What backroom dealings are going on in Ohio government these days? Could it be that the forces opposed to payday lending (PDL) have given the nod and wink to the Ohio Division of Financial Institutions (DFI) to create a chilling effect on lenders? There's certainly an argument to support that position.
A quick recap of Ohio payday lending. Last year, a politically-motivated firestorm against PDLs took place. When it was discovered that a Democratic Assemblywoman had a husband who lobbied for PDLs in Virginia, Republicans orchestrated political payback by backing a law designed to kill PDLs. The new law, called the Short Term Loan Act, put a 28% APR cap in place, a rate at which lenders could not survive.
Encouraged by the legislature to offer alternative products, the PDLs did exactly that. They are either operating under the Small Loan Act or Mortgage Loan Act. In both cases, the lenders can really only afford to make loans of $300 or less. The permitted origination fees and 26% APR interest hamper their profits, and restrict principal lending ability.
Some lenders, who are also licensed as check cashers, decided to provide the loan proceeds in the form of a check. Others had already done so in the past. Borrowers are given the option as to whether they want to cash the check right there in the store for a fee, or take the check elsewhere. Nothing in these Loan Acts prohibits that practice.
Nobody is forced to cash the check in the store. It’s a matter of free will. Apparently, most borrowers do cash the check in the store. The fees for cashing the check, coupled with the lending fees, allow the lenders to earn what they had been making under the old payday lending law -- about $15 per hundred.
So what’s the big deal? Who would have a problem with this, and why?
Overzealous Regulatory Enforcement Syndrome
The word I get is that the legislators no longer want to get involved in this issue. They put on their pageant, and passed the Short Term Loan Act in the most disgusting display of political theatre I’ve seen in a long time. Supposedly, they’re done with this.
So somebody, somewhere, started hammering on the DFI to do something. I imagine it’s the usual suspects – the ideologues who can’t support their credit-restricting, paternalistic (some say “fascist”) position on the issue. Maybe the Governor started screaming at DFI because he backed the rate cap and didn’t want to be embarrassed by lenders still trying to serve the people. Or maybe DFI Superintendent John Reardon has political aspirations.
So the DFI began aggressively auditing every lender in the state. By some accounts, these audits are occurring four times more frequently than they had ever occurred in the past. Despite asking DFI spokesman Dennis Ginty if this was the case or not, he avoided the question, instead citing that under the check-cashing act the department may audit as frequently as it wishes.
So, all of a sudden, lenders who cashed borrower checks started receiving ‘Notices of Violation”, along with settlement and consent orders from DFI. These lenders were threatened with $25,000 fines if they did not comply, and the fines would be suspended if they did comply. Licenses could also be revoked, suspended, or not be renewed.
Spokesman Dennis Ginty, explained the DFI renders its authority from Sec. 1321.13(G) and 1321.57(H)(1) of the Ohio Revised Code. Those sections list the specific fees that can be charged when making a loan, and a fee for cashing a check for loan proceeds is not one of them. In addition, if another affiliated business operates out of a lending office that charges fees whose intent is to evade the rules prohibiting other fees, then that is a statutory violation. Mr. Ginty noted that, “These notices and consent orders are primarily being sent to businesses that have been issuing their loan proceeds in the form of a check or money order without providing the borrower the option to obtain the proceeds in cash, and then charging those loan customers a fee to cash the proceeds check.”
Mr. Ginty concluded,
Therefore, to impose a charge or receive a fee for cashing SLA or OMLA loan proceeds checks through the same entity or an affiliated entity is to obtain an unauthorized fee. It is the opinion of the Division that in this context charging a fee to cash a loan proceeds check creates an impermissible evasion of Ohio law.
That's DFI's side of the argument.
The Other Side of the Story
Mr. Ginty first admits that there is nothing in these statutes that requires loan proceeds be provided in cash. In fact, ORC 1321.51(D) defines principal as “the amount of cash paid to, or paid or payable for the account of, the borrower”. That means a check.
Second, ORC 1321.57(H)(2) says,
Division (H)(1) of this section does not limit the rights of registrants to engage in other transactions with borrowers, provided the transactions are not a condition of the loan.
The question at hand, therefore, is whether the cashing of the loan proceeds check is a separate transaction. Logic, as well as two anonymous lawyers familiar with the PDL space, says they are two separate transactions.
The moment the customer signs the paperwork and takes possession of the check, the loan transaction is complete. The customer can walk out the door. Or they can stay to carry out other business. That includes the cashing of the check, if they wish.
Which brings us to the salient question: why is DFI aggressively enforcing statutes when their interpretation with respect to lender behavior is equivocal, at best? When one considers that the cost of the loan to the consumer is the same as it was before, and that the number of complaints remains a miniscule percentage of total loans made, why make an issue out of the matter?
Furthermore, why is it that current reports are that only small to mid-size mom-and-pop lenders are being hit with these violation notices?
Perhaps because, unlike the big chains, they don’t have the money to battle DFI in court. The result is they are forced to accede to these dubious tactics, wielded by an agency that lacks the moral backbone to stand up to whatever forces are pressuring it.
How It Affects the Stocks
Advance America (AEA) has almost 9% of its base, or 244 stores in Ohio, but has not had any trouble with DFI yet, nor do I expect them, too. Advance America has deep pockets and could wipe the courtroom floor with DFI. Cash America has more exposure in Ohio, with 60% of its payday loan stores in Ohio, although that only accounts for about 12% of its overall revenue. They haven't received any notice from DFI, either, and I doubt DFI will tussle with them, either. It's not even clear that Advance America or Cash America are even going the route of cashing consumer checks.
The Bigger Picture
DFI Superintendent John B. Reardon should be ashamed. His job as a regulatory agent is to enforce the laws so that consumers are protected. But when the law's interpretation is vague, and consumers aren't complaining, then his actions should raise suspicion.
Mr. Reardon, show that state of Ohio that you have both scruples and dignity. If you wish for a career in politics, your potential constituents will be far more likely to support you if you show that you are your own man, not an owned man.
Full Disclosure: EZPW, FCFS.