycle of debt as one high-priced payday loan leads to another and another as interest rates and fees mount, Ohio lawmakers, who have been divided for months between making minor reforms to or making major reforms that, among other changes, finally reduced the annual percentage rate from 391 to 28 percent, a rate the industry said would make the business unprofitable and lead to its demise.

"The theory in the (payday) business is you've got to get that customer in, work to turn him into a repetitive, long-term customer, because that's really where the profitibility is."- Dan Feehan, CEO of Cash America, at the company's 2007 annual meeting.

Of the four senators who did not support the bill, the harshest arguments were made by Republican Sen. Bill Seitz of Hamilton County in southwestern Ohio, who congratulated the coalition of groups that sought reforms to payday lending for eliminating both thousands of jobs and for eliminating an affordable option for people who need small loans to meet sudden, unexpected events, like purchasing tires for a car, as one of his constituents told him in a voice mail she left on his home answering machine.

Seitz, arguably one of the legislator's most astute legal minds and a legislator who can boil complicated matters down to layman's language and do so with a modicum of humor, told senators that the coalition that ganged up on payday lenders in order to protect borrowers from entering a so-called cycle of debt should now turn their attention to doing battle with banks and credit card companies, whose fees for bounced checks and late payment fees are, when framed as annual percentage rates as was done with two-week loans from payday lenders, are hundreds of percent higher than the 391 percent rate that garnerd headlines across the state in one editorial after another that supported the reform bill. 

Bill backers, mostly Republicans because they control the upper chamber by such a large margin, said the intransigence of the industry to make changes in their product left them little option but to vote for the bill, which by all accounts was even stricter than what bill supporters had argued for. Meanwhile, Democrats like Sen. Capri Cafaro rose to speak about the economic toll the industry's lending practices were having on individuals. Cafaro, telling a story that opposed the one from Seitz, said she sat in her district office while a man who cried in front of her told his story about taking one loan out after another to pay off previous loans. She said the man wanted her to take on th industry just to prevent cases like his from happening again.     

WHAT’S AT STAKE FOR OHIO

Although senators and representatives can tell editorial boards of Ohio newspapers that the bill heeds their call for major changes that will protect unsuspecting borrowers who don’t have options for borrowing small loans from banks or credit unions, the industry is bemoaning the pell-mell passage of this bill as more about politics than protecting consumers and said the shuttering of the industry will result in the loss of about 1,700 licensees, 6,000 of approximately 7,500 good-paying jobs with benefits being lost and a loss to the state’s economy of about $270 million in combined taxes, rent and benefits, which doesn’t include the cost of state unemployment benefits paid out to the new army of jobless workers.

Ohio’s economy has been beleaguered for years as hundreds of thousands of manufacturing and construction jobs have disappeared. Nearly seven years after the recession of 2001 ended, the Buckeye State still doesn’t have as many jobs now as it did then and continues to lag the nation in job growth. Gov. Ted Strickland has sought to bridge a potential budget deficit of between $733 million and $2 billion by reducing state employees, and is proposing a $1.57 billion spending package he and legislative leaders hope will produce an estimated 50,000+ jobs in the coming years.

Based on quantifiable components of the industry, insiders told ePluribus Media OhioNews Bureau that Ohio stands to loose $80 million in payroll, $77 million in store rent, and the value of benefits that goes with the 6,000 or so employees who will be out of a job and who will then file unemployment claims, which will cost the state more dollars in benefit payments now the bill is passed. For one company, Ohio will loose about $20 million in taxes. Gov. Strickland is expected to sign the bill. In general terms, Ohio could suffer an economic hit of $270 million.

In the past two weeks, payday lenders mounted a public relations strategy that included building a Web site comparing and contrasting costs of a loan from them to the costs of a bounced check or late payment fees from credit card companies, TV spots that warned politicians to keep government out of their borrowing decision and bringing thousands of supporter to the Statehouse in Downtown Columbus to sit in on hearings and besiege legislators at their workplace.

Another key talking point to their argument to keep their option viable was the admonition to legislators to let them have the freedom to make their own decision on when or with whom they borrow money. Freedom of choice and the responsibility to make their own decision, normally basic topics for Republicans and others who want to keep government out of personal decisions, were cast aside today.

With the passage of the bill today, it is now widely suspected that payday lenders will start shutting units down in about 3 weeks, following the same exit strategy that happened in Oregon when it similar drove the industry from the state. Some units will remain open for a time for purposes of debt collection.

Clearly, senators had not paid any attention to a recent Zogby Poll on payday lenders that showed Ohioans think state lawmakers should focus on creating jobs and improving the economy instead of reforming the payday lending industry to the point of extinction.

“Likely voters would greatly favor a state legislative candidate who backs reforms and consumer protections to improve the Payday Loan industry over candidates who favor banning it altogether, the Zogby survey shows

“The telephone survey also shows wide support for the payday loan industry and for freedom for Ohioans in making decisions about their personal finances. A huge majority – 84% – said they believe the individual citizen should be free to make their own decisions about what kind of credit they can use, and 70% said the government should not be in the business of telling adults who have bank accounts that they cannot get a payday loan if, in their own opinion, people feel that payday loans are the best option for them. [Zogby International Poll]”

An additional study performed by the Federal Reserve Board of New York revealed that when the payday lending industry left that state, bounded check fees skyrocketed to $17-a-day, supporting industry arguments that their product is both needed and necessary as it gives borrowers more options to choose from when exercising their freedom to make their own choices on borrowing or lending.

Now that Ohio lawmakers have regulated the industry out of business, an unintended consequence of their action may have opened the door for unregulated, non-licensed off-shore competitors to step into the short-term, small loan breach.

When the topic of payday lending was pitted against other issues like taxes, the war in Iraq or education, those contacted for the survey said they either didn’t care or cared very little about it.

Even though bill supporters said the industry was doing great damage to Ohioans desperate for a small loan, ePluribus Media OhioNews Bureau was told that complaints to the Ohio Department of Commerce, which regulates the industry, amounted to no more than 75 in five years, a number industry backers said proved that Ohioans were not as concerned as anti-industry advocates said was the case.

PAYDAY PAYBACK?

Even though the alleged harm payday lenders were causing Ohio borrowers struck a major chord with newspaper editorial boards who helped fan the flames that may have burned the industry to the ground, proponents of a bill that originally sought to make minor reforms that included more protection for consumers said the head of steam the bill generated in the past several weeks was more to do with politics than true concern for consumers.

One theory on the politics behind the bill says that House Speaker Jon Husted, R-Kettering, who is term limited and seeking to win a seat in the state senate, had his future and the future of Rep. Chris Widener, a term-limited member from Springfield who also seeks to move to the senate in the fall and who chairs the committee in the House that held hearings on the bill, more in view than the plight of preyed upon borrowers. Another key lawmaker, Sen. Steve Stivers, R-Columbus, running for a Congressional seat this fall and who is fighting to overcome his pedigree as a bank lobbyist turned lawmaker who sponsored major tort reform legislation that sided with industry over the interest of consumers, likely wanted an issue he could campaign on this fall that demonstrated his concern for coming to the defense of consumers.

One insider theorized that both Husted and Widener wanted to insulate themselves from the message editorial boards would have hit them with come election time had they backed the tweaked version of the bill the industry was lobbying for.

Widener was supporting the industry bill that would have kept the APR at 391 percent, but turned on a dime recently when Husted cracked the whip on him to introduce a stricter version of the bill.

As members of the General Assembly congratulate themselves for taking on the payday lending industry, they may have to look over their shoulder come fall when payday lenders may offer a little payback to those politicians like Husted or Widener or Stivers who put them out of business. EPluribus Media OhioNews Bureau was told that the formation of 527 groups, funding by payday lending revenue from other states, could come back to haunt anti-industry legislators.

SUBSTITUTE PAYDAY BILL AMENDMENTS

Database Changes- if more than 400 licensees under new section of Small Loan Act, Commerce required to do database- If less than 400 licensees, licensee is required to subscribe to a database in order to comply with loan requirements.

Eliminate “approximate” when referring to business location of new licensees.

Allow background checks under new small loan section to be one on a schedule determined through rule rather than every.

Eliminate language that Commerce believes would require them to warn a licensee every time prior to taking action under new
small loan section.

Allow Superintendent to also levy a fine of up to $1,000 under new small loan section.

Additional reporting & record keeping for licensees under new small loan section.

Clarify the divisions ability to refer cases to the Attorney General under the new small loan section- Information remains privileged and confidential.

SPA for mortgages clean up- fixes a typo in HB 545 that inadvertently would have exempted mortgages from CSPA.

Ensure that loans under the small loan act can not be broken into $100 loans to maximize fee revenue.

Clarify that a current check cash lending licensee would not be required to pay an additional license fee to become a small loan act licensee for the remainder of 2008.

Removes Banks, S & L’s and Credit Union CRC sections from HB 545.

Remove Credit Unions ability to make short term loans with 10% of principal interest rate- 1733.25 (F)

About the author

John Michael Spinelli is a former Ohio Statehouse government and political reporter and business columnist. He now serves as the OhioNews Bureau Chief for ePluribus Media Journal. Find ONB archives here. If readers have a news tip or story idea about Ohio politics or government, contact the OhioNews Bureau at: \n \n \n This e-mail address is being protected from spambots. You need JavaScript enabled to view it This e-mail address is being protected from spambots, you need JavaScript enabled to view it This e-mail address is being protected from spambots, you need JavaScript enabled to view it This e-mail address is being protected from spambots, you need JavaScript enabled to view it