Until now, the industry has largely confined its efforts to battling state legislatures, many of which have moved to protect borrowers who take out the short-term, high-interest loans. Ohio, New Hampshire and Virginia lawmakers approved payday reforms this year.
The strategy could be risky. If voters reject the ballot measures, opponents of payday lending say they would use the defeats to puncture the industry's argument that such loans are popular with consumers who need small amounts of cash for emergencies. The borrower usually receives the cash after writing a personal check for the loan amount and a fee. The lender holds the check until the worker's next payday, usually two to four weeks, when the borrower must pay off the debt.
Ohio was the big prize for the national coalition of consumer, religious and senior citizen groups that has been fighting the industry. They contend that payday loans snare borrowers in a cycle of debt because they keep taking out loans they can't repay. The average loan is about $300; lenders usually charge $15 for each $100 borrowed until the next paycheck, or nearly 400 percent annual interest.
The Ohio Legislature approved and Gov. Ted Strickland (D) signed a bill that caps the annual interest rate on payday loans at 28 percent. Earlier in the year, New Hampshire set the rate at 36 percent, so the consumer coalition viewed Ohio's action as a watershed. According to the Center for Responsible Lending , 15 states and the District of Columbia effectively ban payday lending by setting double-digit interest rate caps: Arkansas, Connecticut, Georgia, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, Vermont and West Virginia.Industry officials say if the Ohio law goes into effect Sept. 1, it will force many lenders to shut down. "There's no way anyone can make a profitable loan" with those terms, said Schlein, who works for the Community Financial Services Association.
Cash America International, a Texas company, already has announced it will close up to 139 payday lending stores in Ohio. On a smaller scale, Melissa Lutz, who owns two payday loan outlets outside of Columbus, said she probably will close by Aug. 31. She nets a profit of about $3,000 a month on each store, she said, and the new rate cap will substantially reduce that figure. "Ohio has definitely set a precedent," she said.
The industry's fear is real. Since Oregon's 36 percent rate cap went into effect last year, the number of payday business licenses dropped 73 percent, according to the state Department of Consumer and Business Services.
Payday outlets are also shutting down in Arkansas, where Attorney General Dustin McDaniel targeted 156 payday lenders by issuing cease-and-desist orders and filing lawsuits against them earlier this year. Most are complying, though he said, "It's going to be a long process."
In an interview, McDaniel said he was surprised by the number of employees in state government, including some in his own office, who said they were wrapped up in payday lending schemes. "They come up to me and say, 'I was a victim of this, but I don't want anyone to know about it,'" he said.
Other politicians are catching on to the political potency of the issue. Democratic presidential candidate Barack Obama has called for a 36 percent cap on the annual interest rate for payday loans, the same as in Ohio. He and GOP rival John McCain supported a 2006 federal law that sets a 36 percent rate for armed service members, who Congress said were particular targets for the loans. At least one statewide candidate, Missouri gubernatorial candidate Jay Nixon (D), has embraced a rate cap.
The industry did win some big victories this year, scuttling reform attempts in Colorado, Minnesota and South Carolina. Lawmakers introduced more than 100 bills around the country this year, including some backed by the industry, that would have tightened regulation, according to the Consumer Federation of America.
Although the Virginia General Assembly approved some revisions, consumer groups said they don't count Virginia as a win. Lawmakers set a fee structure that critics said is too generous to the industry.
"It's a small step but not a giant leap for mankind," said Ward R. Scull III, a Newport News businessman who headed Virginians Against Payday Loans.
Virginia illustrated the financial clout of the industry, which has spent millions of dollars around the country on advertising, lobbying and campaign contributions. The industry funneled more than $300,000 to Virginia candidates last fall, helping the Democratic Party take control of the state Senate and gaining an ally in the incoming majority leader, Sen. Richard Saslaw of Northern Virginia.
Stan Barnes, who heads the industry's campaign in Arizona, declined to confirm a news report that lenders contributed about $2 million to the ballot initiative effort in that state. He said he believes the group, Arizonans for Financial Reform, will gather the 153,365 signatures needed to place the initiative on the ballot by the July 3 deadline. The deadline in Ohio for 241,365 signatures is Aug. 31.
The industry is defending itself on other fronts this year, part of a general backlash against high-cost credit that also has roiled the home mortgage market. Congress held a hearing on what it called predatory payday loan outlets near Native American reservations. The Federal Trade Commission won settlements from three payday lenders who failed to disclose the annual percentage rate of the loans as required by federal law.
The tone has sharpened over the last year, as consumer groups accuse industry officials of attacking opponents in more personal terms than before. More battles lie ahead next year in states such as Texas.
"There's definitely been a lot more 'attack the messenger' this year in part because they can't defend their product," said Uriah King, a policy associate at the Center for Responsible Lending, which is based in North Carolina.
Schlein, the industry spokesman, said critics of payday lending are "unredeemable. They are a motley collection of socialists, elitists and 'against everything' type activists. Unfortunately, the media always gives voice to their grievances. And the legislators respond to the local media."