Saturday, June 14, 2008

The Effects of Ohio's Payday Lending Reform

Now that Governor Ted Strickland has signed House Bill 545, Ohio’s landmark payday lending reform law, what happens to lenders within the state? It likely is quite simple: door-closing time. While Dayton Business Journal’s Matt Roth wrote last month that the future of payday loans in Ohio is “hazy,” his article headline—“Payday lenders prepare to close up shop”—is telling.

Roth does have a point about uncertainty; as he writes, the state’s Small Loan Act allows for “origination fees” that might be enough to keep larger lenders alive. Still, it’s helpful to consider the situation of Oregon’s payday lenders. Last year, Oregon legislators passed a bill that capped loan interest rates at 36 percent, while allowing for an origination fee of up to $30 for a 31-day minimum loan. This was enough for many lenders to start jumping ship almost immediately. Less than six weeks after the bill took effect, 60 of them were already out of business. By September, that number was above 100; in March, the chain Check into Cash announced that they were closing their remaining stores in the state.

In comparison, Ohio has more lending stores (over 1,600 as of last year) and more of a potential customer base. Yet Ohio’s reform law is also more stringent than Oregon’s, with a capped rate of 28 percent. Moreover, origination fee limits under the Small Loan Act are smaller than those of Oregon. This is why it’s unsurprising that the lenders quoted in Roth’s article paint a bleak picture of their future.

And—putting on my editorial hat—that’s a good thing. Payday lenders and their advocates protest that they provide a vital, beneficent community service, one that would otherwise leave those in need of short-term loans high and dry. This is a blatantly dishonest argument. There is nothing vital or beneficent about a predatory system that targets vulnerable clients whom quickly fall into “debt traps.” It’s also remarkably cynical to suggest that consumers have no other alternatives to such a system. Credit unions and counseling services are much better alternatives, both in terms of financial cost and general goodwill.

Ohio citizens have every right to celebrate the potential end of the payday loan era.

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