Payday lenders use loophopes to maintain high loan rates
The Vindicator (Ohio)
By: Anna Tultz
March 22, 2013
When it comes to payday-lending businesses and their practices, voters and judges like to just say no.
In 2008, Ohio voters said these businesses had to stop issuing loans with exorbitant interest charges, sometimes higher than 400 percent. When these businesses decided to become mortgage brokers and still charge the higher interest rates on the short-term loans, a judge also said no.
"The reason payday lending still exists is because the lenders are using lending statutes that were not meant for short-term, high-cost lending," said David Rothstein from Policy Matters Ohio, a nonpartisan policy research organization that focuses on economic issues facing low- and middle- income workers.
In 2008, the Ohio Short-Term Loan Act was approved after 64 percent of voters agreed to a 28 percent cap on interest and fees regardless of the borrowed amount.
To get around this law, many payday lenders began licensing themselves as mortgage lenders under three different acts: The Credit Service Organization Act, which allows a lending company to arrange loans with an out-of-state third party; The Ohio Small Loan Act, which allows companies to make loans up to $5,000; and The Ohio Mortgage Loan Act, which allows companies to make loans secured by real estate as well as unsecured loans.
Under these types of loans, the businesses can charge fees for out-of-state check cashing, brokerage, origination, investigation and other services, all of which add up to as much as they used to get in interest on loans before the 2008 regulations.
Recently, however, the 9th District Court of Appeals denied payday lenders the use of one of these loopholes.
"The court basically said 'no' to small, short-term, one-pay loans under the Ohio Mortgage Loan Act," said Linda Cook, a senior attorney for the Ohio Poverty Law Center. Cook is one of the attorneys who filed as a friend of the court.
The ruling was handed down in December in a case brought by Ohio Neighborhood Finance, or Cashland, which appealed the decision by an Elyria Municipal Court magistrate.
Cashland was suing a customer with an overdue loan payment. The annual percentage rate on the loan was calculated at 245 percent.
Elyria Magistrate Richard Schwartz had ruled against Cashland, which had used its mortgage-lending license for the loan and charged fees that brought interest rates above the 28-percent limit.
Cashland appealed the ruling.
"The [appeals] court ruled that these statutes were not intended for the payday loans, and if they're going to do that, they can't lawfully make them under the mortgage loan act," Cook said.
"The 9th District is admiring the lower court decision that lenders cannot collect interest on these because the mortgage loan act was made for mortgage, not balloon payments on short term loans," said Rothstein.
The ruling is valid only in Lorain, Medina, Summit and Wayne counties.
Repeated attempts to reach representatives from Cashland to comment were unsuccessful.
What this means for the rest of the state is uncertain.
"Other courts of appeal may consider the decision if a similar case comes before them, but they are not bound to follow the 9th District, and could decide the legal questions differently," said Cook.
Cook also said the arguments used in this case could be used to support similar cases against loans taken out under the Small Loan Act, which was another way payday lenders skirted the Short Term Loan Act. However, the same cannot be said about the third loophole.
"Licensees under the Credit Services Organization Act do not make loans. Instead, among other permissible activities, they may arrange credit. Therefore, the 9th District ruling does not address the activities of CSOs," said Cook.
Rothstein said the ruling would indirectly affect the CSOs. "The CSO use would be interesting because the third-party lender in the CSO transaction is usually licensed under the Mortgage Lending Act. So it could indirectly impact the CSO transaction if the third party can't loan under that law."
Despite these questions, Cook believes that the court ruling is a step in the right direction.
"I do not believe that one appellate court decision will substantially change the current face of payday lending in Ohio, but it is a good start down the road."
It may be a small victory for Ohioans, but the payday lenders aren't giving up.
"Cashland has taken the first step in an appeal to the Ohio Supreme Court, but that does not guarantee that the court will accept the appeal," said Cook.
If the Supreme Court takes the appeal, its decision would affect the way the industry handles payday loans.
A ruling against the lenders would threaten their future business. If they can no longer use these licenses to handle loans, it would put lenders in a bind as Rothstein said. "There's a danger for the payday lenders if they appeal and lose. They would be in a tough position."
Lenders are used to this "tough position." They had the same issue in 2008 and worked their way around it.
The Supreme Court could prevent lenders from using these licenses for payday lending, but, as Ohio already has seen, it is not a guarantee the lenders will comply.
"This industry is very nimble and creative in finding ways to make exploitative loans and argue they are providing a valuable service, meeting a need," said Cook.
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