Nearly a year of foot-dragging by Ohio House Republicans on a bill that would curb abusive payday lending is having the entirely predictable result: Fed-up advocates want to take the matter to the ballot.
That’s understandable, but it’s not the best option. We hope the possibility of a ballot issue spurs lawmakers to approve some version of House Bill 123, designed to ban ruinous interest rates and fees but still allow short-term lending that isn’t abusive.
But if the payday-lending lobby succeeds in killing the bill and its reasonable terms, abusive lenders could end up with something much harder to live with: The proposed ballot issue would have terms stricter than HB 123, and few will shed tears for their fate.
What we know as payday lending was illegal in Ohio until 1995. That’s when the quick-loan industry lobbied for and won an exemption from legal interest limits. Since then, thousands of Ohioans, strapped for cash, have taken out loans for a couple-hundred dollars, only to end up trapped with an ever-swelling debt they can’t repay.
When a borrower can’t repay, say, a $300 loan in two weeks, he typically takes out a second loan to cover it, and in many cases another and another, until high interest rates and added fees have swelled the balance to many times the original amount.
The effective annual interest rate is astronomical. Right now, the average in Ohio for payday loans is 591 percent, the highest in the nation.
Industry apologists claim that reining in their exorbitant rates would drive them out of business and that low-income people with bad credit wouldn’t have anywhere else to go for loans. But responsible lenders don’t float loans with unrealistic terms like a two-week payback period that they know the borrowers can’t meet.
HB 123 would limit short-term loans to 28 percent interest, plus a monthly fee of 5 percent on the first $400 owed. Payments couldn’t exceed 5 percent of a borrower’s gross monthly income.
The terms are similar to a law in Colorado, under which the payday-loan industry shrank, but survived. By contrast, the ballot issue being considered by reformers in Ohio would ban fees, allowing only the interest, capped at 28 percent.
Ohioans already proved they want an end to abusive short-term lending; when the General Assembly passed a reform bill in 2008 and the payday-lending industry tried to overturn it at the ballot, voters overwhelmingly upheld it.
Unfortunately, framers of that bill didn’t anticipate the industry’s resourcefulness, and payday lenders simply switched to operating under laws meant for mortgage lending and credit-services organizations. Not one company has registered to operate under the 2008 payday-loan law.
HB 123 would close that loophole by limiting the mortgage and credit-services statutes to higher-dollar loans.
Lawmakers owe it to Ohio voters to deliver the lending reform they demanded in 2008. HB 123 provides a good way to get that done. If legislators instead choose to continue siding with their friends in the industry, they may well find that voters have taken the matter into their own hands, and they won’t like the result.
—The Columbus Dispatch