Payday Lending in Ohio: How Lenders Get Around the Rules
Ohio's Short-Term Loan Act restricts what payday lenders can charge and prohibits them from engaging in certain abusive lending practices.
Ohio's payday lending law is one of the best in the nation when it comes to protecting consumers. Unfortunately, Ohio's payday lenders have found a loophole in the law, and as a result Ohio residents pay some of the highest payday loan rates in the country. (To learn what payday loans are, how they work, and why you should avoid them, see Avoid Payday Loans.)
(Find out about other Ohio consumer protection laws.)
The Ohio Short-Term Lender Law
In 2008, Ohio enacted the Short-Term Lender Law (“STLA”). The STLA contains significant protections for borrowers. It prohibits lenders from giving you a short-term loan over the phone, by mail, or through the Internet. Additional protections include:
- The amount of the loan is capped at $500.
- The loan duration cannot be less than 31 days.
- The interest rate is capped at 28% APR.
- The amount due may not be more than 25% of your gross salary.
- The number of loans a borrower may take within specified periods of time is restricted.
- The tactics that may be used to collect past due payday loans are restricted.
The STLA requires lenders who make payday loans to register with the state as a short term lender. The STLA is similar in this respect to other Ohio laws that regulate lending. For example, mortgage lenders must also register with the state, as must organizations that help consumers find lenders who will offer them loans.
How Payday Lenders Evade the Law
To get around the consumer protections provided by the STLA, payday lenders do the following:
- Register as mortgage lenders under Ohio's Mortgage Lending Act ("MLA"), rather than as payday lenders under the STLA. The MLA has less protections for consumers than does the STLA.
- 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”) places a cap on interest rates, but it does not contain any of the other restrictions found in the STLA. Payday lenders registered under the MLA are able to continue to offer short term loans with terms that would have violated the STLA.
The only restriction on loans made by lenders registered under the MLA is that the interest rate is capped at 25%. Payday lenders get around the cap by creating Credit Service Organizations, a kind of payday loan broker.
Payday Lenders Tack on Credit Service Organization Fees
Under Ohio law, a Credit Service Organization is an organization that, among other things, helps consumers find loans. There is no cap on the fee that the Credit Service Organization may charge for its services. In the standard payday lending contract, you agree that you are hiring a Credit Service Organization to "find" the loan for you, and that the payday lender is "accepting" your payment to the Credit Service Organization.
As a result, when an Ohio resident gets a payday loan, he or she typically takes out the loan from a lender that is actually registered as a mortgage lender. The interest rate on the loan will not be more than 25%. However, there will be a large fee 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 that you sign will describe the fee as a “prepaid finance charge,” and it will be added to the total interest you pay on the loan. In the end, the interest rate stated on the promissory note will be significantly higher than the 25% rate allowed under the MLA because of this additional fee.
The Ohio Supreme Court Has Approved the Payday Lending Loophole
The Ohio Supreme Court resolved any doubts about the legality of this 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 passage of the STLA, 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?
If you are an Ohio resident considering a payday loan, read the fine print in your loan agreement carefully. You no longer have the protections that Ohio lawmakers intended you to have.