One of the two most contentious issues on Ohio’s Fall 2008 ballot is Issue 5. In 1995 Ohio’s legislature foolishly repealed the existing usury laws. In the wake of that action hundreds of so-called “payday” lenders popped up all over the state, usually in or near areas where predominantly lower- to lower middle class workers reside.
Just a few years ago, Ohio passed very tight new bankruptcy laws. The combination of tighter bankruptcy laws and the repeal of usury laws have created an economic atmosphere in which usurers can flourish. And have they ever flourished. The number of payday lenders grew by more than 1500% since 1996 from 107 to 1638 in 2007. Between 2006 and 2007 the number of Ohio’s payday lenders grew by 76 or over 5%1.
Taking advantage of Ohio’s current law which allows a 391% Annual Percentage Rate (APR) ceiling (this is for a two-week loan. A 10 day loan can be as high as 548% APR2 due to the decreased loan duration and subsequent increase in annual repayment periods ; to be fair a loan at the $800 cap is “only” 367% APR3) and an $800 borrowing cap, Ohio’s virtually unregulated payday lenders are reaping huge revenues from their chosen targeted customer base. And just who is that base? Those who can least afford it, naturally. People who have limited or no access to other kinds short-term credit- credit cards, equity in real property, acceptable credit rating (or in the case of young people new to the job market and college students, any credit rating) people in low-income jobs (seasonal employees, etc) or on a “fixed-income (retirees, injured and disabled workers4).” A favored target of payday lenders is families of enlisted military, whose pay rates tend to be dismally low. In many states payday lenders cluster near military bases. Or they used to. The federal government recently (2006) capped loans to soldiers and their immediate families at 36% and most payday lenders have moved on to greener pastures like subsidized housing.5 So much for noble payday industry claims of “just being there to provide a necessary service.” Only if the interest rate is in the triple digits as we will prove later.
What payday industry watchdogs say about the industry-
Morgan Stanley IPO Analysis of Advance America:
The Georgetown study reveals the long-term nature of much payday lending. At a 300 percent APR, the interest on a payday advance would exceed the principal after about four months. In these circumstances, the loan starts to look counterproductive: rather than bridging a gap in income, the payday advance may contribute to real financial distress. Advance America’s disclosures show that repeat borrowing is important. [emphasis added]
FDIC Center for Financial Research:
‘We find that high-frequency borrowers account for a disproportionate share of a payday store’s loan and profits.
Ernst & Young Analysis of Payday Lending Business Model:
The survival of payday loan operators depends on establishing and maintaining a substantial repeat customer base.’
Michael Stegman’s “Payday Lending: A Business Model that Encourages Chronic Borrowing” – Economic Development Quarterly:
The financial success of payday lenders depends on their ability to convert occasional users into chronic borrowers.
What the Payday lenders themselves say-
Stephen Winslow–Former Harrisonburg, Virginia Payday Store Manager:
This industry could not survive if the goal was for the customer to be ‘one and done’. Their survival is based on the ability to create the need to return, and the only way to do that is to take the choice of leaving away. That is what I did.6
My customers were not stupid or ignorant – they were in crisis. I ended any ability they may have had to overcome that crisis by putting the final nail in their financial coffins.7 [emphasis added]
Rebecca Flippo – Former Virginia Payday Store Manager:8
These companies feed on the people living on a paycheck-to-paycheck basis.The customers who do come in and repay the loans take out another loan right then almost every time.They want to create a dependence on their services so the customer is forced to reissue the loan on every payday.
We saw most of our customers every month.
We really played down the APR. We disclosed it, but we played it down.[emphasis added]
What the Bible has to say about deliberate gouging those who can least afford it-
If you lend money to any of my people with you who is poor, you shall not be like a moneylender to him, and you shall not exact interest from him. Ex. 22:25 ESV
Take no interest from him or profit, but fear your God, that your [poor] brother may live beside you. You shall not lend him your money at interest, nor give him your food for profit. Lev. 25:36, 37 ESV
You shall not charge interest on loans to your brother, interest on money, interest on food, interest on anything that is lent for interest. Deu. 23:19 ESV
Whoever multiplies his wealth by interest and profit [That is, profit that comes from charging interest to the poor] gathers it for him who is generous to the poor. Prov. 14:31 ESV
Though the exegesis of this is well beyond the scope of this article (see Gary North and R.J. Rushdoony for an expansion), the Bible doesn’t condemn interest bearing loans for commercial purposes. The Institute For Principled Policy believes in the basic economic premise that market forces should set interest rates for commercial loans under normal circumstances. However, the Bible does strongly condemn the lending of money at interest, especially at rates that are condemned as usury under any circumstances except extreme hyperinflation, to those in society least able to repay the loan for reasons that are obvious. Truly, the book of Proverbs states it most eloquently
The rich rules over the poor, and the borrower is the slave of the lender [emphasis added] Prov. 22:7 ESV
Compare the verse above with the highlighted part of Steven Winslow’s quote above. The payday lenders know they are a lender of last resort (i.e., the bad players are little better than loan sharks) and they are fully aware that most of their customers are unable to repay within the normal 2 week window without creating either a severe financial hardship or taking out another loan at the same usurous interest rate. That is why payday lenders specifically target a specific demographic of borrower. Why would anyone with a credit card or home equity loan capped at no more than 36% APR borrow from a payday lender at 391% APR in an emergency?
Currently there is no mechanism for making 0% bridge loans to needy borrowers. The Progressive movement and its influence on policy making, has resulted in the takeover of church functions like charitable loans, feeding, clothing, housing and educating the needy through the old church tithe agencies by the government, complete with gross over-taxation, nearly completely. Therefore, the biblical concept of equity provides for the private-enterprise establishment of a system to provide loans at reasonable cost and under reasonable repayment conditions for those who have fiscal emergencies but have no other recourse.
Unfortunately, the lenders have completely failed to govern themselves, as illustrated by the earlier quotes and, more importantly, the statistics which show that unscrupulous lenders know a cash cow ripe for milking when they see one.
Here are some interesting numbers9. Statistically, the average Ohio payday loan is $328. The average interest rate is 391% with a two-week interest due payment of $49.33. But as we have noted, the payday industry thrives on and cultivates repeat business. The average payday borrower visits a single location 7.4 times per year. This means that the average borrower pays out $365.01in interest alone on top of his original loan amount of $328 or more than 111% of the original. But that doesn’t end the story. That same borrower doesn’t just visit one payday store front. On average, he visits 1.7 per year. That means that the 7.4 times he visits a single shop has to be multiplied by 1.7 to get his total number of loans taken each year at the average $328. That brings the total to 12.6 loans of $328 each with an interest payout of $49.33 each, bringing the total interest only to $621.51or 189% total interest paid. This also means that the average payday borrower is indebted to a payday lender for nearly 6 months per year!
But the situation is worse than it looks at first blush. Using data from Michigan , the state closest to Ohio’s demographic and economic numbers, we find that 94% of the entire revenue generated by payday lenders came from borrowers who had 5 or more transactions per year (pretty close to our example above and the equivalent of 75% interest only repayment). Seventy-seven per-cent of their revenue came from borrowers who had 12 or more transactions per year (very close to the example). Eight per-cent of Michigan customers had 30 or more transactions but they accounted for 27% of the revenue of Michigan payday lenders. In other words, a small but significant percentage of borrowers were indebted with one loan for the entire year, and a second loan virtually certainly with at least one other payday lender for at least part of the year and paid 450% or more in total interest. That’s $1476 or more in interest alone for a $328 loan. If that’s not usury then what is?
Here’s the bottom line. Low-income payday borrowers are easily trapped in a cycle of debt by extremely high interest rates and very short pay-off times from which there is virtually no escape.10 It’s designed that way by testimony of former and present industry insiders and industry analysts
The financial success of payday lenders depends on their ability to convert occasional users into chronic borrowers.11
Irrespective of whether the repeat transactions are cast as “renewals,” “extensions,” or “new loans,” the result is a continuous flow of interest-only payments at very short intervals that never reduce the principal.12
– Michael Stegman, “Payday Lending: A Business Model that Encourages Chronic Borrowing,” Economic Development Quarterly
Having put to rest the false industry arguments that it “isn’t really 391% interest” by showing that, indeed it can be 391% interest and more and that the APR is a reasonable description that allows loan comparisons with credit cards, banks and credit unions, we now must deal with the question that seems to have ruffled so many libertarian feathers- the loan registry.
An analysis of HB 545 shows the following information: Under the new law loans are capped at 28% APR and borrowers are permitted only 4 loans per year, only one at a time and only 2 in a given 90 day period (this final requirement is waived for borrowers who complete a state-approved “financial literacy” course to be offered at low cost at local community colleges). The repayment period must be longer than 30 days.
And, to insure that these requirements (and a number of others borrower safeguards including seriously restrictions to the loan shark-style harassment collection methods often used by payday lenders against those whose finances they have had a significant hand in ruining) are adhered to there is a provision for the creation of a loan registry. BUT, and this is important, the registry CANNOT be used by law for any purpose other than tracking the transparency of the loan transactions, CANNOT by law contain any private financial identity information (e.g., the Social Security number of the borrower, bank ID numbers, etc.) and CANNOT by law even be created if there are less than 400 licensed payday lenders. Industry sources have made it clear that 90-95% of lenders will leave the state if the law passes.
Taking the best case scenario given by lenders would leave 10% of the current number of lenders or about 164 proprietors left to pull licenses, well under 400. Therefore, no registry.13 And if there ever is one, it will most likely be under the supervision of a contractor with experience handling sensitive records- just like a bank, credit card company or credit union!
The loan registry is recommended by groups like The Ohio Coalition For Responsible Lending because it keeps the more predatory payday lenders from playing the corporate shell game of moving loans around to corporate subsidiaries and partners to hide them from regulators, hardly an unimaginable scenario for companies who have no qualms about targeting low- and fixed- income borrowers with 391% APR interest rates. The experience of other states proves the necessity of the registry.
Frankly, we’ve left out a lot of information regarding details like interest rate and cost deception and collection methods employed by the payday industry but you can research these yourself, especially by reading Stephen Winslow’s blog site and The Center For Responsible Lending website (see footnotes below).
It is clear that the current payday lender regulation is completely inadequate to control the rampant greed and usury that creates a cycle of debt in the low- and fixed-income community which the industry targets. While the Institute For Principled Policy applauds initiative and vehemently supports the right of businessmen to conduct their chosen business, we cannot sit on our hands and say nothing as social Darwinists actively work to allow the poor to be trapped into penury and wage slavery by unscrupulous lenders. To do so would be a dishonor and curse on our own heads.
The legislation which will be approved by a “YES” vote on the Issue 5 referendum will go a long towards keeping low- and fixed-income families from disintegrating due to debt and bankruptcy and the downward spiral of family despair and destruction that often follows. It will also allow the principled players in the industry who really do want to provide a needed service stay and run an efficient and profitable business to continue to operate. It is not an outright ban, as the industry has claimed. We know this from the several other states which have been forced, as has Ohio, to regulate corporations who have allowed themselves to become no better than the loan sharks the usury laws were passed to stop originally.
VOTE “YES” ON ISSUE 5
1 Rothstein, David & Jeffrey D. Dillman, The Continued Growth of Payday Lending, Policy Matters Ohio, The Housing Research & Advocacy Center, Mar., 2008, p. 1
2 Rothstein, p. 3f
3 Rothstein, P. 3, table 1
4 Rothstein, P. 8
5 Rothstein, P. 8
6 King, Uriah & Leslie Parish, Center For Responsible Lending, Springing the Debt Trap: Rate caps are only proven payday lending reform Dec., 2007, P. 12
7 Winslow, Stephen, Payday Lending: A practice whose end has come, Conservative Viewpoint blog entry for May 25, 2007
8 Center For Responsible Lending, Payday Loans Trap Borrowers, video at http://www.responsiblelending.org/issues/payday/inside-the-payday-industry.html
9 Ohio Coalition For Responsible Lending Trapped By Design: Payday Lending By The Numbers, Sept. 19, 2007
10 Rothstein, P. 10, Table 5
11 King, P. 11
12 King, P. 12
13 Gakh, Max, Ohio General Assembly Legislative Service Commission Final Analysis Sub. H.B. 545 127th General Assembly