Judge says lender created ‘legal fiction’ to circumvent payday loan reforms
A Franklin County Municipal Court judge last week pushed back against a “legal fiction” she said was concocted to evade Ohio’s new payday loan law and ruled against a company seeking to collect the debt.
Judge Jodi Thomas, in what she said was one of the first major rulings in Ohio’s 2018 payday loan reform, ruled that a short-term loan issued by Green Bear Ohio was confusingly structured to evade Ohio borrower protections.
A woman named April Williams walked into a local CheckSmart office on April 28, 2019 for a loan and walked out with a check for $501 to be repaid in 30 days. Unbeknownst to her, she accepted an additional $500 “collateral” at the time held by another party – TPG LLC.
She never received the $500 collateral and had no control over it, but she had to pay 24.99% interest plus fees on the $1,001 quasi-loan in what Thomas called it an “extraordinarily convoluted” transaction.
This security, said Thomas, was a “legal fiction that had no other purpose than to ensure [Williams’] the original line of credit drawdown was over $1,000. In other words, by crossing the $1,000 threshold, the loan was controlled by Ohio’s mortgage laws, not its payday loan laws.
Green Bear is registered to issue loans under Ohio mortgage law, not the state’s short-term loan law.
“The CheckSmart employee told me that due to a change in the law, the loan would be structured as a line of credit and that I would be required to ‘borrow’ an additional $500 which I would neither receive nor would control, but would instead be held by the lender as ‘security’ for the loan,” Williams said in an affidavit.
“I only received $501, but I was charged 24.99% interest on the entire balance of $1,001, plus a $10 credit investigation fee and an annual $150 for the first year.”
A call to CheckSmart’s corporate headquarters was redirected to the company’s general counsel, who did not respond to a voicemail.
The term payday loan generally refers to short-term, low-value unsecured loans that borrowers repay on their next payday. These loans may be the only source of capital for poor Americans with bad credit who are in dire straits. However, loans often come with predatory rates and fees, trapping borrowers in cycles of taking out new loans to pay off old ones.
Williams returned to the CheckSmart location on four monthly visits to repay the first loan with a new, larger loan. In July 2019, she left with a $600 loan, which she never repaid. Subsequently, Insight Capital LLC, which purchased Williams’ debt, filed a lawsuit against her. Insight was asking for $600 in capital (plus 24.99% interest from the date of judgment), as well as $150 in annual fees and $10 in credit investigation fees.
A review of court records shows that Insight Capital has filed hundreds of such collection cases in Franklin County Municipal Court alone. Kevin Murch, an attorney representing Insight Capital, declined to comment but noted that all cases are now closed.
“It’s absolutely outrageous what the industry has done and what it has done,” said Emily White, an attorney representing Williams.
The court dismissed Insight Capital’s lawsuit seeking repayment from Williams, finding the underlying loan was structured to circumvent Ohio mortgage laws. However, Thomas also dismissed Williams’ counterclaims that the loans violated the Ohio Payday Loans Act of 2018 and the Consumer Sales Practices Act. White said she and Williams are considering appealing.
“If this is not a violation of consumer protection to be collected on loans, it will be difficult for ordinary consumers to find lawyers willing to defend cases and pursue legal remedies, especially more than most people who take out these loans have very limited funds in the first place,” White said.
The History of Payday Loans in Ohio
The Ohio General Assembly has tried and failed repeatedly to thwart the predatory practices adopted by some payday lenders.
In 2008, lawmakers passed legislation to force lenders to apply for a license and comply with various limitations. Ohio voters defeated an industry-backed referendum to repeal another law aimed at curbing payday lending.
However, instead of obtaining licenses under this law, lenders registered as brokers, circumventing consumer protections against soaring fees and interest rates.
A challenge under this law went to the Supreme Court of Ohio, ultimately resulting in a 2014 opinion allowing payday loans under Ohio’s mortgage law. It was based on a loan of $500 with repayment required within two weeks and an annual interest rate of 235%.
The decision was unanimous, but Judge Paul Pfeifer wrote a concurring opinion calling payday lending a “scourge” and criticizing state lawmakers for not closing the loophole.
“How is it possible?” he wrote. “How can the General Assembly set out to regulate a controversial industry and accomplish absolutely nothing? Were lobbyists smarter than legislators? Did lawmakers realize that the bill was all smoke and mirrors and would accomplish nothing?
In 2018, state lawmakers passed a law requiring payday lenders — those offering loans for less than $1,000 or for periods of less than a year — to obtain a license and adhere to certain consumer protections. It also capped interest rates on loans at 28%, down from rates well into the hundreds.
It also capped total loan costs (fees and interest) at 60% of the loan principal.
The 2018 law was designed to close the loophole, prohibiting registrants under Ohio mortgage law from issuing loans for less than $1,000 or for one year or less. The Williams case suggests that payday lenders are still trying to circumvent state regulations.
Rep. Kyle Koehler, a Springfield Republican who led the 2018 effort, did not respond to an inquiry into the recent judgment.
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