Some of Indiana’s payday lenders want the state’s legislature to consider allowing them to offer small, long-term installment loans.
Indiana House Bill 1340 would have allowed lenders to offer installment loans for amounts between $550 and $2,000 for at least a year, with a monthly finance charge that does not exceed 20 percent of the principal.
When sufficient support for the initial version could not be found in the Indiana House Committee on Financial Institutions, the bill morphed into legislation to form a study committee on the subject.
Groups opposing the bill in its original form included the Indiana Assets & Opportunity Network, Indiana Association for Community Economic Development, Indiana Catholic Conference and Indiana Community Action Association with its Indiana Institute for Working Families.
“We think that it is just an egregious amount of interest for families to take out over that long a period of time, and the loan was renewable,” said Jessica Fraser, program manager for the Institute for Working Families.
On a 12-month $2,000 loan, a borrower would pay about $167 on the principal and $400 in interest each month, which would bring the total interest paid to $4,800 within a year, according analysis of HB 1340 on the institute’s website.
Indiana allows finance charges on 14-day payday loans at 15 percent for the first $250 borrowed, 13 percent for any amount on the loan ranging between $251 and $400, and 10 percent for any amount on the loan above $400.
“We welcome the opportunity to have a study committee because we think we would like to have a data driven conversation about the installment loan products the payday loan industry is seeking,” Fraser said. “We definitely want the legislators to know there are alternatives to payday lending.”
Fraser and Rep. Woody Burton, R-Whiteland, expect the Consumer Financial Protection Bureau to finalize federal rules for payday lenders this year and believe that can provide important context for a study of Indiana’s regulation of the industry, they said.
Burton chairs the Committee on Financial Institutions and introduced HB 1340. As with payday loans, the small, long-term installment loans his bill proposed would be designed for high risk borrowers. As a result, because lenders offering these high risk loans would lose principal to defaults more than usual, the loans “would charge the high interest rates to get it from somebody else,” he said.
“I don’t want to put down these kind of lending organizations; they fill a need out there. I don’t think it’s a good thing, but I think it’s a necessary thing,” Burton said. “If it’s going to be out there, I would much rather it be done in a regulated process than in parking lots.”
Before the bill was changed to a study committee proposal, proponents suggested alternate versions of it when Burton told them the finance charge rate was too high for the committee to accept, he said.
Forming a study committee to consider where the industry should be headed will enable members to look at it along with other industries where the state needs to strike a balance between providing consumers with protection as well as access to credit, Burton said.
Indiana already regulates small installment loan lending and caps the annual rate on those loans at 36 percent. This provides the summer study committee the ability to broaden its focus.
“I want to take a look at that whole product – payday lending, high risk lending, rent-to-own, that whole category of things,” he said. “We want to make sure the consumers are protected and know what they’re getting into.”
About 35 licensed small loan lenders are originating loans at about 350 locations in Indiana, according to Mark Tarpey, deputy director of the state’s Department of Financial Institutions.
Payday lending associations and businesses contacted for this article said they were either unfamiliar with the legislation or did not return requests for comment by this publication’s deadline.