Ohio makes scant progress in phasing out payday loans

CINCINNATI — Michael Kendrick spent 12 years mixing bread dough at an Interstate Brands bakery in Cincinnati’s West End. He made it through the Great Recession only to find himself unemployed when the company was shuttered in 2012.

For seven long months after that, Kendrick, 39, struggled to get by. He ran up thousands of dollars on credit cards and got behind on bills. Soon his credit card company was garnishing his wages and filing suit.

A payday loan seemed to offer a financial lifeline to someone drowning in debt. So he took out his first loan, and quickly, he said, “it became like a revolving door. You are getting paid and then giving them all your money.” He now works two jobs, one in food service and the other in custodial work at a local university.

Then collection calls starting coming, and he found himself in over his head.

Brandon Watkins, 33, tells a similar story. He moved to Cincinnati from Alabama to live near his wife’s family. He is a cook at a casino, with dreams of one day having his own restaurant. “The first time going in, I was happy with it. I got money in my hand very quickly, and all I needed was my pay stub. I had to make ends meet,” said Watkins, who is married with four kids. But he ended up taking out more payday loans, including from online shops.

Meanwhile, struggling Ohioans just go in deeper. “I’ve seen people with five or six payday loans out at once,” said Tim Brandon of Graceworks Credit Counseling, a nonprofit debt-counseling firm in Dayton. As people struggle to meet their loan payments, they go to competing payday lenders for new loans to pay off the old ones.

He said negotiating with the payday lenders isn’t an easy proposition. “They are very difficult,” he said. “You have to persuade them that a little money is better than nothing and that if they don’t negotiate, the client may file for bankruptcy and they’ll get nothing. They don’t like calls from us.”

Jeffrey Diver, the executive director of Supports to Encourage Low-Income Families, a social service agency in Hamilton, Ohio, said predatory lending is a big problem. “I wouldn’t advise someone to get a payday loan under any circumstances. Borrow money from a family member. Work out a payment plan with the creditor,” he said.

So how did Ohio get to this point? Payday lending came onto the scene in the state in 1996, when the legislature made a special carve-out in Ohio’s small dollar loan regulations by passing the Check Cashing Loan Act. It allowed check-cashing stores to offer short-term loans and created a niche for companies to offer high-interest loans to the most marginal.

“But the experiment has failed. It wasn’t people dealing with unexpected emergencies or their car breaking down who have been visiting payday lenders. Instead it is people looking for help paying their regular bills,” said Nick Bourne, who heads the Pew Center’s small dollar loan project.

This use of payday loans for everyday expenses is the prime reason the business model doesn’t work, he said. “When the underlying need is so the working poor can get help paying their bills, a balloon payment that takes one-third of their paycheck is not relief … They need a longer term loan with safeguards,” he said.

Much is now riding on proposed payday loan reforms coming from the Consumer Financial Protection Board (CFPB) this fall. But the federal-level guidance might not be enough.

Bourne points to Colorado has a model for reining in predatory lending. In 2010, Colorado’s legislature passed a package of reforms that allows for repayment of payday loans over a longer period at a more reasonable rate.

“Colorado shows us that a reasonably structured payday loan can have about one-fourth the interest rate … that a typical payday loan has and still be profitable for the lender, and banks and credit unions could make access to credit for even less,” he said, adding that the key to neutralizing payday lenders may well rest in simply giving mainline financial institutions the tools to compete.

Unfortunately, Bourne isn’t overly hopeful that the forthcoming CFPB reforms will bear much fruit in Ohio because of one last Buckeye State loophole: the CSO statute. Ohio is one of only two states to have CSO laws on the books, allowing lenders to act as brokers for loans. The fees charged are technically brokerage fees, not interest.

“Ohio lenders will be able to shift to installment loans using the CSO model. It’ll take a lot of enforcement and tightening of Ohio’s laws to solve that problem,” he said.

Policy Matters Ohio helped shepherd the 2008 reforms to the ballot box. Williams said there was awareness of loopholes, including the CSO, at the time. “The legislature recognized that there were loopholes but … there was so much momentum to get it passed, everyone figured they’d just pass it and go back and close the loopholes later, but that never happened,” she said.

One of the reasons the loopholes were never closed, some suspect, is the large amount of money the payday lending industry funnels into legislators’ campaign coffers.

“One of the ways in Ohio that payday lenders have not only been able to survive but thrive is they've found the loopholes and because they have an active lobby. Because they make significant contributions, they are able to influence the process and will halt anything that will rein in the loopholes,” said Catherine Turcer, a policy analyst with Common Cause Ohio.

A review of Ohio’s campaign finance filings show the strong presence of payday lenders. The contributions range from as small as $350 from Cash America for state Rep. Tim Ginter’s (R-Salem) 2014 re-election to $2,500 for state Sen. Chris Widener’s (R-Springfield) 2012 re-election, also from Cash America. The payday loan largesse is especially evident in Ohio’s Senate. State Sen. Kevin Bacon (R-Columbus), for instance, received $1,000 from Ohio-based CheckSmart and $500 from Cash America during the last election cycle. On the federal level, Republican Rep. Steve Stivers has received $69,625 from lender lobbyists.

Turcer said the cash drives the policy. “If our legislators were concerned about the voters rather than donors, they would close the loopholes. Clearly the interests of their campaign contributors weigh on them more than consumers, who are the poorest of the poor and who are really struggling.”

But it is the struggling consumer who payday lenders say they are standing up for.

“It is clear that people want and need our product. The marketplace speaks very loud and clear on this topic. And if we were not here, people would use unregulated lenders on the Internet. We are filling a need. A lot of our customers are unbanked, and they need us,” said Pat Crowley, a spokesman for the Ohio Consumer Lenders Association, a trade group of payday and nontraditional lenders.

He said many of the arguments people use against payday lenders are unfounded or unrealistic. “People get caught up in the interest rates because these are presumed to be on a year loan, but the average loan is two weeks. Our customers are aware of the fees paid going in and appreciate the convenience,” he said.

Crowley said lenders are waiting to see what reforms the CFPB might roll out. “We are all for a conversation about some national standards,” he said, pointing to Florida as a possible model. Florida allows for payday loans of no more than $500, with a limit of one loan at a time and a database to tracks consumer usage. He said his group opposes interest rate caps.

Some traditional lenders, however, are already making moves. Cleveland-based Key Bank has been one of the first to jump into the short-term loan market, offering loans of $250 to $5,000, capped interest rates tied to the prime rate. Its loan program has been lauded by Congress as a model. Bruce Murphy, the executive vice president and head of corporate responsibility at KeyCorp, said Key tries to take a holistic approach when dealing with its most marginal customers.

Among other services KeyCorp offers are a competitively priced check-cashing service and a savings program.

“I think the markets have to be regulated in a way that does no harm to consumers, that doesn’t get them in a debt cycle, so I worry about those kinds of issues,” he said.

But for people like Watkins and Kendrick, whatever reforms the CFPB unveils are too little, too late.

“I’m just going to keep grinding it out, but I would like to see the payday lenders put out of business,” Kendrick said.