States File Suit to Regulate Payday Lenders

By Angela Joyce and Susan Cihla

             This is Part 2 of our ongoing examination of Payday lenders.  In this issue, we’ll discuss the latest government-sponsored lawsuit against a payday lender, and discuss weaknesses in Ohio law, which may prevent Ohio governmental agencies from calling for justice for its residents.  For Part I see the Grapevine on the Internet at www.neoch.org under programs.

            July 13, 2001, marked the beginning of the latest state-sponsored lawsuit filed against a payday lender.  The State of Colorado is suing the country’s largest payday lender and check cashing company, ACE a.k.a. American Cash Express, Inc., of Irving, Texas.  The State of Colorado accused ACE of violating state laws and charging exorbitant interest rates to mostly poor clients.

            The state of Colorado is not the first government entity that has filed suit against a payday lender.  The State Attorney General of Virginia brought suit against several payday lenders some years ago.  In addition, a private, class-action suit is currently pending in Florida against another payday lender.

            The lawsuit stemmed from a lengthy report published by the Colorado Public Interest Research Group (CO-PIRG. In April of 2001, CO-PIRG conducted a survey, revealing that payday lenders were exploiting their ties to national banks in order to charge higher interest rates and roll loans over in pursuit of double or triple fees. The Colorado State Attorney General’s office also began to investigate ACE’s practices during an audit ordered after ACE voluntarily surrendered its Colorado supervised lender’s license in December of 2000 ACE has been operating without a state license in Colorado every since.

            ACE terminated its Colorado license because its operators believe that its partnership with Goleta National Bank, of Goleta, California, allows ACE to sidestep restrictive state of Colorado regulations placed upon payday lenders.  Eric Norrington, an ACE vice president, told the Denver Post, “The dispute boils down to an interpretation of the law.”

            Colorado law permits payday loans, but does not classify them under their code of usury.  Usury codes in Colorado possess a loan cap of 36%.  Payday loans in Colorado may not exceed $500.00, and the lender cannot charge more than 20% of the loan amount for the first $300.00, and 7.5 percent foe the next $200.  For example, for a 14 day, $500.00 loan, the lender may charge a $75 fee, the equivalent of a 391% annualized percentage rate.  Under Colorado law, the original loan can be rolled over once, with the lender charging the same fee of $75.00.  After one roll over, the rate, by law, has to drop. The lawsuit alleges that ACE continued to roll over loans at higher interest rates.  The CO-PIRG survey revealed that ACE’s cash stores advertised three or more rollovers.  With these multiple rollovers, the customer could pay as much in fees as the original amount of the loan.

            The lawsuit rates questions as to whether or not a non-bank, lending agency, such as ACE, when in partnership with a nationally chartered bank, falls under the National Bank Act.  If that were the case, ACE and other payday lenders would not be obligated to observe state consumer protection laws.  Ken Lane, Colorado State Attorney General spokesman, believes the case may reach the Supreme Court.

            Representatives from ACE, on the other hand say their company is providing a valuable service to the community, and that the company has been overwhelmed by the demand for payday loans.  The loans are popular, they say, because so many consumers are denied access to traditional banks or credit lines.  According to CO-PRIG, residents of Colorado borrowed 86 million dollars from payday lenders in 1999; up from 67 mission the year before.

            No public or private agency has yet to determine either the number of payday loan borrowers in Ohio, or the loan amounts they borrow annually.  While Ohio law requires payday lenders to make their books and records available to the Attorney general on demand, this statue does not apply to any bank, bank holding company or affiliate of a bank or bank holding company.  Since most payday lenders are not partnered with financial institutions, even the Attorney General is prohibited from an on-demand examination of payday lender records in Ohio.  Furthermore, Ohio law prevents information gathered by the Attorney General for these purposes from being made public.  These statues make it difficult, if not impossible, for the public to gain any access to information, positive or negative, about payday lender activity in our state.

            ACE, at its area locations, does comply with Ohio state statues calling for full disclosure of interest rates and fees for payday loans.  However, it remains to be seen whether ACE is circumventing statues limiting a loan to a period not to exceed 6 months, by engaging in endless loan rollovers.  This should be of special interest to Ohio lawmakers, government officials, and residents: this is a law similar to that in Colorado, the violation of which is being answered there with governmental intervention.

            Ohio does not specifically name a 6-month limit on rollovers (i.e., newly negotiated loans): just existing ones.  But even if payday lenders like ACE were ordered or cared to restrict the duration of their rollover periods to 6-months, that’s little consolation to area debtors.  In that amount of time, a single loan could rollover 11 times, causing the consumer to pay 100% of the loan just in fees, without touching the principal.

            The consumer Federation of America, in response to payday lender abuses, recommended the following:

  1. federal legislation preventing the use of national bank and thrift charters to evade state small loan rate caps and usury laws.
  2. the maintaining and enforcement of interest rate caps for small loans at the state leave.
  3. compliance by payday lenders with the Truth in Lending Act by disclosing annual percentage rates, so consumers may comparison shop for credit.
  4. and state reform of existing payday loans laws, with lower maximum rates and comprehensive consumer protections.

The problem is, three out of four of thee recommendations (the three adoptable on

a State level) are already in effect in the state of Ohio.  The reforms are not slowing payday lenders and their bank partners in the least.

            In response to a query about the private class action suit filed against ACE in Jacksonville, Florida, ACE president, Jay B Shipowitz, was quoted as saying, “This produce (meaning payday loans) was designed and developed with thee types of claims in mind.  We believe that the favorable outcome of this matter will be an important step in the evolution and broader acceptance of this new credit product.”

Copyright NEOCH and the Homeless Grapevine, Issue #49 August-September -2001