Should lawmakers allow payday lenders to expand their offerings?
Indiana is ground zero in a push by payday lenders, testing whether states will allow predatory-lending expansion. But a large coalition of faith leaders, veterans and community-development advocates are standing with Hoosier consumers to push back against this effort to offer new loans that will further destabilize divested neighborhoods and devastate low-income borrowers.
House Bill 1319 would allow payday lenders to continue offering small, two-week payday loans of up to $605, carrying annual interest rates of up to 391 percent. It also expands the payday lenders’ exemption from Indiana’s 72 percent loan-sharking cap, allowing for larger, longer-term loans at rates up to 222 percent. This is the third session that payday lenders have sought a new exemption, claiming it will help credit-impaired borrowers weather financial emergencies.
Payday lenders assert that the volume of loans speaks to the need. But their model relies on a cycle of debt—on average, eight to 10 payday loans long, speaking to the predatory nature of the model versus the need. They also argue that failure to pass this bill forces consumers into unregulated online loans. To the contrary, Pew Charitable Trusts found that borrowers in states with strong regulations, like a rate cap, do not head online. Instead, they dramatically reduce their usage of online and storefront payday lenders.
Lenders want to distract legislators from the reality on the ground. Organizations around the state provide food and utility assistance, affordable rental housing and homeownership opportunities, home repair loans, financial counseling, and innovative payday loan alternatives, such as the Community Loan Center program—all to address the root causes of financial instability. But too frequently, consumers seek their assistance only after payday loan debt has exacerbated their financial crises.
The Center for Responsible Lending finds that payday borrowers are more likely to default on credit cards, lose their bank accounts, delay medical care, rely on food-assistance programs and fall behind on housing payments. We have seen payday loans contribute to more bankruptcies and foreclosures in our state. Currently, Indiana has the seventh-highest bankruptcy rate nationwide.
Is it any surprise that 15 states now cap all loans at 36 percent? Bellwether Research polled Hoosier voters on this approach: 88 percent said they support a 36 percent cap. Unfortunately, a bill by Sen. Greg Walker, R-Columbus, to cap rates never got a hearing. Instead, HB 1319 is moving Indiana in the opposite direction.
HB 1319 would allow a minimum-wage worker earning $15,000 a year to qualify for a $1,500, 12-month loan. That borrower would pay $1,598 in fees alone—more than the original loan total. Twenty percent of the borrower’s already-meager income would be diverted from buying essentials to paying exorbitant fees. That is not a lifeline. It is an anchor further drowning Hoosiers in debt.
Simply put, when it comes down to dollars and cents, these payday dollars make absolutely no sense for struggling consumers. We strongly encourage discussion on ways to meet the needs of underserved consumers. HB 1319 is not the answer.•
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Lara is policy director of Prosperity Indiana, an association of community development organizations. Send comments to [email protected]