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Court Decides Payday Loan Case

Image of a storefront for a payday loan business

The court determined that the Short-Term Loan Act (STLA) does not prohibit lenders registered under the separate Mortgage Loan Act (MLA) from making interest-bearing, payday-style loans. (Photo by Taber Andrew Bain / CC BY 2.0)

Image of a storefront for a payday loan business

The court determined that the Short-Term Loan Act (STLA) does not prohibit lenders registered under the separate Mortgage Loan Act (MLA) from making interest-bearing, payday-style loans. (Photo by Taber Andrew Bain / CC BY 2.0)

Legislation passed in 2008 to reform the regulation of payday loans does not apply to similar types of loans made under another section of law, according a decision from the Ohio Supreme Court today.

Writing for the unanimous court, Justice Judith L. French determined that the Short-Term Loan Act (STLA) does not prohibit lenders registered under the separate Mortgage Loan Act (MLA) from making interest-bearing, payday-style loans. Also, under the MLA, a registered lender is permitted to require that an interest-bearing loan be repaid in a single installment, Justice French wrote.

The decision reverses the judgment of the Ninth District Court of Appeals and returns the case to the trial court for additional proceedings.

Ohio Neighborhood Finance, which operates lending businesses called Cashland, registered as a lender under the MLA in 2008. The company is not registered to make loans under the STLA.

On December 5, 2008, Cashland loaned $500 to Rodney Scott. The loan agreement set up this payment schedule: “One payment in the amount of $545.16 due on 12/19/08 (Payment Date).” The repayment amount included a credit investigation fee, loan origination fee, and interest.

Scott did not repay the loan on December 19, and Neighborhood Finance filed suit in Elyria to recover the money. A magistrate concluded that Neighborhood Finance was using its lending status under the MLA to avoid the limitations established in the STLA, which the magistrate held should govern this loan. The municipal court adopted the magistrate’s decision.

Neighborhood Finance appealed, but the Ninth District affirmed the lower court’s ruling. The company filed an appeal with the Ohio Supreme Court, which agreed to hear the case.

In today’s opinion, Justice French explained that the MLA provides for either interest-bearing or precomputed loans. Scott’s loan was interest-bearing. The relevant statute in the MLA defines an “interest-bearing loan” as a loan “in which the debt is expressed as the principal amount and interest is computed, charged, and collected on unpaid principal balances outstanding from time to time.”

While precomputed loans are required by law to be repaid in monthly installments, the MLA statutes governing interest-bearing loans do not include a monthly installment mandate, Justice French wrote.

“The General Assembly could … have included a separate provision in the MLA that specifically requires that interest-bearing loans be repayable in multiple installments, just as it did with precomputed loans by requiring monthly installments,” she reasoned. “[I]t did not do so. Reading the statute according to the natural and most obvious import of the statutory language, we conclude that R.C. 1321.51(F) is not ambiguous.”

Justice French then addressed the question whether the STLA bars MLA lenders from making payday-type loans. She explained that, before its repeal in 2008, the “Check Cashing Lender Law” allowed lenders to make payday loans, which are usually unsecured short-term loans for small amounts that are to be repaid in full on the borrower’s next payday. The STLA was enacted in its place in 2008 to in part deal with concerns about payday loans.

Justice French noted, however, that no loan providers are now registered under the STLA. Instead, lenders making payday loans in the state are mostly registered under the MLA or another loan act.

In its decision, the Ninth District ruled that the General Assembly intended, when it repealed the check-cashing law and passed the STLA, to bar any payday loans.

Justice French pointed out that “[p]ursuant to R.C. 1321.36(A), no person may make a short-term loan to an Ohio borrower without first obtaining an STLA license, but R.C. 1321.35(A) defines ‘short-term loan’ narrowly as a loan made pursuant to the STLA.”

“Thus, there is no language in the STLA that requires a lender to be licensed under that act before making a payday-style loan,” she continued. “Had the General Assembly intended the STLA to be the sole authority for issuing payday-style loans, it could have defined ‘short-term loan’ more broadly.”

“[Ohio Neighborhood Finance] is not licensed under the STLA and is, therefore, not entitled to make short-term loans pursuant to the STLA,” Justice French wrote. “But the loan here was not an STLA loan; it is undisputed that the STLA would not permit the subject loan, because its terms contravene the STLA’s requirements regarding the loan term, interest, and fees. Because [the lender] did not issue a ‘loan made pursuant to [the STLA],’ the loan does not qualify as a ‘short-term loan’ subject to the requirements of the STLA. Nothing in the STLA limits the authority of MLA registrants to make MLA loans. “

Justice French’s opinion was joined by all of the justices. Justices Paul E. Pfeifer also wrote a concurring opinion.

In his concurrence, Justice Pfeifer commented: “Payday lending was a scourge. It had to be eliminated or at least controlled. So the General Assembly enacted a bill, the Short-Term Lender Act (“STLA”), R.C. 1321.35 to 1321.48, to regulate short-term, or payday, loans. And then a funny thing happened: nothing. It was as if the STLA did not exist. Not a single lender in Ohio is subject to the law. How is this possible? How can the General Assembly set out to regulate a controversial industry and achieve absolutely nothing? Were the lobbyists smarter than the legislators? Did the legislative leaders realize that the bill was smoke and mirrors and would accomplish nothing?”

2013-0103. Ohio Neighborhood Fin., Inc. v. Scott, Slip Opinion No. 2014-Ohio-2440.

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