Pay Day Lending Legislation At Heart of FBI Investigation Part I of II

Legislation Slated for May Full House Vote. Maybe.

By Steve Holmes

Tainted Pay Day Lender Legislation slated for House vote in mid-May?


Legislation at the heart of Speaker Rosenberger's resignation and alleged FBI investigation, H.B. 123, advanced on April 18th from the Government Accountability and Oversight Committee of The Ohio House of Representatives and is thought to face a post-primary vote in the full House when that body reconvenes.  The much talked about legislation is also the subject of a little explored industry in Ohio. The politics of this bill has overshadowed the policy debate, but the bill, in its current form, spells the effective end of the mortgage lending industry in Ohio, as was the case with the 2008 legislation that virtually eliminated short term loans.


The bill was written and sponsored by State Representative Kyle Koehler. 


The bill has gained notoriety as it is at the center of an FBI probe. The probe may or may not have involved one or more players of the pay day lending industry being shaken down by Rosenberger for campaign contributions, trips, gifts, all with the tacit threat of voting on H.B. 123. At the same time Rosenberger was publicly stating that there would be a vote on the legislation and interested party meetings continued to produce language requests acceptable to both sides.


It appears the months of high stakes meetings by interested parties, direct negotiations between the industry and anti-consumer lending forces were all a show as Rosenberger appeared to have no intent to move the bill.  It is intimated by Statehouse sources, that Rosenberger went back on his word and was about to move this and other bills as the FBI started to investigate his alleged promise to kill or advance legislation in exchange for something of value. That triggered the theory that a scorned industry advocate approached the FBI with the scheme and was able to produce enough evidence to force Rosenberger from office.


Consumer finance is a complicated business and so is the intense lobbying on this piece of legislation.  Over 500,000 Ohioans use short term loans on a yearly basis. In 2008, Ohioans amended the state constitution with restrictions that effectively regulated the Mortgage Loan Industry out of business in the Buckeye State.  


Here is what the 2008 changes did:


The law prohibits lenders from providing short-term loans over the phone, by mail, or through the Internet.


Also approved were these regulations: loans are capped at $500.00, cannot be less than 31 days, and the interest rate is capped at 28% APR. Further restrictions include that the total amount due cannot be more than 25% of a borrower’s gross salary.


A borrower is restricted as to the amount of loans that they can take out over a set period of time, and collections were greatly modified from prior practice. Anyone who lends under this act must register with the State as a short- term lender.


The 2008 law changes effectively ended what was known as “payday loans” as no firm has chosen to lend funds to consumers under the provisions of the law. Instead, the short-term loan industry effectively morphed into the mortgage lending industry.


Consumer demand continued for short term lending products, so the industry found a new vehicle to offer loans.  Ohio’s Mortgage Lending Act, housed in another section of the Revised Code, places a cap on interest rates like the short- term loans but it does not contain any of the other restrictions found in the Short-Term Lending Act. Mortgage lenders registered under the MLA are able to continue to offer short term loans. The terms and conditions vary greatly from the more restrictive short-term loans, but also have a capped rate of 25%.


At issue is the fact that lenders can charge fees over and above the cap by creating Credit Service Organizations, a vehicle akin to a loan broker.


The Revised Code prescribes that a Credit Service Organization is an organization that can help consumers find loans. For familiarity sake, it is to short term lending, what Trivago is to hotels. CSO’s aggregate loans to find the best match.  The caveat? There is no cap on the fee that the Credit Service Organization may charge for its services. This creates a multi-layer business model for the lender, and an important distinction in the debate around H.B. 123.


This fee, regulated by the U.S. Truth in Lending Act, allows the CSO fee to become a finance charge. The consumer signs a promissory note - a prepaid finance charge, that is added to the total interest the consumer pays on the loan. This is how a consumer pays more than the legally prescribed 25% rate of interest.


Hundreds of thousands of consumers use these products every day in Ohio.  The Ohio Attorney General website reports that these loans are not the subject of widespread consumer complaints.  The users are largely great credit risks and the loans are considered “loans of last resort” to people who have poor credit scores or are in need of quick cash. Industry sources report that as many as 25% to 35% of loans default, and they have to collect involuntarily from the consumer. By contrast, the last report on standard consumer loans showed a 9.7% default rate, three times lower than consumer finance loans.


Who is pushing this legislation? Please check out tomorrow's 3rd Rail Politics for Part II of Pay Day Lending Legislation At Heart of FBI Investigation.