Monday, November 3, 2008

Issue 5 and the Dishonesty of the Payday Lending Industry

Ohio voters will have no fewer than five statewide ballot measures to consider when they step into the voting booth tomorrow. While Issue 6's proposal of a $600 million casino project has become the most controversial (and costly) measure at this point, we still shouldn't overlook Issue 5 and its implications for payday lending reform. Although it has been less than six months since Governor Strickland signed House Bill 545, a rejection of Issue 5 will repeal the bill's 28 percent interest-rate cap. Consequently, payday lenders would once again be able to charge up to 391 percent interest on short-term loans.

Payday lenders and their supporters that are on the "no" side are primarily relying upon three arguments: 1) payday loans are the only viable option for consumers in need of short-term financing; 2) reform represents unnecessary government interference due to the creation of a database that records loan transactions; and 3) reform will cause lenders to shut their doors, leading to the loss of some 6,000 jobs statewide. As newspaper editorials and columnists around the state have documented, all of these arguments are (perhaps unsurprisingly) disingenuous:

--Cheryl Harris of the Cleveland Plain Dealer notes that the lenders' argument about viable financial options is really an effort to avoid describing how their loans actually work. The truth is that there are short-term alternatives--credit cards, bank and credit union loans, overdraft protection for checking accounts, credit counseling services--that are all better options than pre-reform payday loans. This comparison chart demonstrates why.

--Syndicated columnist Thomas Suddes dismisses the complaint over government interference by writing that "lenders themselves mishandle such data. Cincinnati-based Check 'n Go paid the state of Texas $220,000 in May because Check 'n Go 'exposed customers to indetify-theft [sic] by discarding records in easily accessible trash cans'--records such as borrowers' names, addresses, Social Security and driver's license numbers, and checking account information. It takes a lot to disgust Congress, but payday lenders did."

--Are payday lenders crying wolf when it comes to their claims that 6,000 jobs--their entire in-state workforce--will disappear. If Issue 5 passes, there is a distinct possibility that the industry will have to eliminate some jobs. But it's incredibly unlikely that the number will reach 6,000 because, according to Suddes and the Columbus Dispatch, over 70 percent of the state's payday lenders--1,149 out of around 1,600--have already applied for licenses as small-loans and/or second mortgage operators. Contra their own claims, they won't be vanishing from the state anytime soon.

When we add up the facts, the Dayton Daily News is correct to point out that what payday lenders are arguing is, in a word, "baloney."

UPDATE: Issue 5 has passed, with 63 percent of voters in favor.


Anonymous said...

But, what about improper government intervention into what people do with their own private lives? The real issue with payday lending locations is the misuse of the services by some; when they are used properly, they can work as an emergency source of funds when there is not time to go through a bank process. It is not up to the government to regulate a system when it is being abused by a portion of people who have the freedom to do what they wish with their funds, especially when eleiminating the service can be so detrimental to those who are using it properly.

YesOn said...

I hope we defeat Issue 5 today. We need to regulate the pay day industry. It was bad loans that got us into this financial mess - let's uphold the smart decision our legislature made and clean the industry up up.

Yes on Issue 5!

Anonymous said...

Issue 5 has passed, allowing the government to step in where they should not be needed.

In response to YesOn, I agree that bad loans have helped to ruin our economy, but the majority of those loans were mortgage loans, not loans made by these pay day lending instituions. It is the government that had deregulated mortgage loans from banks that had caused many of these bad loans to be made and eventually led to the large number of foreclosures. I stand by the fact that the pay day lending industry can be effectively used and could have served as a valuable tool to many had they remained without unnecessary government control.