An Indiana House committee on Wednesday advanced a bill that the payday loan industry says would create a longer-term, higher-value loan for people who have such bad credit scores that they can't be helped by regular banks.
But consumer advocates say the measure would lead to an expansion of predatory lending in the state.
The House financial institutions committee passed the bill 8-5, with one Republican joining all four Democrats on the committee to vote against it. The bill advanced even as lawmakers who supported it said they were wary of the payday loan industry.
House Bill 1319, authored by Rep. Martin Carbaugh, R-Fort Wayne, would allow payday lenders to offer so-called unsecured consumer installment loans, which are three-month to one-year loans in amounts ranging from $605.01 to $1,500.
The monthly payment requirement would be no more than 20 percent of a borrower’s gross monthly income, and lender would be restricted to making one loan to a borrower at a time.
Carbaugh said the product would “help people build credit.”
“These are folks that can’t get credit from a traditional bank,” Carbaugh. “These are folks that a lot of times have emergencies pop up and need help.”
Rep. Mike Speedy, R-Indianapolis, said the loans could be “very crucial to small businessmen who have bad credit.”
“I see these loans as hillbilly venture capital,” Speedy said, referencing one of the lobbyists from the short-term loan industry, Matt Bell, who read a passage from author and venture capitalist J.D. Vance’s book, "Hillbilly Elegy: A Memoir of a Family and Culture in Crisis," during the committee meeting.
Bell said the loans created by the bill would have “rates dramatically lower than existing products.”
The bill would also require each storefront that offers the product to pay $1,000 each to the state to a fund that would provide financial education programs.
Sabra Northam, a Barnes & Thornburg lobbyist representing the Community Financial Services Association, a national group for the short-term loan industry, said traditional payday loans might become obsolete if an Obama administration-era federal rule goes into effect. The proposed loans would allow the industry to be "able to serve that same market need."
She cautioned that consumers "will have to turn to the unregulated market" without available products to them.
Another lobbyist, former Indiana state lawmaker Matt Whetstone, said the short-term loan industry in Indiana made 1.2 million loans last year representing $413 million.
But advocates who spoke against the bill—including the Indiana Catholic Church, several veterans groups and traditional consumer groups—said the measure would amount to a “dramatic expansion of payday lending” in the state.
Under the proposal, a borrower making $17,000 per year who takes out a $1,500 loan could pay nearly $1,800 in fees on top of that, according to Erin Macey, a policy analyst with the Indiana Institute for Working Families.
“The payday loan product is very problematic and needs to be reformed,” Macey said. “Today, instead of reforming that product, we are now expanding the amount people can borrow dramatically.”
Lisa Wilkin, legislative director for national veterans group AMVETS, said “we understand this type of product needs to be available for those who can’t get traditional loans, but we believe the interest rates and fees are too high.
Rep. Wes Culver, R-Goshen, said he voted against the bill because “I’m not comfortable with the interest rates.”
“I think we’re comparing to something that’s really bad,” Culver said. “To compare to something bad doesn’t make this good. We could do much better with a lower rate, at a rate that wouldn’t put people in a hole.”
Rep. Thomas Washburne, R-Evansville, said these lending products “are mostly ridiculous.”
“I’ll probably support it, as a nod to the free market,” Washburne said before voting for the proposal. “Not that I don’t think the free market ought to take most of this stuff out.”
Rep. Donna Schaibley, R-Carmel, said she felt “very conflicted about this,” but voted for it.
The bill heads to the full House for possible amendments and a final vote.