State legislators aim to regulate high-interest payday loans

State lawmakers plan to again consider imposing stricter regulations on so-called payday lenders issuing loans that can carry interest rates as high as 459 percent in Hawaii.

It’s unclear what proposals will be introduced in the upcoming legislative session, but past attempts to regulate the much-criticized industry have called for capping interest rates at 36 percent — mirroring a nationwide cap imposed on such loans for active military members.

“Payday lending is something that we’ve had some dealings with in the past, but hopefully we can shine some additional light and garner some additional support for making sure that our consumers are not unprotected and know what they’re getting into if they go this route and what other options might be available,” said state Sen. Roz Baker, chairwoman of the Senate Consumer Commerce, Consumer Protection and Health Committee.

Baker’s committee held a joint informational briefing on the topic Friday with the House Consumer Protection and Commerce Committee.

Hawaii legalized payday lending in 1999. Money is lent at a high rate of interest with the agreement that it will be repaid with the borrower’s next paycheck.

At the time, the law was supposed to be temporary, but the sunset date was later removed. Under the law a check casher can charge up to 15 percent of the face amount of a check for a deferred-deposit transaction, or payday loan. With the maximum amount of a check capped at $600, the annualized interest rate charged under this scenario amounts to 459 percent for a 14-day loan, according to lawmakers.

“The law around payday lending is broken,” Nick Bourke, consumer finance director for the Pew Charitable Trusts, said. “What was implemented 25 years ago maybe was intended with good sentiment, but we know a lot more now.”

Bourke called payday loans harmful and said Hawaii’s annualized interest rate, or APR, for payday loans is among the highest in the country. The national average is 391 percent; Colorado’s is the lowest at 120 percent. Eighteen states prohibit extremely high-interest payday lending.

“The choice in how to respond is to either eliminate high-cost credit, which is better than status quo, or reform it,” said Bourke, who is based in Washington, D.C.

To show how prevalent payday lending is in Hawaii, officials compared the number of payday loan retail stores with the number of 7-Eleven convenience stores in the islands. There are 91 payday loan stores in Hawaii, outnumbering the 7-Eleven stores at 64 statewide, according to the nonprofit Hawaii Community Lending.

Stephen Levins, executive director of the state’s Office of Consumer Protection, agreed that consumers need added protections.

State Rep. Roy Takumi, chairman of the House Consumer Protection and Commerce Committee, questioned whether imposing a 36 percent interest rate cap would force payday lenders out of business, which has happened in other states.

“There would be consequences, and it would adversely affect the business model,” Levinson said. “But that has to be weighted against what’s going on right now and the societal cost for the people who are taking out these loans.”

Bourke said those turning to payday loans are often financially vulnerable and unable to access traditional credit through banks or credit unions. He said they use the money to cover recurring bills like rent, utilities and car payments, adding that the average borrower earns about $30,000 in annual income and has a credit score of 517. (A perfect credit score is 850.)

Borrowers often get stuck in a cycle of debt by renewing or re-borrowing payday loans.

Bourke suggested reform efforts should include regulations to make payments affordable; spread costs evenly over the term of the loan; lower costs and guard against harmful practices such as prepayment penalties.

Baker (D, West Maui-South Maui) said she anticipates proposed legislation that “pulls some of the recommendations from (Friday’s) briefing.”