Ohio Governor John Kasich on Monday signed into law tough new restrictions on small-dollar lending. It will take at least 270 days until licensed lenders are required to comply with the limitations in the new law. The new law will eliminate motor vehicle title lending and payday lending in Ohio and also lead to a dramatic reduction in unsecured installment lending in the state.
On September 5, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar, "New Ohio Restrictions on Small-Dollar Lending." A link to register is available here. Topics will include whether and how small-dollar lending remains feasible in Ohio.
The new law prohibits loans facilitated by credit services organizations (CSOs) where: (1) the amount of the loan is less than $5,000; (2) the term is less than one year; and/or (3) the annual percentage rate (APR) exceeds 28%. Currently, virtually all small-dollar, high-cost loans in Ohio are made under the CSO model.
Under the new law, companies currently operating as CSOs may instead obtain short-term loan licenses and offer a new type of small-dollar installment loan, subject to a number of restrictions and requirements. Maximum APRs on the new loans depend on the loan amount and term. Based on initial analysis by attorneys in Ballard Spahr's Consumer Financial Services Group, the chart below shows approximate APRs on these new Ohio loans, when paid in biweekly installments, for loan amounts and number of payments indicated:
|
Loan Amount |
Maximum APRs 7 Biweekly Payments |
Maximum APRs 26 Biweekly Payments |
|
$300 |
226% |
100% |
|
$500 |
162% |
100% |
|
$1,000 |
102% |
91% |
These APRs fall far below "typical" APRs for small-dollar loans in Ohio.
The new Ohio loans must be $1,000 or less and generally must be payable in substantially equal installments over a term of 91 days to one year. Interest must be precomputed at a rate of 28% per annum or less. Insofar as finance charges under Regulation Z are concerned, in addition to precomputed interest up to 28% APR, the lender may charge, on new loans, but not refinancings: (1) a monthly maintenance fee equal to 10% of the amount financed or $30, whichever is less; (2) a 2% origination fee on loans of $500 or more; and (3) a $10 fee to cash a loan proceeds check. These fees and interest are limited to 60% of the amount financed over the loan term. Computation of the monthly maintenance fee is somewhat uncertain for loans not payable in monthly installments.
Lenders making the new type of Ohio loans are required to:- make a recommendation to the consumer of the length of the loan term based on monthly income of the borrower verified through, at least, a pay stub or bank statement within the preceding 45 days, although it is unclear how this requirement would apply to a licensee that does not offer varying loan durations;
- provide a three-business-day rescission right;
- provide pro rata rebates of finance charges for prepayments in full, with the rebate based on the number of days the new Ohio loan was outstanding and the original scheduled term; and
- make specified disclosures, including a factually doubtful statement that banks, credit unions, and other financial institutions "may be able to offer you a similar loan at a lower cost."
- take a vehicle title or registration as security;
- make multiple new Ohio loans (together with affiliates and employees) to the same borrower at the same time;
- charge monthly maintenance fees;
- allow total amounts outstanding from all lenders under new Ohio loans, as certified by the borrower, to exceed $2,500 at any time;
- provide for acceleration earlier than 10 days after a missed payment;
- provide incentives for repeat business; or
- attempt to collect from a borrower’s account after two consecutive failed payment attempts, absent a new post-failure written authorization from the borrower.
Additionally, the permissible purposes for which a licensee can contact a borrower would be severely limited. Indeed, read literally, the bill would preclude a licensee from soliciting a refinancing or new post-payoff business from an existing borrower on one of the new Ohio loans. The constitutionality of these new communication limits under the First Amendment strike us as highly questionable. Worse, the substantive limits on new Ohio loans strike us as overly severe.
Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.Copyright © 2018 by Ballard Spahr LLP.
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