Ohio's Payday Solution a Bigger Problem
There appears to be an orchestrated effort across the country to essentially shutdown the payday loan industry. Legislation offered in various states, including H.B. 333, currently under consideration in the Ohio General Assembly, all feature a similar set of regulatory changes, like a cap on payday loan interest rates at around 36 percent, restricting the number of loans that can be obtained in a year, and prohibiting loan origination fees. Ohio legislators should take a pass on H.B. 333.
Payday loans are one choice out of many financial options for individuals to obtain a loan. The loan is money provided as an advance on a working person’s paycheck and the loans in Ohio are regulated by the Superintendent of Financial Institutions. Current law in Ohio requires that a payday loan not exceed $800 and have a duration of no longer than six months. Most lenders in Ohio charge $15 per $100 borrowed for two weeks. This works out to a 15 percent interest rate, not the compounded 391 percent rate claimed by the sponsors of H.B. 333. If would only be possible for the borrower to incur an interest rate of 391 percent if he or she were taking the loan for a year. To get a payday loan, a consumer must have a checking account, so they are already familiar with banking and therefore are not among the population of "unbanked."
The Ohio General Assembly should be mindful of the unintended negative consequences for Ohio taxpayers if the Assembly imposes unnecessary new regulatory restrictions on the payday lending industry or drives it out of the state altogether. Doing so could invite less appealing options, such as encouraging more credit card use or bouncing checks, both of which provide hefty fees to banks and credit unions, while hurting the credit ratings of individuals who may just need short-term financial help.
As Marc Kilmer of the Buckeye Institute for Public Policy Solutions noted in an article on the subject, "It is presumptuous to second-guess the financial decisions of people who take payday loans. Most are not the ignorant borrowers portrayed by the opponents of payday lending. Instead, they are making an informed choice that is rational to them. Only the borrower knows his or her true financial needs and preferences."
The wrong decision on this issue could also drive Ohio down the path taken by neighboring Pennsylvania, which ended up passing laws favoring credit unions over other lenders. Pennsylvania has also exposed its taxpayers to increased financial risk because the state treasury also deposited $20 million into a reserve fund for a potential loan-loss for the new payday loan program introduced by the state's credit unions. The Pennsylvania Better Choice program is a payday lending alternative that is a result of collaboration between the Pennsylvania Treasury Department and the Pennsylvania Credit Union Association. Obtaining a loan requires membership in a credit union a $25 application fee, plus an 18 percent Annual Percentage Rate on the loan.
Ohio taxpayers should be wary when politicians begin picking winners and losers in any marketplace. Their new target in Ohio and in other states is the payday lender industry, even though private sector payday loans are a legitimate business with tens of thousands of employees across the country that help provide a proportionate remedy to meet the short-term financial needs of millions of working customers. As usual, politicians’ solutions are worse than any perceived problems.
David Hansen is president of the Buckeye Institute. Tom Schatz is president of Citizens Against Government Waste.
