Among the various provisions of the law, which was passed by the House and is under consideration in the Senate, are a limit on Annual Percentage Rate (APR) of 28%, restricting borrowers to no more than four loans per year, and a requirement for borrowers to participate in a state-mandated financial education class prior to a third loan.
Accordingly, in order to keep track of how many loans people take out and whether or not you need to be financially educated, there is a requirement for a state-wide data base to track such activity - and the state must develop and provide such financial education classes.
Opponents of the law have some very valid points:
* APR is only applicable to long-term loans which payday lenders don't offer. If our state legislators are so worried about usury, then maybe they should look at other types of fees that have higher APRs - like bad check fees (as high as 1400% APR) or even the late payment requirements for government utility/water bills (as high as 1200% APR). Both of these costs are equivalent to the $15 fee charged for borrowing $100 - an APR of about 391%.
* In both North Carolina and Georgia, the number of bad checks written went up after payday loans were similarly regulated.
* Using payday lending is a choice. For some people, it is a good financial choice that is cheaper, easier, more convenient and more logical than other options. There are some individuals who abuse the choice, but such individual action should not be the reason to limit the choice for everyone in the state.
Proponents make points which are based upon, imho, emotion and the idea that individuals who make poor choices need to be prevented from doing so and held harmless from any consequences:
* They routinely trot out a small number of individuals who have serious financial difficulties and have not used the option of a payday loan responsibly. They imply that most - if not all - payday loan customers are the same.
* They say that individuals are going into debt and that the state must break the cycle of debt by prohibiting these types of choices that they believe contribute to the cycle of debt. (note: eliminating one option that may contribute to some people's debt does not mean that those individuals change their spending habits nor that they stop borrowing.)
* They claim it is morally wrong to charge so much for a loan and, as a result, such companies are predatory and need to be prohibited from doing so.
Not Business Friendly
The payday lenders say this new law will put them out of business, resulting in the loss of about 6,000 jobs in Ohio. Elected officials (Rs and Ds) say they need to act in order to 'help' the citizens of Ohio and to 'protect' them from making such a financial mistake.
Even the Toledo Blade got into the act with their editorial calling these job providers 'legal loan sharks.' Of course, the editors there truly believe that government needs to take care of us and prevent us from having a choice we could abuse (smoking, mortgages, payday lending) - after all, they certainly know what's good for us, even if we don't.
"Payday industry backers claim the interest-rate cap would put Ohio's 1,600 stores out of business and 6,000 Ohioans out of work. To that we say good riddance. The state, as well as the people suckered into using their services, will be better off."
Yes, you see, The Blade thinks that running companies - employers - out of the state is a good thing!
But that's not the only anti-business comment they make.
"As we noted a year ago, the watchdog groups Policy Matters Ohio and Housing Research and Advocacy Center reported that check-cashing and payday-loan outlets have been growing like a plague in Ohio for a decade..."
This industry is growing - obviously because they are meeting multiple needs of the people who utilize them. And not every customer can be as portrayed by the proponents of the law because, if they were, these companies would be bankrupt themselves.
But note the description of Policy Matters Ohio? It's not described as the liberal, union-backed think tank that it is. (Seven of the 12 board members of Policy Matters Ohio are current or former members of unions - or represent unions in their jobs. State Sen. C.J. Prentiss, D-Cleveland, is a founding member.) It's called a 'watchdog group.' What they don't tell you is that Amy Hanauer, the founding Executive Director of Policy Matters Ohio, is on the board of Demos another liberal think tank whose latest focus/issue is debt.
"Demos is a national, non-partisan (and nonprofit) public policy, research and advocacy organization. Based in New York City, Demos publishes research reports and books, hosts public forums, and works with advocates and policymakers around the country in pursuit of three overarching goals: a more equitable economy; a vibrant and inclusive democracy; and a public sector capable of addressing shared challenges and working for the common good."
(Sounds like the other socialist, anti-capitalistic groups with whom they affiliate.)
They, along with several other organizations, want increased government regulation on credit cards, pawn shops, payday lenders and just about any other company that provides various choices for individuals.
They don't believe that such debt is the consequence of frivolous spending or irresponsible finances, but because there is too much 'inequality' in the world and poor and middle class 'families' (they never use the term 'people') are being preyed upon by such industries.
Accordingly, these national organizations are reaching out to like-minded state groups to promote laws that conform to their opinions of what financial options should be available to citizens. They've even included the National Council of Churches, which is why so many ministers have joined the debate.
Their quiz on their "new thrift" website that claims the 'most valuable current pro-thrift idea' is 'alternatives to payday lenders.'
Of course, if one industry is under attack, it's very likely that another will benefit. So, it should come as no surprise that the credit unions will be the 'vehicle of choice' for the state's new lending programs and that they, too, are intricately involved in the 'new thrift' initiative (through the National Federation of Community Development Credit Unions - a CDCU is a credit union with a specialized mission of serving low- and moderate-income people and communities).
Interestingly, credit unions are not subject to the same truth in lending laws that payday lenders and banks must follow. And credit unions also charge 'fees' which have high APRs - but since they're part of the 'solution,' such issues are being overlooked by the proponents and the legislators.
From a state perspective, the Republicans were afraid that the Democrats might own this issue during a critical state/national election cycle. So, despite significant opposition to the proposed regulations, in light of a forced vote on the issue, the GOP leadership decided to lower the targeted APR from 36% to 28% and then get behind the bill. So the bill passed with significant GOP support.
From a national perspective, this is more about controlling the economy and limiting individual choice to 'approved' industries, ones that are community-owned rather than 'for profit.' And Ohio's state-wide groups are more than willing to be a part of the effort.
Ohio is losing population and businesses. We certainly don't need to pass more laws that force particular industries out of the state.
The goal - of 'saving' citizens from these 'evil predators' so they 'break the cycle of debt' - will not be met. Removing an option that serves many responsible individuals does not mean that irresponsible individuals suddenly change their behavior.
The government should not create a state-wide data base of individuals utilizing a specific lending service. Furthermore, the state should not be mandating financial classes in order to obtain a loan. Nor should the state spend taxpayer dollars to do these things.
It is the height of arrogance to believe that the state can make a better decision than the individual when it comes to what type of loan best serves a person. And with all the criticisms of government tracking coming from the left side of the political spectrum, I find it highly contradictory and hypocritical that these same left-leaning groups are supporting a state-wide data base of people who borrow money.
This is a bad law whose intent is to eliminate payday lending in Ohio and will not accomplish the goal of 'helping' people who are financially irresponsible in the first place. The Senate should reject this and, especially, the emotional appeal being presented by the proponents.
If you agree, you can share your thoughts with our elected officials here.
* interest rates reflect risk and by limiting possible returns to a set interest rate, you effectively forbid legal loans to any group of people whose collective risk rate exceeds that rate.
* Testimony to Ohio General Assembly - Senate Finance and Financial Institutions Committee on May 7, 2008, by Tom Lehman, Ph.D., Associate Professor, Economics in Marion, Indiana
* In defense of payday loans