Payday Lending in Ohio

Ohio's payday lender law ("Short-Term Loan Law") protects consumers from abusive lending practices. But for many years, Ohio's payday lenders found a loophole and were able to avoid complying with the law's requirements. So, Ohio residents often paid some of the highest payday loan rates in the country.

However, the legislature changed the law in 2018 so lenders that make payday-type loans in Ohio must comply with the state's Short-Term Loan Law.

Are Payday Loans Regulated in Ohio?

In 2008, Ohio enacted its Short-Term Loan Law (Ohio Rev. Code § 1321.35 and following). This law provides significant protections for borrowers.

However, because lenders could evade this law, no lenders obtained licensure under the Short-Term Loan Law from 2008 to 2018. Instead, they made loans under other laws that were less restrictive.

How Ohio Payday Lenders Used to Evade the Short-Term Loan Law

To get around the consumer protections the Short-Term Loan Law provided, payday lenders used to do the following:

• Register as mortgage lenders under Ohio's Mortgage Lending Act (MLA) rather than as payday lenders under the Short-Term Loan Law. The MLA has fewer protections for consumers than the Short-Term Loan Law.
• Get around the MLA's interest rate cap by tacking on additional fees for "helping" the consumer find the loan.

The Mortgage Lending Act: Fewer Consumer Protections

Ohio's Mortgage Lending Act (MLA) (Ohio Rev. Code § 1322.01 and following) places a cap on interest rates but doesn't have the other restrictions found in the Short-Term Loan Law. Payday lenders used to be able to register under the MLA and offer short-term loans with terms that would have violated the Short-Term Loan Law.

The only restriction on loans made by lenders registered under the MLA is that the interest rate is capped at 25%. (Ohio Rev. Code § 1322.30). Payday lenders got around the cap by creating Credit Service Organizations, a kind of payday loan broker.

Payday Lenders Tacked on Credit Service Organization Fees

Under Ohio law, a Credit Service Organization is an organization that, among other things, helps consumers find loans. (Ohio Rev. Code § 4712.01 and following). In the past, a borrower agreed in a standard payday lending contract to hire a Credit Service Organization to "find" the loan, and the payday lender "accepted" the borrower's payment to the Credit Service Organization.

So, when an Ohio resident got a payday loan, that person typically took out the loan from a lender that was actually registered as a mortgage lender. The interest rate on the loan wouldn't be more than 25%. However, a large fee was tacked on to the loan for payment to a Credit Service Organization.

Under the federal Truth In Lending Act, the Credit Service Organization fee must be treated as a finance charge. The promissory note described the fee as a "prepaid finance charge," and it was added to the total interest the borrower paid on the loan. In the end, the interest rate stated on the promissory note was significantly higher than the 25% rate allowed under the MLA because of this additional fee.

The Ohio Supreme Court Approved the Payday Lending Loophole

The Ohio Supreme Court basically gave a seal of approval to the loophole in Ohio Neighborhood Fin., Inc. v. Scott, 139 Ohio St.3d 536, 2014-Ohio-2440. The Court held that payday lenders can also be mortgage lenders under the MLA.

Interestingly, one of the justices noted that after the passage of the Short-Term Loan Law, not a single payday lender registered as such under that law. The justice wrote:

How is this possible? How can the General Assembly set out to regulate a controversial industry and achieve absolutely nothing? Were the lobbyists smarter than the legislators? Did the legislators realize that the bill was smoke and mirrors and would accomplish nothing?

So, to address these issues, the Ohio legislature passed the Ohio Fairness in Lending Act in 2018.

The Ohio Fairness in Lending Act

Because of the Ohio Fairness in Lending Act, payday lenders in Ohio that offer loans of $1,000 or less or for a duration of one year or less can't operate under any law other than the Short-Term Loan Law.

What Are the Payday Lending Laws in Ohio Now?

Again, the Short-Term Loan Law, which payday lenders must now comply with, has significant protections for borrowers.

Restrictions on Payday Lending Practices

The Short-Term Loan Law prohibits lenders from giving you a short-term loan over the phone or by mail. (Ohio Rev. Code § 1321.36).

Restrictions on Making Multiple Payday Loans

The law also prohibits a lender from making a short-term loan to a borrower if an outstanding loan exists between that borrower and any of the following:

• the lender
• a person related to the lender by common ownership or control, or
• any employee or agent of the lender.

But this prohibition doesn't apply if the loan is being refinanced. (Ohio Rev. Code § 1321.41).

Right to Cancel a Payday Loan in Ohio

The law gives the borrower the right to rescind or cancel the loan by returning the originally contracted loan amount by 5:00 p.m. of the third business day after the day the borrower enters into the loan contract. (Ohio Rev. Code § 1321.39).

Contacting the Borrower About a Payday Loan

After making a payday loan, the lender can contact the borrower only about specific topics, and the contact must be for the borrower's benefit. Generally, the allowed topics include upcoming payments, payment options, payment due dates, and the effect of default. (Ohio Rev. Code § 1321.41).

After default, the allowed topics include receiving payments or other actions permitted by the lender, advising the borrower of missed payments or dishonored checks, and assisting the transmittal of payments via a third-party mechanism. (Ohio Rev. Code § 1321.41).

More Payday Lending Protections

Additional protections under the Short-Term Loan Law include:

• The amount of the loan is capped at $1,000.
• The loan duration can't be less than 91 days, and the maximum duration is one year. (But the minimum duration of the loan may be less than 91 days if the total monthly payment on the loan doesn't exceed an amount that is 6% of the borrower's verified gross monthly income or 7% of the borrower's verified net monthly income, whichever is greater.)
• The interest rate is capped at 28% APR (annual percentage rate).
• The lender can't make a short-term loan to a borrower if the loan will result in a total outstanding principal of more than $2,500 in short-term loans made by lenders to that borrower at any one time.
• The tactics that may be used to collect past-due payday loans are restricted. (For example, a lender can't attempt to collect from a borrower's account after two consecutive attempts have failed unless the lender gets new written authorization from the borrower to electronically transfer or withdraw funds from the borrower's account.) (Ohio Rev. Code § 1321.39, § 1321.40, § 1321.41, § 1321.411).

Also, lenders are limited to charging a monthly maintenance fee of not more than 10% of the loan or $30, whichever is less (and the fee can't be added to the loan balance to which interest is charged). (Ohio Rev. Code § 1321.40).

In addition, the lender can't accept the title or registration of a vehicle, real property, physical assets, or other collateral as security for the loan. (Ohio Rev. Code § 1321.41).

Does Ohio Require Licenses for Payday Lenders?

The Short-Term Loan Law requires lenders who make payday loans to get a license from the state as a short-term lender. (Ohio Rev. Code § 1321.36).

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Getting Help

If you need money fast, it's usually best to avoid payday loans. For information on how payday loans work and managing debt, get Solve Your Money Troubles: Strategies to Get Out of Debt and Stay That Way, by Amy Loftsgordon and Cara O'Neill (Nolo).