By Kevin E. Brown
With the passage of a landmark small loan finance reform bill last month, Ohio now has the best payday lending legislation in the country, said Tom Allio, director of the Cleveland Diocese Office of Social Action.
“It’s a great day for Ohio consumers. We expect Ohio to be a model for the rest of the nation,” he said.
Allio’s comments came after a three-year battle to bring payday loan reform legislation into state law. It was a battle Allio called “a David and Goliath” effort, as he and his coalition of some 300-plus faith-based and social service organizations throughout the state fought Ohio’s $6 billion-per-year payday loan industry. “The (payday loan) industry worked overtime to try and defeat this measure,” he said.
In 2005, Allio formed the Ohio Coalition for Responsible Lending and led the cause to reform payday loans in the state. Before the recent reform, the industry offered loans up to $800 at an effective 391 percent interest rate.
The reform legislation, which was signed into law by Governor Ted Strickland on June 2 and will become effective in 90 days, caps the small loan interest rate at 28 percent and limits loans to a maximum of $500. The bill also limits the number of payday loans a person can take within a 12-month period to four and requires any consumer taking three payday loans within 90 days to attend financial literacy classes.
About 40 members of the Ohio Coalition for Responsible Lending we’re in the governor’s office to witness the bill’s signing into law.
“It was a joyous occasion and an honor to be there,” Allio said.
Under the old law, payday loan critics often referred to “usurious interest rates” charged to consumers. But that was not their only complaint with payday loan practices. Another major problem with previous payday-lending model was the industry’s two-week repayment-cycle, Allio said. This model didn’t give consumers time to realistically repay their loan, he explained.

Staying financially afloat
Ruby Thomas, of Euclid, found out the hard way that payday loans were financially painful to payoff. Thomas, who testified in favor of the reform legislation in April at a hearing in front of the House Financial Institutions, Real Estate, and Securities Committee, ended up in the payday lending debt cycle with a total of nine loans--as she tried to make ends meet and stay financially afloat.
“I didn’t know what I was getting into,” she said.
Thomas admits that the loan paperwork spelled out all of the terms, but she said that she didn’t read the small print and didn’t fully understand the debt cycle she was entering.
“I was desperate. My back was up against the wall,” she said, as she described how she needed quick cash to move to an apartment after her Cleveland home was in foreclosure. “I had a 90-day eviction notice and I was facing homelessness.”
It was easy to get the cash from a payday lender and feel, for at least a short time, that she had the money to stave off financial disaster and homelessness—but that feeling quickly changed.
Before taking a payday loan, Thomas tried everything she could think of, to first try and save her home from foreclosure and then to try and find money to move into an apartment, once she realized foreclosure was inevitable.
In addition to trying several banks and credit unions, Thomas and her daughter tried selling off household items at yard sales. “We couldn’t raise the money we needed,” she said.
One day, driving home from work, Thomas noticed a payday-lending store with a sign offering fast cash. She went in and found out that there were no credit checks. She only needed to show proof of employment and proof of address—no other questions asked.
With a payday loan, Thomas had the cash to move into an apartment, but found that she had no money for food, rent, or for the gasoline she needed to get to work when nearly all of her next paycheck went to repay the payday lender.
After taking out nine payday loans, Thomas now owes nearly $4,000 to various lenders. She reported that she has been taken to court due to her inability to repay the loans and that court costs have only added to her total debt.
Thomas accepts responsibility for her actions. She said she offered to make payments over time to repay the money that she owed—but was told that it was all or nothing. She reported that she was told that she would be taken to court--or even arrested for fraud and writing bad checks. Writing a post-dated check and giving it to the lender at the time of the loan issuance was common practice, Thomas explained. Some of her checks bounced.
Lisa Ferguson, director of communications for Dublin, Ohio-based CheckSmart, said that she couldn’t speak to Thomas’ case specifically, but payday lenders that are members of the Community Financial Services Association, the industry’s trade association, are required to offer a four-payment repayment plan with no additional fees to customers having difficulty repaying their loans.
“If her loan were with a member agency, she would have been offered (this option),” Ferguson said.
The practice of not verifying a consumer’s true ability to repay the loan was another significant problem with this “toxic loan product,” Allio said.
While Ohio law had limited payday loans to a maximum amount of $800, there were no limits on how many loans a consumer could take.
Thomas, with her nine loans, is a prime example. In addition to taking subsequent loans to pay rent, and to buy food and gasoline, Thomas also turned to payday loans when her car needed repair and she needed transportation to get to her job in Cleveland.
Many consumers fell into this cycle of payday loan debt, explained Rep. Bill Batchelder, R-Medina, who co-sponsored the recent bipartisan reform legislation with Robert Hagan, D-Youngstown.
While the payday loan industry talks about “short-term emergency loans,” Ohio Coalition for Responsible Lending statistics showed that Ohioans using payday loans averaged more than one per month once they took out that first loan and that this loan product took consumers deeper into long-term debt. The typical Ohio payday borrower averaged 12.6 loans per year and the loans were easily accessible.
“They didn’t have to go far (to get the next payday loan). There was usually another payday lender just down the street,” Batchelder said.
Ohio’s payday loan industry grew rapidly over the past 13 years, since Ohio’s 1995 legislation opened up the market to the payday-lending model.
In 1996 Ohio had 100 payday lending locations; by 2007, that number reached 1,600 stores. The Ohio Coalition for Responsible Lending statistics state that Ohio currently has more payday loan stores than major fast-food giants, McDonald’s and Burger King, combined.
Batchelder stated that he proposed this reform because the payday-lending model was harming unsuspecting Ohioans. He saw the payday loan issue as a ‘moral’ issue and the reform that offers protection for Ohio consumers was not only needed, but it was the right thing to do.
Batchelder, who was first approached by Allio in 2005 about the payday lending issue, is pleased that the faith community led the way toward this reform. After his meeting with Allio, he studied the issue and said that he agreed that changes were needed.
“People (of faith) need to look at this effort and realize that they can make a difference,” he said.

New way of doing business
CheckSmart’s Ferguson said that she is disappointed that “the Catholic Church itself took such a harsh criticism of (payday lenders). I didn’t think that the full truth was represented,” she said.
Ferguson worries that her company, which she said has generously given to many Ohio-based charities, will have to layoff its 700 employees within the state.
With the 28 percent interest cap on these small loans, there isn’t enough margin to pay salaries and cover overhead, Ferguson said. Under the new rules, the company would have to operate on less than $1 per $100 loaned, she added.
CheckSmart is currently looking at its business model and trying to figure out what they can do for their employees, Ferguson stated. Closing some, if not all, of the Ohio stores is a real possibility.
CheckSmart conducts 40 percent of its business in Ohio--but does have locations in several other states. “Losing 40 percent of our business will be devastating for us.”
Community Financial Services Association spokesperson, Lyndsey Metzler, stated that Ohio might lose all of its 6,000 jobs currently provided by payday lenders—suggesting that no payday lender will be able to afford to do business under the new law.
Even before the bill was signed by the governor, many of the smaller payday-lending companies in Ohio started making plans for closing, Metzler reported.
“We think that Ohioans lose, here,” Ferguson said. “We don’t believe that this bill was the way to deal with this cycle of debt.”
She would have liked to see the new legislation require better tracking of payday loans by requiring the creation of a statewide database that would track the number and dollar amounts of payday loans taken by a single consumer. “The industry was in favor of a database,” she said.
Rep. Chris Widener, R-Springfield, chairs the House Financial Institutions, Real Estate, and Securities Committee. He is the one who pushed for the 28 percent interest cap. Other states capped the interest rate, Widener said, and he strongly felt that Ohio needed to do the same.
“This bill should be the strongest in the country,” Widener said.
The new law will likely face legal challenges. A group calling itself the Coalition of Payday Lenders hired Washington, D.C.-based attorney and former U.S. Solicitor General, Theodore B. Olsen, to explore the constitutionality of this new legislation.
Ron DeMoss, general counsel to Rent-A-Center, one of the payday lenders’ coalition members, said, this legislation “will put our short-term lending operations out of business.” Citing unfairness in this new law, DeMoss stated that his coalition members feel that they have no alternative but “to ask the courts for justice.”
Thomas, who still feels the weight of the $4,000 debt she incurred, said that she wants people considering a payday loan to understand one thing before they ever take the money. “You’re just getting deeper into the hole.”
Brown is a freelance writer.