Within 48 hours of Ohio Gov. Ted Strickland signing House Bill 545 — characterized by many groups as the “country’s strongest payday lending reform law” — the payday lending lobby mobilized to fight it.
The Nov. 4 ballot included Issue 5, an initiative that allowed voters to say yes or no to the reforms passed by the Ohio House and Senate and signed into law earlier in the year. Voters embraced reform by a wide margin, with unofficial totals showing Issue 5 passing 63-37 percent.
At least one company in the payday lending business in Ohio has already announced it will close loan shops and change the services available in those that remain open.
“The passage of Issue 5 is good because it preserves the legislation in place to put checks and balances on exploitations of poor people,” says Georgine Getty, executive director of the Greater Cincinnati Coalition for the Homeless. “People work so hard to make ends meet, and they can’t. I hate to see these predatory forces come in and take what little they have. They were robbing people and getting them caught in this endless loop of owing.”
Calling the potential legal annual interest rate of 391 percent payday lenders could charge before Issue 5 passed “outrageous,” Getty says the new law’s positives far outweigh the negatives.
In addition to restricting consumers to four loans per year, the law caps the interest rate a payday lender can charge at 28 percent APR. A database will also be created to collect the names of people using payday lenders as a means to prevent people from taking out any more than the allotted number during the year.
Media focus on this specific kind of lending, combined with the current troubles in the financial industry, have brought into stark relief the issue of credit and its use and misuse, Getty says.
“One of the big things we can do is education about credit,” she says. “I don’t think people really understand credit. You can’t have a society that says, ‘Consume, consume, consume, consume, consume, consume but be smart about credit.’ We’re kind of a schizophrenic nation about that.
“Who are our role models here? We have no role models. If China called our loans we’d be in trouble. Our country is a bad role model.”
Smart Money Community Services has been in the financial education business for more than 20 years in Over-the-Rhine. The focus of the nonprofit agency is to provide financial services and economic education to underserved individuals in Over-the-Rhine and Greater Cincinnati. Having the information needed to make smart decisions about using banks, payday lenders and other options is essential to avoid getting caught up in predatory lending practices, according to Lisa Roberts-Rosser, executive director.
“We have been providing core education, and what that means is providing enough information to make a good choice regardless of what your income base may be,” she says. “It can be difficult to look past the situation you’re walking through. We have done a really good job of getting folks to trust us to get you to a place where you can be self-sufficient, which is key to having more confidence.”
Roberts-Rosser says some people can successfully use payday lenders to help them get through an immediate financial crisis but others don’t understand the terms of the agreements. She points to credit unions as a “more accessible” alternative for people who have financial difficulties or are turned away by banks.
Fully understanding your options is essential, Roberts-Rosser says, and thus Smart Money’s services are available to anyone of any income level.
“Some of the problems or hurdles that we face are the same regardless of the neighborhood you live in,” she says. “They just affect you differently because of your ability to respond to it.”
Even with some payday lenders closing shop in Ohio, it’s not likely that all of them will go away. It could be more challenging for people without bank accounts to get immediate cash for their paychecks. So what’s the solution to that new services gap?
Getty says the gap shows an obvious solution.
“Ultimately what it speaks to is the need for the banks to step up and create the banking services that are needed in these neighborhoods: second chance banking, banks in the neighborhoods, banking services that low income people need,” she says.
The reason cited most often by banks when they close a branch is lack of business or not enough profit. So the tension remains between for-profit companies and the needs of the poor that brought about the Issue 5 ballot initiative.
The reason payday lenders were singled out is because they’re so “over the top” in their effort to earn profits at the expense of the people who can least afford giving up their cash, according to Getty. The national mortgage financial crisis has also raised the question of how banks and other financial institutions earn their big bucks.
One possible alternative is usury laws that protect all consumers. A simple explanation of usury laws is offered by www.usurylaw.com: “Usury is defined as the act of lending money at an unreasonably high interest rate; this rate is defined at the state level. Repayment of loans at a usurious rate makes repayment excessively difficult to impossible for borrowers.”
The state regulation of payday lenders is specific and doesn’t get at the real issues of poverty and having access to the money we earn when we need it, Getty says.
“It is kind of ‘big brother’-y,” she concedes. “Do I think it’s over-regulated? Yeah. But I think greed overwhelms. I would be in favor of more universal usury laws.”