Post by: Eric Jones | Posted Date: December 11th, 2013 | Categories: Debt Collection
I recently had a case in the Franklin County Municipal Court wherein I represented a payday lender who was seeking judgment against a borrower for a relatively small balance but at an annual interest rate of 25%. The Court in my case raised the issue of whether the lender had the legal right to be a licensed registrant under Ohio’s Mortgage Loan Act and hence could avail itself of the annual statutory interest ceiling of 25% as found in the Act. After briefing the issue and presenting my arguments, the Court found in my client’s favor and entered judgment accordingly.
The purpose of this article is to discuss some of the issues involved in payday lending loans. This particular type of loan is generally defined as a small loan to be repaid with a single automatic withdraw from the borrower’s checking account when his or her next pay check is deposited into a checking account. Some critics point out what they claim are the exorbitantly high interest rates on these loans, and have assailed payday lenders as ruthlessly praying upon consumers who, as a last resort, have been forced into borrowing money between employment pay periods at these high rates in order to make ends meet. Others have voiced support for this type of loan by pointing out that the consumer borrower would not have otherwise been able to feed his or her family, put gas in their car to travel to and from work, or keep their electricity on but for this loan product. For a time Ohio law allowed lenders to charge an APR of 391% on these types of short-term loans. (See, Ohio’s previously-repealed Payday Loan Act). However, in 2008 the Legislature enacted the Short-Term Loan Act. R.C. §§1321.35-1321.48 (STLA). Among other things, this law typically limits these types of loans to the 8% annual interest rate found in Ohio’s general usury statute. (R.C. §1343.01).
The Ohio Mortgage Loan Act (R.C. §1321.01 et seq.) (OMLA) is somewhat of a misnomer as it is a general-purpose licensed lender act permitting registrants to make not only mortgage loans but also other types of direct consumer loans. A lender making loans under the OMLA must register with the Ohio Department of Commerce. Among other things, the OMLA governs the maximum interest rate a licensed lender may charge the consumer borrower, which, as set forth in R.C. §1321.571, is 25%. Naturally payday lenders would prefer to charge 25% interest as permitted under the OMLA rather than the lower interest rate prescribed in the STLA. Many Courts throughout the State of Ohio have agreed that payday lenders have the right to avail themselves of the interest rate found in the OMLA, and for several years the general rule of thumb is that the 25% rate is perfectly acceptable in these types of loans.
A recent case in Lorain County, however, has cast some doubt as to whether that rule of thumb will continue. In 2009, the Elyria Municipal Court ruled in Neighborhood Finance, Inc. dba Cashland v. Scott that by writing payday loans using the guidelines found in the OMLA, specifically the interest rate ceiling of 25%, lenders are attempting to circumvent the intent of the Ohio Legislature in repealing the Payday Loan Act and enacting the STLA. The Judge in the Scott case ultimately held, among other things, that the payday lender could not legally charge the borrower 25% interest but rather was limited to the 8% rate found in the general usury statute.
It is important to note that Scott is currently being appealed to the Ninth District Court of Appeals in Lorain County, so the case is far from being the controlling law in Ohio. But if the Appeals Court affirms the Trial Court’s ruling, that decision would become the controlling law in the Ninth District and it would create a split amongst Ohio Courts on this issue. Should that occur, the Supreme Court of Ohio may ultimately have to decide what the law of the land is.