(FinalCall.com) – Ohio joined Arkansas, New Hampshire, Oregon and the District of Columbia recently by capping a two-digit interest rate on payday loans. The state move was the latest regulatory change since Congress limited interest to 36 percent for payday and car title loans to military families last year.

The Pentagon said predatory payday lending threatened the quality of life of military families and combat readiness of servicemen and women. Payday loan and car title companies are outlawed near military bases.

“The bipartisan legislation signed today takes a major step toward protecting Ohio consumers who are already struggling with debt by strictly regulating payday lenders and lowering the maximum interest rate for short-term loans,” said Gov. Ted Strickland. He signed the bill into law June 2.


The bill caps the interest rate for payday loans at 28 percent, reduced from the current annual interest rate of 391 percent, sets a $500 borrowing limit for consumers and restricts borrowers to four loans per year. Additionally, the legislation extends loan terms to 31 days from 14 days.

With payday loans, a customer writes a check to a lender. The amount on the check equals the amount borrowed plus a fee that is either a percentage of the full amount of the check or a flat dollar amount.

Some payday lenders offer an alternative “automatic debit” agreement. Customers who sign this agreement give the lender permission to automatically debit the customer’s account at a future date.

Automatic debit arrangements, in particular, are often marketed to public assistance and Social Security recipients. The check or automatic debit is held for up to a month, usually until the customer’s next payday, hence the term payday loan, or until receipt of a government check.

The customer pays another fee to extend the loan.

It sounds nice and easy and can be for customers who use the service for a temporary need or an emergency. But for borrowers entrenched in debt, the loans can become part of a cycle that costs more to get out of than it did to get into.

Payday loans companies said consumers should be able to decide whether to access to payday advance services. After the bill was signed, the Community Financial Services Association of America, which represents payday lenders nationwide, announced a referendum to overturn the law, which effectively bans payday advances in Ohio.

“During the debate in the state legislature, consumers were left out of the equation,” said Lynn DeVault, of Community Financial Services Association of America President. “We intend to give consumers a voice in the democratic process.”

The lobby group said a recent Zogby International survey found 84 percent of likely voters in Ohio believed citizens should be free to make their own decisions about what kind of credit they can use, and 70 percent said the government should not be in the business of telling adults they cannot get payday loans.

Under the new Ohio rate cap, the current fee of $15 per $100 advanced would be reduced to less than 10 cents per day. The law takes effect 90 days after it was enacted. In response, many payday advance companies have announced they will be closing stores in Ohio, putting as many as 6,000 jobs in jeopardy.

“We expect that the voices of consumers will be heard in November and payday advances will again be available to the people of Ohio in 2009,” Ms. DeVault said.

In a faltering economy marked by high debt, payday lending threatens to further rock the finances of people struggling to meet their obligations, advocates warn. Payday lenders draw in borrowers who need cash before their next payday, and charge them annual interest of about 400 percent, or $50 every two weeks for a $300 loan.

“Payday loans trap borrowers–it’s that simple,” said Uriah King, a policy analyst with the Center for Responsible Lending. “Even the payday lenders admit they need their customers to reopen their loans many times at these astronomical interest rates just for their business to survive.”

“We’re all for good, responsible credit,” said Mr. King. “It’s just got to be done without basing your business model on gouging low-income borrowers.”

Payday lending took hold in the late 1980s and quickly swept the country as industry lobbyists convinced state legislatures their two-week loan product should be exempt from annual interest rate limits. Advocates and policymakers increasingly see the two-week loan as a myth. The industry relies on repeat loans for 90 percent of its revenue and loan terms are designed to keep that cycle going, said payday loan opponents.

Connecticut, Georgia, Maine, Maryland, Massachusetts, New Jersey, New York, North Carolina, Pennsylvania, Vermont and West Virginia also enforce two-digit interest rate caps.