Ohio has become the hot bed of contention over Payday Loans. It is a simple concept. You need a few bucks for a few days, and you pay a small fee. Sounds simple? Well it is anything but simple. The Ohio legislature is set to close the industry down. At the center of the controversy is the APR, it sits at 391%. Outrageous, most would say, “my credit card only charges 28%”.
The facts are somewhat different, the borrowers are folks that generally have no other place to go, no credit cards, no friendly bank manager to talk to. And are more than happy to pay $15 for borrowing $100 for two weeks.
This is a high risk business, the loans are small, and they tend to be for less than 14 days. Unsecured loans are a high risk business.
Senior VP of Dublin-OH based Checksmart and President of the Ohio Association of Financial Service Centers Jamie Frauenberg was gracious enough to sit down with me and talk about the situation.
Can you tell us a little about yourself, and your involvement with the Payday Loan industry?
I have been in the check cashing/PRA industry for 13 years. My father started the company in 1987 with one store and we now have over 250 location in 11 states. I am now the Sr. VP at Check$mart Financial located in Dublin, OH, the President of the Ohio Association of Financial Service Centers (OAFSC), the chair of the Payday Advance Committee for the Financial Service Centers of America (FISCA), a board member of the California Financial Service Providers (CFSP), and a board member of the Utah Consumer Lending Association (UCLA).
What is happening in Ohio is potentially problematic on a couple of levels. It could result in 6,000 people losing their jobs, and 1600 companies going bust. The 391% APR is the catch that has caused the problem, but the interest rate is pretty much irrelevant, the loans are short term, 14 days. In real terms this works out at $15 per $100 borrowed. What has caused this ’scrutiny’ from the law makers?
The scrutiny from lawmakers comes from reading misleading media coverage and listening to the anecdotes and fact-free information from so-called consumer advocates who have not taken the time to learn about the customers or the service. They’ve likely never stepped foot in a store or been in a position to need a small amount of cash between paychecks.
It’s easy for people who have nothing to lose to call for a ban. Their jobs aren’t on the line and they will likely never be in a position to need a payday advance.
Is there a solution that would keep The Payday loan industry and the law makers of Ohio happy?
The solution is to put in place additional protections for the consumer that address lawmakers’ concerns but still allow reputable lenders to stay in business and service demand.
Consumers are harmed, not helped, if payday lending is banned.
If the Payday Loan industry disappears, where will people with no credit go?
Customers use payday loans to avoid other fees or less desirable alternatives. They choose between bouncing a check or overdraft protection, incurring late fees on routine bill payments, borrowing from friends, family or church, taking out a cash advance on a credit card, using an online lender or taking out a payday loan. All of these products have a cost associated with them.
Eliminating payday loans just forces people to chose alternatives they had previously tried to avoid.
Recent studies have shown that without payday loans, customers bounce more checks, complain more about lenders and debt collectors, and file for Chapter 7 bankruptcy at a higher rate. One survey found some customers had utilities disconnected, went without a prescription medication or ended up with a damaged credit rating.
In each case, consumers may have been better served by payday advances, which often offer lower fees and do not negatively impact credit ratings.
Links to independent research:
“Payday Holiday: How Households Fare after Payday Credit Bans,” by Donald P. Morgan, Research Officer with the Federal Reserve Bank of New York, and Cornell University graduate student Michael R. Strain
Survey by University of North Carolina Finds Consumers Face Costly Short-term Credit Choices Since Payday Loans Exited the State
Jamie, thank you so much for taking time to talk with us. This is clearly a subject that is multi faceted. One can only hope that the law makers take time to consider the consequences of their actions.
Simon Barrett
(1 votes, average: 4 out of 5)
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2 users commented in " An Interview With Jamie Frauenberg - Is it Payday Loan, or Payday Moan? "
Follow-up comment rss or Leave a TrackbackIt’s great to see both sides of the story rather than sensationalizing the issue. Unfortunately, it’s unsurprising that no one’s chosen to comment on this particular story. The worst part about the internet is that it allows people to simply tune out information and news that they don’t want to hear or to omit evidence which doesn’t support their claims. Bravo for balance.
I have worked for Checksmart for 3 years. At first, I was surprised by the amount of people choosing Payroll Advances for their short term needs. Basically, I had been fortunate enough to not need an advance, so I did not know their reasons to get one. Over time, through established relationships and processing thousands of transactions, I learned that people came to us from all walks of life because we were cheaper than their other options. I believe that banks are fee-based these days, and it is amazing that a bank can charge you $30 for an overdraft of .01 penny and $5 each additional day; or a credit card company can charge a late fee, but we can’t charge our “fee” because we have to quote an “APR”. Wake up–I get 5 credit card offerings in the mail a day, they show up at sporting events, college campuses(a lot of students don’t even have jobs), and I can’t buy a shirt without the cashier asking if I would like to sign up for their credit card to “save” an additional 10% while the credit card company banks on the fact that a certain percentage of its consumers won’t pay the balance in time and will make them $$$$. So who’s the bad guy? My honest opinion is that the American public needs to learn how to not spend money they don’t have–budget, budget, budget!!! I drive a crappy car, don’t go on vacation, and don’t go out much–but guess what: I work my butt off and I’m not in debt. But if my car got a flat tire and I needed to get to work, I sure as hell would choose a payroll advance over giving those credit card companies anything. I don’t need people to tell me what I’m capable of understanding. The problem with this country is that we have raised a bunch of breast-feeding babies with rubber corners to protect them and those of us who are privileged to work for the government are afraid to let people think for themselves. I guess if people were allowed to think for themselves and if we focused on educating people, they wouldn’t need to borrow so much and probably wouldn’t vote for some of you. Imagine not having that job security…kinda scary, huh? My point is: People are smart enough to make their own financial decisions, but if you don’t think we’re capable of this, then change it across the board. Banks should only be allowed to charge 28% overdraft on their customers, credit cards and other billers should also only be able to charge a fee that is proportionate to the balance owed and credit cards should only be able to allow usage 4 times a year. The customers that came into Checksmart: teachers, police officers, lawyers, business executives, factory workers, secretaries, waitresses, etc.–they came to us because of YOUR business practices with credit. We were an affordable last resort. Please respond–I beg you! By the way, my name is David Schmitz and I live in Cincinnati, Ohio.
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