February 2, 2018 // National

New loan product preys on low-income persons

Brigid Curtis Ayer 

Indiana Catholic Conference

INDIANAPOLIS — A proposal to expand short-term loan products that prey on low-income persons advanced in the Indiana House. The Indiana Catholic Conference opposed the proposal.

House Bill 1319 would create a new class of high-interest, unsecured, consumer loans designed for persons who need cash, but do not qualify for traditional loans. The bill passed the House Financial Institutions panel, by an 8-5 vote, Jan. 24 after a lengthy hearing.

The proposal would preserve two-week payday loans up to $605 and would expand allowable predatory loans up to $1,500 over 12 months, with up to 222 percent annual percentage rate. The bill stipulates that the minimum payment set for the borrower cannot exceed 20 percent of the person’s gross monthly income. Under current law, payday loans may charge borrowers up to 391 percent APR.

While the new class of loans authorized in HB 1319 have a lower interest rate and a longer term to pay back than the current payday loans, the high interest rates still have the same effect on working people with low income, said Glenn Tebbe, ICC executive director, who testified in opposition to the bill.

Tebbe said although employed, the borrowers’ pay is not enough to make ends meet. As a result, those struggling financially seek out resources to provide for ordinary or sudden unexpected needs. The borrowers’ paycheck is not enough for living expenses plus high interest and fees of these loans.

The bill’s author, Rep. Martin Carbaugh, R-Fort Wayne, said the concept of the bill was brought to him by the payday loan industry. He said the goal is to create a product for hard-working people with bad credit who need to secure emergency funding for various reasons. “When I say bad credit, these are folks who can’t get credit from a traditional bank or even a credit card.” Carbaugh said similar products exist in other states and have shown to help people meet immediate need and build credit.

Public testimony given at a recent hearing in the House of Representatives offered a bleak perspective on the effects a new small-loan product, authorized in HB 1319, would have for low-income persons.

Erin Macey, policy analyst for the Indiana Institute for Working Families, calls the bill “a dramatic expansion of payday lending.” Macey disagreed that these loans would be a credit-building product because research has shown that half of all borrowers with these types of loans default. Under this bill, Macey calculates a borrower making $17,000 in annual income, who took a 12-month loan, could pay up to $1,800 in fees alone. Macey sees the bill as the legalization of “criminal loan-sharking.”

The panel heard testimony from members of the armed services who said the bill would hurt veterans. Jim Bauerle, retired army brigadier general, representing the Indiana Veterans Coalition, said soldiers he knew used to get caught up in a revolving loan crisis. It took Congress to step in and limit the interest rate to 36 percent on predatory loans to protect those on active duty.

Bauerle called the interest rates on these products “outrageous,” and added that the federal law doesn’t protect those serving in the reserves or veterans. He said reservists, serving in Indiana who gather intelligence to help those on active duty, could lose their security clearance if they get into credit trouble. Many veterans are young and lack financial literacy. Creating a new high-interest loan product could hurt reservists’ clearance status, and the national defense.

Steve Hoffman, president and CEO for Brightpoint, opposes the bill. “The costs are just too high,” he said. “We do a lot of research in our organization. We found that 89 percent who had previously had a payday loan say they never want to use the product again.”

About 15 months ago, Brightpoint, an organization based in Fort Wayne, serving low-income persons, launched an alternative loan program which fills a need for those with bad credit who need money. The loans have an APR of 21 percent. The alternative loans, offered through Brightpoint, also help low-income persons build credit. Hoffman said the loans created in HB 1319 won’t help citizens; it will actually hurt them.

Members of the payday loan industry, who testified in support of the measure, assert the new product would help meet the immediate needs of low-income persons and help them long term by enabling them to establish good credit.

The ICC is actively working to protect low-income Hoosier consumers from predatory loans. One effort is to support a payday loan bill, Senate Bill 325, which caps high-interest loans at 36 percent. The other effort is to halt final passage of this new class of predatory loans contained in House Bill 1319.