Federal change in payday loan restrictions won’t undermine Ohio law

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WASHINGTON, DC – A Trump administration effort to relax payday lender regulations won’t curb newly enacted protections by Ohio for payday lender clients, although it will reduce protections that consumers have of Ohio receive under federal law.

The payday loan regulations that Ohio passed last year are more stringent, in many ways, than the rules that the Consumer Financial Protection Bureau (CFPB) passed in 2017 to keep low-income borrowers out of business. being trapped in a cycle of debt, said former CFPB director Richard. Cordray.

“These measures will go ahead regardless of what happens at the federal level,” said Cordray, a Democrat who left the CFPB to run unsuccessfully for governor of Ohio shortly after finalizing the elections. federal payday loan rules that he approved. “Our CFPB has a federal floor in place and has not interfered with states that do more.”

Danielle Sydnor, who heads the NAACP branch in Cleveland, sees payday loans as a “necessary evil” that offers small, short-term loans to people with limited credit who lack the savings to pay for emergencies. like auto repairs. But she says loans have historically trapped customers in a cycle of debt.

When Cordray was in charge, the CFPB decided to require payday lenders to determine in advance whether low-income borrowers could afford the terms of the small loans they were securing with the income from their next paychecks. . This requirement was enacted after the CFPB discovered that many lending clients ended up repeatedly paying high fees to refinance the same debt, turning a single loan into a long-term debt trap whose consequences could include closing. bank accounts and vehicle seizure.

Research by the Pew Charitable Trusts found that the average payday loan borrower is in debt for five months of the year, spending an average of $ 520 in fees to repeatedly borrow $ 375. The average fee for a storefront loan business is $ 55 per two weeks. The organization says payday loans are usually due in two weeks and are tied to the borrower’s pay cycle. Payday lenders have direct access to a borrower’s checking account on payday, electronically or with a post-dated check. This ensures that the payday lender can collect the income from the borrower before other lenders or bills are paid.

After Cordray left, his business-friendly successor Kathy Kraninger, originally from Chagrin Falls, eventually took over the office. She proposed rescinding the requirement, arguing that there was not sufficient evidence for this and expressing concern that it “will reduce access to credit and competition”. The CFPB will make a final decision on the proposal after a 90-day public comment period.

Kraninger left untouched another restriction that prevents payday lenders from making more than two successive efforts to debit money from borrowers’ bank accounts without obtaining re-authorization. This provision was implemented to prevent consumers from being charged multiple overdraft fees for the same debt.

“The Bureau will assess the comments, weigh the evidence, and then make its decision,” said a statement from Kraninger. “In the meantime, I look forward to working with other state and federal regulators to enforce the law against bad actors and encourage strong competition in the market to improve the access, quality and cost of credit. for consumers. “

Kraninger’s proposal has received mixed reviews, even from business groups that represent payday lenders. The Consumer Financial Services Association’s short-term lending industry trade group approved its policy reversal, but said it was not going far enough to repeal all payday loan regulations approved by Cordray.

“These rules are good first steps, and we appreciate that the CFPB has recognized some of the critical flaws,” said a statement from group CEO Dennis Shaul.

Ohio Democratic Senator Sherrod Brown was more critical, calling the move “an attack on the payday loan rule” that would put thousands of hard-working families at risk.

“Kraninger should stand up for his fellow Ohioans, not shamelessly help payday lenders rob families of their hard-earned money,” said a statement from Brown, the top Democrat on the Senate Banking, Housing and Finance Committee. of urban affairs.

National Consumer Law Center associate director Lauren Saunders said Kraninger’s proposal “rips the guts of the rule,” and Consumer Federation of America chief financial officer Christopher Peterson called it ” deeply disappointing betrayal of the agency’s mission.

“These are payday lender protection rules, not consumer protection rules,” Peterson said.

After the CFPB rules were finalized, Ohio passed its own payday loan laws. The state legislature acted after the departure of former Ohio House Speaker Cliff Rosenberger, under whose leadership the legislation had stalled. Rosenberger resigned amid reports that the Federal Bureau of Investigation was investigating a trip to London he took with payday loan industry lobbyists.

A decade earlier, Ohio passed a bill lowering the annual interest rate cap on payday loans from 391% APR to 28%. But lenders have found ways to get around the rules, such as charging ridiculously high fees, issuing loans in the form of checks, then charging high fees to cash the checks; operating under the Mortgage Loans Act; or posing as consumer service organizations, says Bill Faith, executive director of the Coalition on Homelessness and Housing in Ohio.

Kalitha Williams, asset building project manager for Policy Matters Ohio, says the end result has turned Ohio into the “wild and wild west” of payday loans with rates of up to 788%.

The new law closed loopholes that allowed lenders to escape the previously passed 28% interest cap and takes other steps to keep loan costs from spiraling out of control:

  • Limits loans to a maximum of $ 1,000.
  • Limits the duration of the loan to 12 months.
  • Cap the cost of the loan – fees and interest – at 60% of the original loan principal.
  • Prohibits loans of less than 90 days unless the monthly payment does not exceed 7% of the borrower’s monthly net income or 6% of gross income.
  • Prohibits borrowers from carrying over $ 2,500 in outstanding principal on multiple loans. Payday lenders should do their best to check their commonly available data to determine where other people might have loans. The bill also authorizes the state to create a database that lenders can consult.
  • Allows lenders to charge a monthly maintenance fee equal to the lesser of 10% of loan principal or $ 30.
  • Requires lenders to provide consumers with a sample repayment schedule based on affordability of loans that last longer than 90 days on.
  • Prohibited from harassing phone calls from lenders.
  • Requires lenders to provide loan cost information orally and in writing.
  • Gives borrowers 72 hours to change their mind about loans and pay off the money, no fees.

Williams says the Ohio law was designed to complement the federal rules implemented under Cordray, and that it would be bad for consumers in the state to lose its protections because state law doesn’t not require lenders to assess whether their borrowers could repay loans, as federal regulations do.

“We think both are necessary,” Williams says.

Ohio CDC Association executive director Nate Coffman said the state’s new law would save Ohio customers at least $ 75 million a year and allow them to borrow four times less Dear. He says other states, like Kansas, see Ohio law as a potential model for their own reforms.

“As long as this group is in control of the CFPB, it would be good for other states to pass their own laws, as it appears that at the moment there will be no reasonable help halfway through the office.” said Coffman, whose is a membership group for community development corporations.

Cordray says credit card and mortgage issuers need to assess whether borrowers can repay the loans, so the CFPB under his leadership thought it would make sense for the payday lending industry to do the same. While payday loan groups like the Ohio Consumer Lenders Association have argued that the change “would dramatically reduce or eliminate short-term loan options for over 2 million Ohioans,” Cordray notes that citizens of the 18 States that ban payday loans seem to be doing well. without this.

Now that he’s gone, Cordray said President Donald Trump’s office “has sided with the financial industry rather than aggressively supporting consumers.”

“It’s unfortunate and it’s the wrong approach,” says Cordray, who writes a book about his time at CFPB. “Whatever they do, they will end up in court. “

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