The Ohio Supreme Court on Wednesday ruled that the state's payday lenders can keep making the short-term loans, reversing a judgment from the Ninth District (Ohio) Court of Appeals.
The appellate court had ruled that Ohio Neighborhood Finance Inc.'s Cashland stores were skirting the state's Short-Term Loan Act that caps loan amounts and interest rates. The 2008 law capped payday loan interest rates at 28% and imposed a $500 maximum loan limit and minimum 31-day payback period to protect consumers. Later that year, voters rejected an industry-backed effort to repeal the law.
Lenders then began making loans under another section of law, the Mortgage Loan Act, that has no cap on interest rates and allows loan repayment to be demanded in a single lump sum.
The case arose when Ohio Neighborhood sued Rodney Scott, of Elyria, Ohio, in 2008 after Scott did not pay back a $500 loan. Ohio Neighborhood wanted to recover the unpaid balance through the Mortgage Loan Act, under which it is registered, and which does not restrict the amount that can be lent or the length of the loan.
Scott had agreed to repay the principal plus 25% annual interest. But because he did not pay on time, the loan interest rose to 235%, well above a 28% cap imposted in 2008.
The Supreme Court on Wednesday ruled that the Short-Term Lender Act does not prohibit Mortgage Loan Act registrants from making payday-type loans.
The Legal Aid Center of Columbus and Ohio Poverty Law Center had argued that payday loans are illegal and allow the industry to continue to prey on poor Ohioans, trapping them in long-term, spiraling debt.
Cashland and other Ohio payday lenders cannot sidestep the requirements of the Short-Term Loan Act by merely relabeling the same payday loan product as being made under the Ohio Mortgage Loan Act, the groups argued.
In a statement, Bill Faith, executive director of the Coalition on Homelessness and Housing in Ohio, expressed disappointment in the Supreme Court's decision.
"As a result, Ohio can look forward to more payday lenders exploiting the loophole in the law that was meant to regulate them. It's a sad day for consumer advocates and an even sadder day for hard working Ohioans who get trapped in mounting debt thanks to the abusive payday lending scheme," the statement said.
Ohioans are some of the biggest users of payday loans in the U.S. About 10% of Ohioans have used a payday loan in the last five years, according to the Pew Charitable Trusts' Safe Small-Dollar Loans Research Project. That compares with a national average of 5.5% and a Midwest average of 7%. The largest share of people using payday loans was 13% in Oklahoma.