Crain’s Cleveland Business
Five years ago, Ohio passed the most robust payday lending regulation in the country in response to the revelation that there were more payday lenders in Ohio than the three most common fast-food chains combined.
The legislation was supposed to protect consumers from predatory lenders charging outrageous fees for small loans that had to be repaid in two weeks or less. Everyone cheered, except the payday lenders.
So why are more than 1,000 outlets still charging 391% interest rates?
The payday lenders are now using mortgage licenses and credit service arrangers to evade Ohio’s usury cap while selling the same predatory loans. The Ohio General Assembly and other elected officials stand idly by while the problem has gotten worse. Last year, auto title lenders began making usurious loans and repossessing cars.
The Ohio Supreme Court recently ruled that using the mortgage lending law seems inappropriate, but the General Assembly needs to address it. And so the circle continues.
Neighborhood Housing Services of Greater Cleveland (NHS), a 40-year-old HUD-approved counseling agency and nonprofit lender, is no longer waiting for the Legislature to act. Instead, we are setting a new bar for the market.
Beginning in 2014, we launched a pilot program that gives consumers a true alternative to payday loans. Working with Employee Loan Solutions, the Business of Good Foundation and the Cleveland Foundation, we help employers access the TrueConnect loan product that is not only better for consumers than payday loans, but is an improvement on the standards set in Ohio’s Short-Term Loan Act.
This innovative product beats payday lending in critical ways that include a substantially lower interest rate, no hidden or additional fees, and a payback term with no prepayment penalty that is far longer than two weeks.
We launched our pilot program with a midsize, private-sector marketing firm in Cleveland.
Already, employees who have typically gone to payday lenders are using TrueConnect. What’s more, the employees are building credit, because positive repayments are reported to the credit bureau.
We are not just lending safely and fairly, but augmenting this product with complimentary financial capability coaching and counseling, to those accessing TrueConnect.
One NHS board member made the astute observation that our goal is to transition a client into a place where they do not need a loan.
A natural question is why NHS or any organization would want to get into this small-dollar lending space.
A recent FDIC report found that 25% of Ohioans are unbanked or underbanked — impacting them with needless fees and additional costs each year.
Our national partner, the Corporation for Enterprise Development (CFED), found an even greater percentage of Clevelanders are asset poor (45%) — unable to survive with existing assets at the federal poverty level for three months.
Lastly, the Consumer Federation of America noted that roughly half of households do not have access to $1,000 in cash in case of an emergency. We see all of these scenarios with our clients and thus we believe there is a need for safe, affordable and credit-building small dollar lending.
Not so long ago, I critiqued the payday lending model that trapped thousands of families in debt by equating it to giving an anchor to a sinking ship. This model of lending — leveraging the workplace with TrueConnect — provides a life jacket and will help families right the ship.
Neighborhood Housing Services of Greater Cleveland welcomes other employers to work with us to bring TrueConnect to their employees and help us provide a safer, better alternative to payday lending.