Adrian Burns

June 13, 2008

Payday lenders are probing how they can continue making lucrative short-term loans in Ohio, despite a state law meant to curtail their business.

Since controversial House Bill 545 first cleared the state House of Representatives in April, six payday lending companies have sought licenses to make loans under the state’s Small Loan and the Ohio Mortgage Loan acts. While typically not as lucrative as payday lending, short-term loans permitted under either statute can be made with the equivalent of triple-digit annual percentage rates – similar to the combination of fees and rates that prompted lawmakers to target the industry with H.B. 545.

Payday lenders still must determine if they can remain profitable by making the small, short-term loans, and whether they face legal hurdles. But the applications are a sign the industry hasn’t given up on Ohio despite claims that H.B. 545 would put payday lenders out of business and their 6,000 employees in the state out of work.

"We’re looking for ways to continue to service customers," said Jeff Kursman, a spokesman for Mason-based Check ‘n Go, which applied for 73 lending licenses under the Small Loan Act. "Nothing is off the table."

The lenders as of June 10 have sought licenses for 557 shops around the state, about 34 percent of the existing payday outlets in Ohio.

The Small Loan and Mortgage Loan acts permit unsecured, short-term loans similar to payday advances. Long ignored by the industry, which loaned money under liberal payday lending provisions passed in the mid-1990s, the laws have drawn renewed attention since H.B. 545 passed, which institutes more-restrictive payday lending rules starting in September.

Payday lenders have little choice but to investigate their options, said William Saunders, acting CEO of Dublin-based CheckSmart Financial Co.

"Any person in my position has to evaluate everything that’s out there," he said. "Can I tell you it’s a workable model yet? No. But it’s my duty to investigate every alternative."

Viable alternative?

Although none of the payday lenders reached for this article would comment on the potential profitability of loans made under either the Small Loan or Mortgage Loan acts, it is clear that in some circumstances terms of such loans could resemble those allowed under the payday lending provisions in the state’s current Check-Cashing Loan Act.

The key provisions in that act allow payday lenders to charge $5 per $50 loaned up to $500, in addition to a 5 percent a month interest rate.

That combination of fees and interest charges equates to an annual percentage rate of 391 percent on two-week loans between $50 and $500.

H.B. 545 replaces the Check-Cashing Loan Act with the Short-Term Lender Law. It bans the fees and limits the annual percentage rate to 28 percent, which payday lenders said will make the loans unprofitable.

"That piece of legislation does not reform anything," Saunders aid. "It was to put an industry out of business."

The Small Loan and Ohio Mortgage Loan acts, however, let lenders charge a $15 origination fee on loans of up to $500, and $30 for loans above that amount, in addition to annual interest of 28 percent for the Small Loan Act and 21 percent for the Ohio Mortgage Loan Act. The fee remains the same whether the loan is $50 or $500, so they’re less profitable as the loan amount grows.

Still, under the Small Loan Act, a two-week, $200 loan would incur fees and interest charges of $17.16, which equates to an annual percentage rate of 223 percent.

Fort Worth, Texas-based Cash America International Inc., which operates the Cashland chain, has applied for Mortgage Loan Act licenses for each of its 139 payday lending outlets in Ohio.

"We’re not saying we’re definitely going to do it. It’s just one of the options we’re looking at," said spokeswoman Yolanda Walker.

As it stands, the state has no prohibitions on payday lenders switching to the licenses, said Dennis Ginty, a spokesman for the Ohio Department of Commerce, which regulates lenders, banks and other financial institutions.

Lenders are making additional preparations as well. CheckSmart on May 19 registered a new business entity with the state named Buckeye Small Loans LLC, and Cash America registered a company called Ohio Neighborhood Finance Inc. on May 29.

A familiar story

Ohio isn’t the first state to slap stiff restrictions on payday lenders, and it’s not likely to avoid industry attempts to find loopholes either, said Angela Martin, a spokeswoman for Our Oregon, a policy group that helped legislators in that state cap payday lending rates at 156 percent last year.

"Payday lenders’ creativity aimed at protecting their profits is unprecedented," she said. "This is the pattern and practice in every state that has tried this."

Oregon’s law was a reaction to payday lenders’ moves after legislators passed restrictions in 2006, Martin said.

"Literally two days later, they flooded the regulator’s office applying for consumer lending licenses that gave them an end run around the law," she said.

Illinois is facing a similar development after passing payday lending restrictions in 2005 only to see payday lenders shift to high-rate lending through an installment loan provision long on the books, said Geoff Smith, a vice president at the Woodstock Institute, a public policy think tank in Chicago.

"I don’t know how much of a concern it was during the development of the act that there was a loophole," he said. "But definitely since it has passed, it’s been pretty obvious what payday lenders have done."

Smith said that after a long struggle to pass Illinois’ first payday lending bill, advocates expect another protracted fight in an attempt to close loopholes.

"Legislation has been proposed and it has been debated," Smith said. "But not passed."