The pandemic has caused financial hardship and job loss for so many people in Hawaii.
Small-dollar, or “payday,” lending continues to be a crucial lifeline for families navigating income interruptions and for those who do not have a formal banking relationship with a financial institution. Historically featuring notoriously high interest rates and harsh terms, these types of loans, often referred to as deferred deposit transactions, have drawn criticism from consumer protection watchdogs.
According to the Pew Charitable Trust, under the previous payday lending regime, a Hawaii consumer paid an average of $529 for a $300 loan over five months. Interest rates were as high as 460%.
Over recent years many states, including Illinois and Nebraska, enacted measures to reform payday lending practices. This past June, Hawaii joined that list of states as Gov. David Ige signed into law (Act 056) the Small Dollar Loans law (also known as the Installment Loan law), replacing Hawaii’s payday lending rules in favor of new small- dollar (less than $1,500) installment loans rules and licensing requirements for small-dollar or “installment” lenders.
Consumers and financial institutions in Hawaii should be aware that as of Jan. 1 these new rules have significantly changed Hawaii’s small-dollar lending landscape. The reform represents a significant milestone that stands to have a major impact on the financial lives of borrowers.
New lending landscape
The hope of the Small Dollar Loans law is that financially vulnerable people will now be less likely to experience injustice at the hands of payday lenders. Many consumers might continue to have access to needed funds, but those funds will be repayable over a longer period of time than under the former payday loan rules. Also, banks and credit unions could see an uptick in personal loan applications given that there may be fewer licensed installment lenders providing loans. It should be noted that insured financial institutions such as banks and credit unions (already heavily regulated) are exempt from the Small Dollar Loan law.
Small-dollar lenders must comply with new licensing requirements or forfeit the ability to demand repayment of loans. Those lenders, as of January, have to be licensed and regulated by the Division of Financial Institutions of the Department of Commerce and Consumer Affairs.
The new lending rules
As of Jan. 1 the following rules are in effect:
>> Installment loan amounts are capped at $1,500.
>> The maximum interest rate that can be charged is 36%.
>> Loans are repayable over the course of two to 12 months, in affordable installments, depending on the size of the loan, as opposed to the traditional two weeks. This effectively eliminates traditional “payday” loans.
>> Total fees cannot exceed more than half the original amount borrowed.
Lenders must provide consumers with a written disclosure of the interest and fees associated with the installment loan prior to obtaining a signed written installment loan agreement from the consumer.
As consumers in Hawaii become aware of their rights and adjust to the new small-dollar lending landscape, financial institutions should be prepared for an influx of small-dollar loan requests as payday lenders work to catch up with the newly implemented state requirements. Banks and credit unions have an opportunity to play a positive role in the state’s milestone consumer financial reformation that will set the tone for an optimistic financial future for so many.
Michelle Kim Stone is of counsel in the transactional practice group at Carlsmith Ball LLP, concentrating her practice on financial institutions, corporate and employment law. She can be reached at mstone@carlsmith.com.
