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Payday Lenders "Will Stop at Nothing" to Avoid Rate Cap
Payday lenders are now pursuing two separate referendums, each with the goal of allowing them to charge customers up to 391 percent annual interest on a typical two-week loan. Consumers decried the industry's tactics and called on Ohio's attorney general to reject the misleading and deceptive petition summaries the lenders are using as they try and qualify both measures for the November ballot.
In a letter dated today, Bill Faith, executive director of the Coalition on Homeless and Housing in Ohio, asked Attorney General Nancy Rogers to reject both summaries, saying, "The payday lenders will stop at nothing. It's no surprise that they are attempting to subvert democracy on the eve of July Fourth. Democracy thrives on openness and truth, not deception."
On June 19, Rogers rejected the summary used on the industry's first referendum because it was not a fair and truthful explanation of the legislation. The lenders responded by drafting a new summary, and by launching a second referendum.
The industry's well-documented abuses prompted state legislators in May to adopt House Bill 545. Considered among the nation's most comprehensive payday lending reform measure, the measure was signed into law June 2nd. Along with the 28 percent rate cap, it included provisions to curb repeat borrowing and crack down on abusive collection tactics.
Payday lenders have mounted a well-financed campaign against the law that now includes two efforts to avoid the rate cap.
The first petition asks voters to overturn the new law entirely - including the 28 percent rate cap -- while the second seeks to overturn only the portion of the law that ended the industry's exemption from usury laws. Specifically, it attempts to delete just that part of House Bill 545 that repealed Ohio's Check-Cashing Lender Law, a statute that exempted the industry from the state's usury law and permitted payday lenders to charge up to 391 percent annual APR.
If the industry's latest referendum is successful, that exemption would remain in effect and the industry could continue to gouge those in need of short-term cash.
The petition summary used in the latest referendum "misleads voters by not explaining the impact passage would have on the rate cap,'' Faith wrote in his letter to Rogers. "The summary does not mention either the 28 percent rate cap or note that voter approval of this referendum would result in lenders being permitted to charge 391 percent APR.''
The 28 percent cap is the cornerstone of the new reforms, and Rogers cited the lenders' failure to include the rate cap on the first petition summary among the reasons she rejected it. Her decision forced the lenders to circulate new petitions with a new summary, but Faith called on Rogers to reject the latest effort because its summary is unfair and unclear.
"It is not a summary; it is a soliloquy,'' Faith said, noting that the "summary'' contains a 15-page technical analysis borrowed from the state's bill-drafting agency. The rate cap is not even mentioned until page six.
· Repeals the current Check-Cashing Lender Law in its entirety and enacts the bulk of the repealed law's provision with changes in a new Short-Term Lender Law.
· Requires the Superintendent of Financial Institutions to create a statewide database of loans made by licensed short-term lenders.
· Creates a short-term installment loan linked deposit program.
· Revises the authority of state officers with respect to making appointments to the Consumer Finance Education Board and expands the Board's responsibilities.
· Establishes the Financial Literacy Education Fund.
· Authorizes state chartered banks, savings and loans, and credit unions to make loans per the terms and conditions of the Short-Term Lender Law.
· Provides special conditions for nonprofit corporations to obtain a license under the Short-Term Lender Law.
· Establishes that a violation of the Short-Term Lender Law is a violation of the Ohio Consumer Sales Practices Act.
Conditions for a short-term loan (interest rates and fees)
(R.C. 1321.39 and 1321.40)
Under the current Check-Cashing Lender Law, a licensee may charge a loan origination fee of $5 per $50 of the amount of the loan up to the first $500 of the loan and $3.75 per $50 of the amount of the loan between $500 and $800, plus interest at a rate of 5% per month or fraction of a month. Also, a licensee may charge an amount not exceeding $20, plus any amount passed on from a financial institution, for each returned or dishonored check, share draft, or negotiable order of withdrawal.
The bill sets forth that a short-term lender may charge interest not to exceed an annual percentage rate of 28%. For the purpose of the Short-Term Lender Law, interest is defined as "all charges payable directly or indirectly by a borrower to a licensee as a condition to a loan, including fees, loan origination charges, service charges, renewal charges, credit insurance premiums, and any ancillary product sold in connection with a loan made pursuant to sections 1321.35 to 1321.48 of the Revised Code" (R.C. 1321.35). The bill also limits the lender to one check collection charge per loan not exceeding $20.
Under the bill, the amount of a short-term loan may not exceed $500 (current law limits check-cashing lender loans to no more than $800).
Under the current Check-Cashing Lender Law, the duration of a loan may not exceed six months. The bill does not establish a maximum duration for short-term loans, but specifies that such loans may not have a duration of less than 31 days.
New prohibitions on short-term lenders
(R.C. 1321.41)
Under current law, a check-cashing lender is prohibited from making a loan to a borrower if there exists an outstanding loan between that check-cashing business and the borrower. Also, check-cashing lenders are prohibited from collecting treble damages in connection with a civil action to collect a loan after default (R.C. 1315.41).
The bill additionally prohibits a short-term loan licensee from engaging in any of the following practices:
· Making a loan to a borrower if there exists a loan between any licensee and that borrower, if a loan between any licensee and that borrower was terminated on the same business day, if the borrower has more than one outstanding loan or if the loan would obligate the borrower to repay a total amount of more than $500 to licensees, or indebt the borrower, to licensees, for an amount that is more than 25% of the borrower's gross monthly salary not including bonus, overtime, or other such compensation, based on a payroll verification statement presented by the borrower.
· Bring or threaten to bring an action or complaint against the borrower for the borrower's failure to comply with the terms of the loan contract solely due to the check, negotiable order of withdrawal, share draft, or negotiable instrument being returned or dishonored for insufficient funds. The bill stipulates that its provisions do not prohibit such conduct, action, or complaint if the borrower has intentionally engaged in fraud by, including but not limited to, closing or using any closed or false account to evade payment.
· Making a short-term loan for the purposes of retiring an existing short-term loan between any short-term lender business and that borrower.
· Requiring the borrower to waive the borrower's right to legal recourse under any otherwise applicable provision of state or federal law.
· Accepting the title of a vehicle, real property, physical assets, or other collateral as security for the obligation.
· Engaging in any device or subterfuge to evade the requirements of the Short-Term Lender Law including assisting a borrower to obtain a loan at a rate of interest that would be prohibited by the bill's provisions, making loans disguised as personal property sales and leaseback transactions, or disguising loan proceeds as cash rebates for the pretextual installment sale of goods or services.
· Assessing or charging a borrower a fee for prepaying a loan in full prior to the maturity date.
· Failing to comply with the debt collection practices proscribed by the bill (R.C. 1321.45).
· Recommending to a borrower that the borrower obtain a loan for a dollar amount that is higher than the borrower has requested.
· Making a loan to a borrower who has received two loans within the previous 90 days from licensees, unless the borrower has completed during that period a financial literacy program approved by the Superintendent.
· Drafting funds electronically from any depository financial institution in this state, or billing any credit card issued by such an institution. The bill specifically states, however, that conversion of a negotiable instrument into an electronic form for processing through the automated clearing house system, for the purposes of the Short-Term Lender Law, is not considered an electronic draft.
· Making, publishing, or otherwise disseminating, directly or indirectly, any misleading or false advertisement, or engaging in any other deceptive trade practice.
· Offering any incentive to a borrower in exchange for the borrower taking out multiple loans over any period of time, or providing a short-term loan at no charge or at a discounted charge as compensation for any previous or future business.
· Making a loan to a borrower if the borrower has received a total of four or more loans, from all licensees combined, in the calendar year.
· Presenting a check, negotiable order of withdrawal, share draft, or other negotiable instrument, that has been previously presented by the licensee and subsequently returned or dishonored for any reason, without prior written approval from the borrower.
· Changing the check number, or in any other way altering a check, negotiable order of withdrawal, or share draft, prior to submitting such check, negotiable order of withdrawal or share draft for processing through the automated clearing house system, or submitting false information about any check, negotiable order of withdrawal or share draft to the automated clearing house system.
A person who violates any of these provisions is guilty of a misdemeanor of the first degree (R.C. 1321.99, not in the bill).
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