The Star Beacon; Ashtabula, Ohio

June 25, 2008

Payday loan shops find fertile ground in county’s low per capita income landscape

By CARL E. FEATHER - Lifestyle Editor -

One of the fastest growing industries in Ashtabula County is payday or cash advance loan stores, which are popping up in strip malls and shopping plazas all over the county.

In 2007, there were 12 such operations in Ashtabula County. That’s one for every 8,500 residents, a concentration that would be illegal if it were in Cuyahoga Falls, which restricts cash-advance stores to one for every 10,000 residents.

Paul Bellamy is special counsel to the Equal Justice Foundation in Columbus. He has studied the siting patterns of payday-loan firms and observed numerous practices consistent with geography and demographics.

“They look for people who are actually considered middle class by Census (Bureau) standards, but they are just under median, at 80 to 100 percent of median,” Bellamy says. “They also tend to gravitate to areas of higher rentals as opposed to home ownership.”

In short, they target the working poor, says Bellamy. The typical payday loan customer is female, young and single.

“That’s the sweet spot for (the lenders),” he says.

The business model depends upon trapping the borrower in a cycle of debt that results in an accumulation of fees and interest that amounts to a 391-percent annualized percentage rate (APR).

According to the Ohio Coalition for Responsible Lending (OCLR), the average payday borrower takes out 12.6 loans per year and borrows an average of $328. By the 13th loan, the borrower has paid $637 in fees to borrow the original $328 over and over again.

A report issued by OCRL in October 2007 showed that 2,255 Ashtabula County borrowers were doing business with payday loan offices.

Bill Faith, executive director of the Coalition on Homelessness and Housing in Ohio (COHHIO), says although it’s a relatively small population that uses the payday loan service, the impact is wider because the industry’s business model withdraws money from the economy without providing any real value to the borrower after the first loan. Ideally, the borrower will pay off the loan after two weeks, along with the fee. But he says, in practice and in order for the business model to work, the borrower must return to the payday loan storefront a day or two later and essentially borrow that same money again to meet obligations left outstanding by paying off the first loan. The industry thrives on borrowers who live from paycheck to paycheck and have no room for a single large payment in their budgets.

By repeating that cycle pay period after pay period, the borrower accumulates fees and interest in excess of the original amount borrowed, which never gets paid back. The average payday loan borrower gets 13 loans a year, says Faith.

“That hurts the rest of the community because that is less money they have to pay their other bills, vendors or to make purchases with,” he says. “They get no value for their money. … They simply borrow the same money over and over.”

Bellamy presents the payday loan business as a microcosmic model of the subprime lending debacle, which is pushing the nation toward recession. He says both operate on the concept that every American has a constitutional right to credit. However, because of the risk inherent in lending money to the working poor, the lenders must charge higher fees and engage in practices that entrap the borrower into a lifetime of increasing debt.

“It is socially and economically bad policy to permit this kind of business model from existing,” he says.

As the bursting of the housing bubble has demonstrated, while a handful of savvy lenders profit, the ramifications and losses are widespread when the system collapses.

“It’s not the borrower who pays the price at the end of the day,” he says.

Several bills are under consideration in Ohio to limit payday lending. Faith says COHHIO supports H.B. 333, which would limit the interest rate to 36 percent APR. The Ohio Legislature exempted the payday loan business from established maximum usury rates. COHHIO also supports lending models that allow for smaller installment payments, rather than an impossibly large single sum.

As a state, Ohio has one of the highest numbers of payday loan storefronts. In Ashtabula County, on average, a new storefront has opened every year since 1996.