After years of struggling to lower the interest rates credit agencies can charge on subprime loans, consumer advocates believed they finally had a victory in view of this legislative session.
A bill that would have capped two-week “payday” loans of up to $ 605 at an annual percentage rate of 36% – compared to the 391% APR that can be charged now – has been passed by an Indiana Senate committee and went to the Senate for a vote in February.
But supporters of the legislation, including Erin Macey, senior policy analyst for the Indiana Institute for Working Families, and Kathleen Lara, policy director for Prosperity Indiana, were not celebrating the day.
Instead, they digested the details of another subprime loan bill that had a 69-page amendment to insert and insert the day before the committee meeting deadline for the first half of the year. the session.
“We have had so little time to analyze the bill,” Macey said.
The new language, adopted by the Senate Trade and Technology Committee, would keep the APR in triple digits for two-week payday loans and introduce new options for short-term subprime lending, including loans that can charge up to at 192% APR over the longer term, even though the state considers any APR above 72% to be a criminal loan shark. (Two-week loans are the exception to the 72% limit on usurious loans.)
Lenders who support the legislation argue that there is a demand for these types of products and that the loans can be used to help borrowers build credit histories so that they can eventually get traditional bank loans.
“The bill is designed to provide people with a way out,” said Brett Ashton, a lobbyist for Krieg DeVault, who represents the Indiana Financial Services Association. “I think that should be our goal.”
But opponents, including several faith-based organizations, veterans groups, and nonprofit social service organizations, describe these loans as predatory, as companies aggressively market low-income individuals and families who might believe that the loans are predatory. ‘they have no other option.
Despite the limited time lawmakers – and the public – had to analyze the impact of the revised Senate Bill 613, the law was passed by committee. And in two close votes on the same day, the Senate rejected the bill to cap the APR on payday loans at 36% by 22-27 and approved Bill 26-23 which would allow the 391% APR to continue, and introduce a new high – interest products.
The battle has moved to the House now, and consumer advocates are not giving up. They hope to kill the bill in committee. SB 613 is assigned to the House Financial Institutions Committee, which is chaired by Rep. Woody Burton, R-Whiteland. Burton is a co-sponsor of Bill.
Burton said he has met with interested parties on both sides of the issue and that if he schedules the bill for a hearing there will be changes.
Gov. Eric Holcomb said the legislation was giving him “heartburn” but he would not go so far as to say he would veto it.
“It just didn’t suit me,” said Holcomb.
Two-week payday loans of up to $ 605 have been permitted in Indiana since 2002 and are exempt from this 72% APR usurious loan rate. Payday loans can have an APR of up to 391%.
Consumer advocates have been pushing for lower rates that payday lenders can charge, but have so far failed in Indiana. And in fact, they fought the industry’s attempts to grow.
This is the fourth year in a row that the Indiana General Assembly has considered some form of subprime lending expansion, but details have varied and opponents say this year’s proposal is the toughest to date. consumers.
“This year’s bill is much worse and much bigger,” said the retired US Army sergeant. General Jim Bauerle, who is Vice Chairman of the Indiana Military / Veterans Coalition.
SB 613 creates two products (in addition to two-week payday loans) that would also exceed the loan spoofing limit: unsecured installment loans and small loans.
Installment products could be six to 12 month loans of $ 605 to $ 1,500 with an APR of up to 192%. That means a consumer who borrows $ 605 at the maximum rate and pays it off in six months would pay a total of $ 986, according to the Institute for Working Families.
Small loans would allow consumers to borrow up to $ 4,000 over terms of six months or more, with interest rates of up to 99%. The loans could include a non-repayable finance charge of $ 100 to $ 150, and unspecified monthly credit insurance and account maintenance fees could be imposed.
A borrower who took out a $ 1,000 loan over 12 months could end up paying at least $ 1,615, plus an unknowable amount of fees.
“It’s even impossible to calculate the potential cost of this,” Macey said.
Ashton said that high interest rates and additional fees should be imposed on these types of loans because they are high risk products for financial institutions.
“There’s a reason unfortunately these rates and fees have to be as high as they are,” he said.
The two parties do not even agree on the ramifications of the bill.
Consumer advocates say it would allow car titles to be used as collateral for loans, but the bill’s mover, Sen. Andy Zay, R-Huntington, said it didn’t.
“It’s not about this arena at all,” Zay said.
Opponents also say the bill could increase the current 72 percent limit on loan sharking from the RPA, due to a change in the definition of criminal loan sharking. But it is not known what the resulting rate would be.
The bill would also increase the interest rate cap on traditional loans to 36% regardless of the loan amount, instead of the lower rates ranging from 15% to 36% which depend on the loan amount. It would also triple the prepaid finance fees that could be charged on these loans from $ 50 to $ 150, and these fees could be imposed repeatedly if the borrower continues to get new loans.
“Interest rates don’t really tell the whole story,” Lara said.
Help or harm?
Consumer advocates argue that the problem with these types of loans is that many borrowers get stuck in a cycle of debt: taking out new loans to pay off old loans, which means they’re continually being charged for new ones. fees and interest rates which make loans extremely difficult to obtain. to pay.
According to the North Carolina-based Center for Responsible Lending, 60% of payday loans in Indiana are taken out on the same day the previous loan was repaid.
“The reality is, these loans are a debt sinkhole that pushes families even further into distress,” said Tanya Bell, President and CEO of Indiana Black Expo. “Senate Bill 613 will be disastrous for Hoosiers who are financially underwater.”
Steven Bramer Jr., an Iraq War veteran, said he turned to payday loans after racking up thousands of dollars in legal fees during a custody battle and now realizes that he is in a much worse financial situation than before.
He admitted that he was at fault for initially obtaining the loan. But he said protections should be in place to prevent others from falling into the same trap.
“I protected you at one point; now it’s time for you to protect me, ”said Bramer, speaking at Statehouse this month.
Zay said he authored SB 613 to Help Struggling Hoosiers Find Short-Term Solutions to Their Financial Woes and Build Credit, and he believes installment loans and small loans would constitute a springboard towards traditional loans.
Zay pointed out that the rates currently offered for installment loans and small loans are lower than the two-week payday loan option and have longer terms.
“We have much more affordable options,” he said.
Yet opponents of the bill are not convinced that the loans would be really affordable in practice.
“Do we need to tackle the root causes of inequality and financial instability? Absolutely, ”Bell said. “Do we need solutions for working families who can’t get by? Yes. Let’s take the time to engage in a dialogue about what these solutions look like. But legalizing the loan shark under the pretext of offering help is absurd. “
Ashton said subprime lenders help people who otherwise might not be able to access a loan or would have to turn to unregulated online credit bureaus.
“I understand [opponents’] desire to see consumers get the best deal possible. The challenge is to make sure that you don’t cut off access to credit, ”he said. “It becomes a discussion of whether the government should protect people from themselves. We like to believe that people should have the right to decide what they want to do with their money.
Some lenders also argue that they should be able to offer these types of loans in Indiana, as online lenders that the Indiana Department of Financial Institutions cannot regulate already do.
“It really is a case of an uneven playing field,” said Ashton. “The hottest companies are at a disadvantage. “•