Lawmakers are looking to revamp the short-term lending industry in Hawaii, where so-called payday loans can carry annual interest rates as high as 459 percent.
Senate Bill 3008 would add consumer protections to regulate the much-criticized industry while still allowing borrowers to access capital, according to Sen. Roz Baker, the bill’s lead sponsor and chairwoman of the Senate Committee on Commerce, Consumer Protection and Health.
“We needed to include some greater consumer protections while not putting the industry that provides these small-dollar-value loans out of business,” Baker (D, West Maui-South Maui) said during a recent hearing.
The bill next heads for a full Senate vote after clearing the Commerce, Consumer Protection and Health and Ways and Means Committees.
SB 3008 would essentially move away from what’s known as lump sum deferred deposit transactions, where a consumer provides a lender a personal check for the amount of money desired, the lender provides the money less a fee, and the lender then defers depositing the check for a specific period of time, typically the following payday.
Instead, the bill would create an installment- based, small-dollar loan industry to be regulated under the state Department of Commerce and Consumer Affairs. Beginning Jan. 1, these lenders would need to seek licensing from the department’s Division of Financial Institutions.
Payday lending is allowed under the state’s check- cashing law, which was approved in 1999. 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.
Under SB 3008 annual interest rates would be capped at 36 percent — mirroring a nationwide cap imposed on such loans for active military members.
The bill also would increase the maximum allowable loan to $1,000, but would:
>> Cap the total monthly payment on a loan at 5 percent of the borrower’s verified gross monthly income or 6 percent of verified net income, whichever is greater;
>> Cap the maximum allowable fees and charges at 50 percent of the principal loan amount;
>> Prohibit multiple loans from a single lender; and
>> Prohibit repayment obligations from being secured by real or personal property.
The bill also would allow lenders to charge a $25 monthly maintenance fee. “The experience in other jurisdictions is that monthly maintenance fees allow the lenders to stay in business,” Baker said.
Baker said lawmakers consulted with the Pew Charitable Trusts on the proposed legislation.
Nick Bourke, the organization’s consumer finance director, previously told lawmakers that those turning to payday loans are often financially vulnerable and unable to access traditional credit through banks or credit unions. He said borrowers use the money to cover recurring bills like rent, utilities and car payments, and often get stuck in a cycle of debt by renewing or re-borrowing payday loans.
To illustrate how prevalent payday lending is in Hawaii, the nonprofit Hawaii Community Lending says there are more payday loan retail stores than there are 7-Eleven convenience stores in the islands: 91 payday loan stores compared with 64 7-Eleven stores statewide.
Several locally operated payday lenders opposed the bill and argued that the existing law includes consumer protections.
“Here we are once again, session after session trying to fix something that isn’t broken, because so far no one has shown that there is a problem with the small loan business in Hawaii that needs fixing,” Richard Dan, operations manager for Maui Loan Inc., said in testimony.
“The law as it stands now safeguards the consumer from being trapped in a cycle of debt to a payday lender, because at the end of the loan the borrower can walk away,” he added. “If the borrower has not paid their balance, they still will owe it, but that’s true of any unpaid balance with credit cards or any other type of loan. Nothing the payday lender can do can trap the consumer in a cycle of debt.”
