INDIANAPOLIS — The Hoosiers would have a new type of consumer loan available to them under a bill the Indiana House is considering, but opponents are calling it nothing more than predatory lending authorized by law. ‘State.
“The bill creates a problematic new loan product, preserves payday loans and lacks safeguards for consumers – fueling a debt trap during an economic recovery,” said Andy Nielsen, senior policy analyst for the Indiana Community Action Poverty Institute.
The institute is a member of Hoosiers for Responsible Lending – a coalition of advocates working against the bill.
“Our legislature should focus on solutions that provide fair and responsible access to credit,” Nielsen said.
Senate Bill 352 represents the latest round in a battle over high-interest consumer loans that have been available for years. It would preserve controversial payday loans and create a new product between payday loans and traditional bank loans for people with good credit.
“I recognize that this is not a popular product. It’s not a perfect product,” said Sen. Andy Zay, R-Huntington. “It’s a good faith effort and a way for people to build credit and work their way to bankability.”
Zay drafted the invoice and acknowledged that the product has high interest rates and fees. But he said the bill creates opportunity and competition and lenders don’t have to charge the maximum rates.
“This is tough legislation. A lot of us don’t get it, and a lot of us will never use them,” Zay said.
The bill needed two votes to pass the Senate. It initially failed for lack of a constitutional majority, 24-22. That means he didn’t get the 26 votes needed to pass, but he wasn’t beaten either.
About a week later, Zay raised it for a revote — when three Republicans who were absent for the first vote were in the chamber. It went 27-22.
The fate of the bill in the House is uncertain. A hearing was not scheduled, and House Speaker Todd Huston said, “I think we just need to understand the bill better.”
The bill creates a new loan product – borrowing up to $2,500 for up to 24 months. This is an unsecured loan with an interest rate of 36%. But there are fees and charges that push the cost even higher.
Pew Charitable Trusts, which has studied small loan laws and markets in all 50 states over the past decade, has weighed in on the legislation.
“We find that the bill would expose Indiana consumers to financial harm, rather than create an affordable loan market like those seen in states that have successfully reformed their payday loan laws,” said said Pew in a letter to lawmakers.
Pew’s analysis said the bill would authorize a $2,500 loan with $2,269 in finance charges — a total repayment of $4,769 in six monthly installments of $794.83. This equates to an annual percentage rate of 267%.
“The total cost of loans offered in SB 352 is much higher than in other states that have allowed widespread access to credit,” Pew said.
Rep. Chris Judy, R-Fort Wayne, is sponsoring the bill in the House and said he is working on a substantial amendment to reduce those costs.
“This creates a new supervised loan that helps Hoosiers in a financially difficult situation,” Judy said. He wants to offer an alternative to online loans which are unregulated and offer no consumer protection.
Judy said “the demand is there” and he and stakeholders are trying to find common ground.
Pew gave examples of other states that have responded to the need with more guardrails in place – Colorado, Ohio and Virginia.
“Credit is widely available in these states, but many of the same lenders who operate in these markets are charging prices two to three times lower than Indiana today and up to four to five times lower than those offered. in SB 352. Those laws resulted in affordable credit without a debt cycle,” the Pew letter reads.
Comparing the Ohio and Virginia laws to the Indiana bill, the current proposal would allow Hoosiers to borrow larger amounts at higher rates and poses a high risk of repeat refinancing.
Sen. Ron Alting, R-Lafayette, voted against the bill in the Senate, noting that it exempts new loans from the state’s loan sharking law.
“It sends a red flag to my house,” he said. “We kind of say it’s a replacement for payday loans, but that doesn’t eliminate that product. The timing couldn’t be worse to put this on low-income people.