John Michael Sp...
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ONB COLUMBUS: A report released Wednesday on payday lending practices in Ohio shows the industry is growing with such vigor that the number of locations, which as recently as last year outnumbered the combined Buckeye State outlets for fast-good giants like McDonald’s, Wendy’s and Burger King, has expanded by another 76 units (or 5%) in one year and spread from mostly urban areas to rural Ohio, where economic conditions have soured the most.
In the report titled The Continued Growth of Payday Lending in Ohio, authors David Rothstein of Policy Matters Ohio and Jeffrey Dillman of the Housing Research & Advocacy Center analyzes data on the 1,638 payday lender or check cash lending shops from the Ohio Department of Commerce and family budgets and uses information gathered by shoppers at payday loan locations to piece together a picture puzzle of an industry whose services come at a steep high price, both in terms of exorbitant interest rates charged and the insidious affect borrowing even small amounts can have on individuals and families.
With two bills bill pending in the Ohio House, one backed by the industry (HB 337) that would not lower the maximum interest rate but would offer borrowers a one-time extended payment plan and the other (HB 333) that would lower the maximum annual percentage rate from 391 percent to 36 percent, two senators, one Republican and one Democrat, say they will introduce their own co-sponsored bill to “kick start” action they say is stalled.
Proponents of the industry-backed bill say the exorbitant interest rates charged -- $15 for every $100 borrowed for a two-week period that results in an annual percentage rate of 391 percent -- are needed for the industry to maintain its profitability. They also say their services are needed because easy credit options for those who need quick cash aren’t available from banks and other lenders.
But others who have studied the payday lending industry say that such painful lending practices can cause the borrowing of a minor sum like $300 to lead from one loan to another until the final stop is bankruptcy court
PAYDAY LENDERS NOW WIDESPREAD
Key findings from the report:
The number of payday lending stores licensed in Ohio increased from just 107 locations in 1996 to 1,638 locations in 2007, growing by a multiple of more than fourteen. There
were 76 more payday lenders in 2007 than 2006, a 5 percent increase.
In 1996, payday lenders were concentrated in urban communities. Payday lending has since become a much more ubiquitous part of the overall Ohio landscape. All but two of Ohio’s 88 counties now have at least one payday lender, and 41 counties, seven more than last year, had more than ten lenders. On a per capita basis, 68 counties had more
than one payday lender per 10,000 people.
Franklin (189), Cuyahoga (163), and Hamilton (125) counties each had well over one hundred payday lenders in 2007. These three counties represent more than 30 percent of Ohio's payday lending stores.
Large urban counties have the most payday lenders in absolute terms, but less populated counties have a greater number of lenders per capita. Of the ten counties with the highest concentrations per capita, not one is a large urban county. Belmont County had the highest concentration, with 3.56 lenders for every 10,000 people. Washington and Gallia
counties ranked second and third with 3.00 and 2.57 per 10,000 people.
Most payday lending locations in Ohio are chains or franchises. The two most common locations are Advance America (177), Cashland Financial Services (144), and First
American Check Advance (111) with more than 100 locations each.
Testers visited 36 total payday loan sites in Franklin and Cuyahoga counties, finding that all locations charged the maximum rates allowed by law. In several stores, staff was
unable to explain what the annual percentage rate meant for a payday loan.
An analysis of basic budgets for low- and moderate-income families demonstrates the near impossibility of a family paying off a $300 loan in two weeks’ time, contributing to the cycle of debt many families face.
The two groups that collaborated on the report – Policy Matters Ohio, a nonprofit, nonpartisan research institute dedicated to researching an economy that works for Ohio and The Housing Research & Advocacy Center, another nonprofit whose mission is to eliminate housing discrimination and assure choice in Northeast Ohio by providing those at risk with effective information, intervention and advocacy -- are urging Ohio lawmakers to protect consumers by first capping interest rates.
Arguing that those who go get caught up in the cycle of debt are likely to be on fixed incomes like Social Security, retirement or disability assistance, the authors say Ohio should follow the lead of the federal government, which addressed the problem for the military and their families in 2006 by passing the Talent-Nelson amendment. It capped the annual percentage rate at 36 percent.
The report points out that Oregon, New Hampshire and Georgia have adopted caps on the interest rates of payday lenders, and that nearby states like Pennsylvania, West Virginia and New York have no payday lenders. Other states like Kentucky, Virginia, and Colorado are also grappling with payday lending reform bills.
Concluding its policy recommendations, the report calls for greater transparency, more legal protections and more thorough reporting and says Ohio should enact a linked-deposit program with credit unions and banks to offer loans at low rates.
CYCLE OF DEBT: CAUSES, RESULTS
Adding even more conclusive research to the notion that bankruptcy awaits many who get ensnared in the cycle of debt that often results from repeat borrowing – an average of eight loans a year, according to payday lending industry figures – Jeremy Tobacman of the University of Oxford and Paige Marta Skiba of the Vanderbilt University Law School make their statistical case that payday loans do indeed cause bankruptcy.
Posting at Credit Slip, a blog on the topics of credit and bankruptcy, Tobacman and Skiba, using personal bankruptcy filings as a proxy for financial stress, compared filing rates for individuals in Texas who were just barely approved to borrow on payday loans with the same rates of those who were just barely denied.
The researchers concluded that a small loan taken out by already financially distress borrowers tend to produce further borrowings, and that the cumulative interest burden can be about 11 percent of the total liquid debt interest burden at the time of filing for bankruptcy. Such lending, they conclude, results in a 2.3 percent per year increase in personal bankruptcies.
Payday lenders now have more storefronts in the United States than McDonald.s and Starbucks combined. This form of short-term, high-interest credit provides small amounts of liquidity until borrowers.next paydays. Though scarce prior to 1990, each year ten million American households borrow on payday loans (Robinson and Wheeler 2003)…
Note again that payday loan interest rates exceed rates on most other forms of credit, suggesting that most pay-day loan applicants have exhausted other liquidity sources. Our .ndings are consistent with the interpretation that payday loans and interest payments on them might be sufficient to tip the balance into bankruptcy for a population that is already severely financially stressed.
We find that payday loan applicants approved for their first loans file for Chapter 13 bankruptcy significantly more often than rejected first-time applicants. [Do Payday Loans Cause Bankruptcy?]
SENATORS TIRED OF INACTION BY HOUSE ON PAYDAY BILLS
The odd couple match-up of Republican Senator Timothy Grendell and Ray Miller, a Democrat and Minority Leader, may be enough to force the lower chamber to move one of the two bills that are in a holding pattern in the House Financial Institutions Committee.
In a recent report, Grendell, who tried but failed to become the Republican Party nominee for Attorney General in 2006 and who has a reputation as a hard-nosed lawyer, said that even though he is a “free market guy,” he acknowledges that “These kind of short-term loans can come back to bite people, especially the ones who can least afford it.”
Miller, whose been undergoing intense scrutiny of his campaign finance filings by many including a member of his own caucus, represents an urban constituency whose may be apt to be hurt from payday lenders.
John Michael Spinelli is a former Ohio Statehouse government and political reporter and business columnist. He now serves as the OhioNews Bureau Chief for ePluribus Media Journal. Find ONB archives here.
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