Posted June 10, 201510:15 am
From Gongwer News Service, June 10, 2015.
House Financial Institutions, Housing & Urban Development Committee
Payday Lending: The committee also heard general testimony about short term loans from the Ohio Poverty Law Center and the Legal Aid Society of Cleveland.
OPLC Senior Staff Attorney Linda Cook recalled how lawmakers sought to rein in payday lending in 2008, but said many similar products are still available in Ohio, such as car title loans offered by storefront businesses operating under license as a Credit Services Organization.
The 1996 legislation was designed to rein in abuses by the for-profit credit repair industry, she said. However, lenders are relying on the legal definition of CSO that says they can offer the service of "obtaining an extension of credit by others for a buyer" to set up title loan shops around the state.
While the CSO statute contains disclosure requirements and other consumer protections, it does not control or limit the fees that they can charge for arranging credit, Ms. Cook said. "These CSO fees drive up the cost of short term, small dollar title loans in Ohio."
Katherine Hollingsworth, senior attorney for Legal Aid, said auto title lending businesses employ a business model similar to that of payday lenders, which depends on repeated borrowing by their customers, many of whom can't afford to pay back the loans.
Many customers have to take out additional title loans just to pay back debt from a few weeks earlier, she said, adding that the amounts often increase until the consumer defaults. CSO fees are often 25-50% of the amount borrowed and in excess of other fees permitted by the mortgage lending act.
Ms. Hollingsworth provided an example where a consumer borrowed $1,500 in March 2013, then refinanced the loan four times over the next nine months, incurring fees totaling $1,457.
Many consumers wrongly believe that auto title loan storefronts are actual lenders and are confused about the large fees CSOs charge, she said. However, they are afraid of losing their car, which could be their only way to get to work.
Responding to a question from Rep. Leland, the witnesses said the most important change to curb abuse by title lenders would be to require them to analyze borrowers' ability to repay the loan.
Ms. Cook said she wouldn't necessarily agree to prohibiting auto title loans because they serve some legitimate purposes, especially for people with the ability to repay them, and can generally expand consumers' access to credit.
Ms. Cook told Rep. Smith that an estimated 6-11% of title loans issued wind up with customers having their vehicles repossessed. "It's actually the threat of repossession that keeps people paying," she said.
Rep. Brenner questioned what percent of title loan customers actually wind up in a cycle of debt.
Ms. Cook said she didn't have that data, but said studies indicate that about 60-65% of customers take out the loans because they can't afford their regular expenses and many of them become repeat customers.