New regulation promises to make a dangerous option viable for those in need of credit.

Bob Miller did what many struggling Ohioans do when faced with a cash crisis: He got a payday loan. Three years ago, after successfully paying off two other short-term loans, the Newark resident decided to get a third, securing $600 from an online lender to cover a car payment.

Miller, however, failed to read the fine print of his loan, which charged him an annual percentage rate around 800 percent. In comparison, a typical credit’s card’s APR is about 12-30 percent. Miller, 53, fell behind. His car was repossessed as his loan’s exorbitant interest rates turned his life upside down. “Who can afford that?” Miller says, sitting in his apartment, which is filled with Ohio State Buckeyes and patriotic decorations. It is tidy and comfortable, though furniture is sparse. He lounges on a loveseat and his dog, Bevo, is large enough to sit on the ground and lay his head on Miller’s leg. “It was so easy to get [the loan], though, because you’re online,” Miller says.

Miller found himself in what payday loan opponents call a “debt trap,” monthly payments that suck cash from bank accounts and do nothing to pay off debt. The inherent nature of the payday loan causes the issue. The loan must be paid off by the borrower’s next payday to avoid refinancing charges that are automatically removed from the borrower’s bank account, or cash a predated check each payday, until the full loan amount can be paid at one time. This means a borrower could end up paying far more than the loan is worth—without paying off any portion of the actual loan.

That scenario was the impetus for the creation of House Bill 123—officially known as the Fairness in Lending Act—which Gov. John Kasich signed into law in July. Set to take effect in April 2019, the new law traveled a circuitous route to passage, stuck in committee for more than year until former Ohio Speaker of the House Cliff Rosenberger resigned amid an FBI investigation into his connections to the payday lending industry. The law is also a repeat performance. A decade ago, the legislature passed another payday lending crackdown, including a 28-percent cap on annual interest rates, which was affirmed by voters after payday lenders attempted to repeal the changes through a ballot initiative. That reform package, however, failed to have impact, as payday lenders found loopholes that allowed them to continue to charge interest rates far above the cap, pushing Ohioans such as Miller deeper into debt.

Miller’s sole means of income is a monthly Social Security check. He used to work in construction and lighting, but health problems forced him to stop (standing up for too long causes him unbearable pain). Treated for spinal stenosis, he says surgery actually made the pain worse. Along with pain pills and blood pressure medicine, Miller takes medication for bipolar disorder. The pressure from his mounting debt—along with the fear of losing his prescriptions and the loss of his car—sent him into despair.

“My whole attitude towards life just started going down,” he recalls. “It’s like, ‘Why bother? Take everything. I give up.’ ”

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According to research done by Pew Charitable Trusts, about 12 million people spend more than $7 billion a year in payday loans and fees. On average, a borrower takes out eight loans of $375 each per year and spends $520 on interest. The five groups most likely to take out a payday loan, according to Pew, are renters, African-Americans, those with no four-year college degree, those earning below $40,000 annually and those who are separated or divorced.

Renting is a huge predictor of payday loan usage, with low-income homeowners borrowing less than higher-income renters—8 percent of renters earning $40,000 to $100,000 a year have used payday loans, compared with 6 percent of homeowners earning $15,000 to $40,000. About 69 percent of all payday loans cover everyday expenses like rent, utilities, food, credit-card bills or mortgage payments, as opposed to an unforeseen expense such as a car repair or medical bill.

Payday loan borrowers have few other options. Without the short-term loans, they might cut back on food or clothing expenses, try to borrow money from family and friends or pawn or sell possessions. In other words, a payday loan can be an easier and faster option to help borrowers stay in a home, keep the electricity on, repair a car or eat for the week.

Ohio Rep. Kyle Koehler, a Republican from Springfield, describes the decision to take out a payday loan this way: If you’re in a sinking boat with your family and someone offers you a spot on their boat for a fee, you aren’t going to wait for another option. If they also charge you for the ride and to exit onto dry land, you are going to pay, because the only other option is the sinking boat. “People say, ‘Well, the free market should work. People should be able to go to any of those,’ ” says Koehler, who co-sponsored House Bill 123. “The fact of the matter is, they go to the very first one they come to, and they don’t leave because they’re like [the person] stuck in the water with their family.”

Borrowers can take out loans via storefronts or the internet. The online option makes the lightning-fast process even quicker by eliminating the drive and potential line, but online lenders—like the one Miller sought out—may do more harm than the storefront lender. According to Pew, nine of 10 complaints about payday lenders made to the Better Business Bureau were about online lenders—46 percent of online borrowers report that lenders’ withdrawals from their bank accounts overdrew them, and online lenders usually ask for a higher APR, around 650 percent. Thirty percent of online borrowers also report being threatened by the lender, which includes the lender contacting friends, family members or employers about the debt, or the police to make an arrest.

Online or storefront, the first thing a borrower does is fill out an application. Minimum requirements for eligibility vary from lender to lender but usually include age (18 in most states), checking account and proof of income. Once approved, the borrower signs a contract and gives the lender either a check to be cashed on payday or access to their bank account for withdrawal.

Koehler uses a real-life example to explain the catastrophic result of high-interest, short term loans—a woman who pays on a $1,200 loan at $200 a month. Four years later, the woman still owes the principal, $1,200 (plus a $399 loan fee), but she has paid the lender $9,600. Not one cent of that money will be put toward the principal. What’s more, the APR on this woman’s loan is around 200 percent, low compared to the projected average in Ohio, which is closer to 600 percent.

Miller secured his loan through CashNetUSA. According to the CashNetUSA website, the lender charges an annual percentage rate of 291.96 percent to 1,171.8 percent for its payday loans, depending on how frequently the borrower is paid (the lower the length of time, the higher the percentage). Miller says he doesn’t remember the information being available at all on the website, although there is a page devoted to explaining terms and fees in detail now. When asked to specify how long the data had been made available on the general website, CashNet was vague, saying in a statement, “CashNetUSA is committed to transparency and has consistently listed the APR, interest rates and fees on its website.”

“There’s a ton of papers you’ve got to sign,” Miller says. “Eventually, you get tired of reading, and you just initial and initial and initial everything. I wish I would have read it now, but I just got it over with.”

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Payday lenders exploited a loophole in the 2008 law by registering as mortgage lenders to avoid the regulation, effectually rendering the reforms irrelevant. With payday lenders acting as credit service organizations, interest rates and other fees ran wild. Ohio became the state with the worst payday-lending rates in the nation.

Doug Clark, the CEO of Axcess Financial, says that 2008 law was an “unworkable model” for lenders, and that other statutes, such as the Small Loan Act, Mortgage Loan Act and Credit Services Act, provided more viable supply channels to meet the demand. Axcess Financial is the Cincinnati-based parent company of Check n’ Go and Allied Cash Advance. There are 34 Check n’ Go stores in Ohio, including three in central Ohio and 960 scattered throughout the U.S.

Check n’ Go also has an online presence in Ohio, which is the only method by which someone can obtain a payday loan with the company. According to Clark, payday loans comprise less than 20 percent of Axcess’ portfolio. He says that Check n’ Go is completely transparent about fees and APR rates for customers when they are applying for a loan, though the rates and fees cannot be found on Cash n’ Go’s general website.

Clark says Check n’ Go is clear about the cost to obtain the credit. “There’s nothing deceptive about it, and our disclosures make sure of that,” he says. “We don’t see anything in complaint data for that. We provide credit in terms they understand, our company’s price in accordance with the risk, and we want positive outcomes for everyone involved.”

Springfield, Koehler’s hometown, is the epicenter of the payday lending problem in Ohio. Koehler says that on just one strip of road in Springfield, there are nine payday lenders. In all, there are 13 stores in Springfield and nearby Urbana that serve approximately 70,000 people. In Columbus, a similar phenomenom can be found on Ohio 161 between I-71 and Cleveland Avenue, where there are at least six lenders. “I had [local] business leaders, chamber of commerce president, pastors come to me,” says Koehler. During an initial meeting at Young’s Jersey Dairy in Yellow Springs, the concerned citizens pushed for the elimination of payday lending in Ohio altogether. In response, Koehler joined with Rep. Michael Ashford, a Democrat from Toledo, to create a bill that closed the loophole and put “guardrails” on Ohio payday lending, rather than total restriction. As the two evangelized about the bill, Koehler says they struggled to get hearings because of the perceived threat the regulation posed to the free market.

“I believe that people should be able to earn money and keep the money they make and not have the government take it all,” he says. “But at the same time, this is putting some regulations on an industry that was out of control. The trouble I had was convincing my Republican colleagues that this was something that needed to be done, that we weren’t trying to tell a business how much money they could make—we just didn’t want to make all their profit off of one person.”

Eventually, Koehler says, people were won over as they realized that the bill provides protection to borrowers in desperate situations while still offering a viable business to the lender. Clark disagrees. He says the new law threatens the free market. “It’s nonsensical, quite frankly, [but] such is the way of our legislative process at times,” he says. Clark goes on to say that the monetary limitations imposed by the law are arbitrary.

Once H.B. 123 goes into effect in 2019, things will change drastically (Closing the Loophole, P. 36). Check n’ Go is preparing a new payday loan product for release that complies with the new law, and Clark says it will change his business’ entire program in Ohio. Clark also says that putting restrictions on this industry will have unintended consequences for borrowers. Basic economics, he says, dictate what will happen. Now that the price controls exist, he says, consumers are going to be left out—namely, lower-income people who are most in need and are the greatest risk to lenders. “Time will tell who gets into the credit access club and who the new law keeps out,” he says. One bright side, he says, is that Check n’ Go’s market share may grow if other area lenders aren’t able to offer a product that fits within the new bill.

Another lender, however, sees the new law as an opportunity. Tony Huang, the co-founder and CEO of Seattle-based Possible Finance, plans to expand his business to Ohio because of the new law. Possible Finance is a mobile app that offers short-term loans that can be paid off in four paychecks instead of one, at no additional cost to the borrower compared to a traditional lender. Possible Finance also reports to all three major credit bureaus to help borrowers build up their credit even as they take on short-term loans. He recognizes that, without the ability to build credit, payday loans will remain one of the only options available to someone with bad or no credit. “Effectively, they’re always trapped in a hamster wheel using payday loans without ever being able to improve their financial wellbeing,” he says.

Huang says the massive profits generated by payday lenders pre-regulation makes competing with them unfeasible, since the large profits allow lenders to spend a lot more to acquire customers. Possible Finance will never be a match for them, since Huang says it makes inherently less money in its efforts to be fair to the borrower. “We believe H.B. 123 will equal the playing field and make the loans that consumers can access much more affordable,” he says.

Huang says he created Possible Finance to help fix a “broken” credit system. Prior to starting the company, Huang and his colleagues pioneered the body camera technology police officers now use at the software company, Axon. After leaving the company, they were hunting for a new concept that would provide an innovation for a sensitive, highly-regulated space and would “provide greater transparency to lower income individuals and make society a little bit more equitable for minority communities.”

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As the dust settles, questions remain: Is this is the end of predatory payday lending in Ohio? Are there more loopholes and debt traps ahead? Is H.B. 123 a usable option—not only for the lender, but also for the borrower?

Koehler is hopeful about the effect of the bill for the borrower and also for the economy, citing the amount of money currently moving from Ohio borrowers to the often out-of-state lender companies—an estimated $75 million per year. “I believe that money is going to go back into the pockets of the people that need it the most—that is, people who are hurting for money, who don’t have good credit,” he says. “I believe that’s going to help the individuals more than anything else, but $75 million per year is leaving Ohio to these payday lenders.”

Looking into the future, Clark doesn’t have to wonder about another loophole. One already exists, he says, in the form of lenders who are using the protected status of tribal reservations to operate. “There’s already a large sovereign-nation lending model in Ohio,” he says. One such lender, Big Picture Loans, explains on its website that its business has a financial services license issued by the Tribal Financial Services Regulatory Authority, which gives it immunity to regulation. Any payday lender located on tribal land can operate as an entity outside of the regulation imposed by H.B. 123 or any other legislation about lending because of its sovereign immunity.

Despite H.B. 123’s reforms, Miller says he will never use a payday lender again. “I didn’t think companies like that would do that to you,” he says. “These are supposed to be good companies. … Then they screw you, and they don’t care.”

At the height of his desperation, he found help through the St. Vincent de Paul Society’s microloan program and is finally out of the hole his payday-lender debt created. The program pays off the debt and accepts monthly payments from users with a 3 percent interest rate that is given back once the balance has been paid off. Miller says he’s grateful for the help.

Now, he has an apartment again and spends his free time creating Ohio State Buckeyes-themed wooden furniture and knick knacks and hanging out with Bevo and his cat, Little Girl. And though he doesn’t plan to take out any more short-term loans, he does appreciate the new law’s reforms. “The bill is awesome,” he says. “I don’t think they should be able to do what they do anymore.”