INDIANAPOLIS – Morality and capitalism are on a collision course as Indiana lawmakers look to legalize a new short-term loan option with rates that could venture into loan-sharking territory.
House Republicans narrowly paved the way for the debate with a 53-41 vote last month. The proposed legislation now moves to the Senate where leadership is unsure of its fate.
“Are you really helping someone by giving someone access to loans at these rates?” asked Rep. Matt Pierce, D-Bloomington.
Acknowledging people might be desperate and need money, he questioned “are we helping them by giving them a loan they probably can't pay back and just get into a debt spiral. This kind of debt level would even make Congress blush.”
Senate President Pro Tem David Long, R-Fort Wayne, said his members are concerned about the upfront money – including a high origination fee – that's being taken under House Bill 1319.
“It's controversial over here for sure,” he said.
Fort Wayne Rep. Martin Carbaugh has carried the so-called payday lending bill.
Payday loans usually last for two weeks at very high interest rates. What often happens is that the borrower cannot repay, and is forced to renew or roll over the payday loan. Then the borrower has to pay more finance charges. Under current law, the maximum payday loan is $550 with a loan term of 14 days.
Carbaugh says another level of loan product is needed for Hoosiers hit with emergency expenses. The new product would allow loans between $600 and $1,500 with a term of up to one year. Interest rates can exceed 200 percent.
Glenn Tebbe, of the Indiana Catholic Conference, testified against the bill, saying it's the state's responsibility to protect and facilitate the common good, including helping the weakest member of society.
“Taking advantage of people living in poverty is unjust,” he said.
Carbaugh, though, says his bill includes a financial literacy component paid for by the lenders so that users aren't relying on the mechanism for ongoing expenses. It also would provide users with a 211 brochure showing them other resources in the community for things like rent assistance and aid with utilities.
Another key facet is that these loans for the first time will be reported to the credit bureaus, allowing low-income Hoosiers to build credit to access more traditional bank loans and credit cards.
“We are giving them an opportunity they don't have with payday lending,” Carbaugh said.
He said people will always need new tires or a refrigerator and he doesn't want Hoosiers to turn to unregulated, illegal options.
A long list of groups came out against the measure, including the NAACP, Prosperity Indiana, the Indiana Catholic Conference, the Indiana Institute for Working Families and a host of individual churches.
Erin Macey, a policy analyst for the Indiana Institute for Working Families, said this is not a credit-building product. Research shows about half of all payday loans end in default.
She said the legislation would allow a person making $17,000 a year to take out a $1,500 loan where under current law they would qualify for only $250. And they would pay $1,800 in fees through the year. She said the interest rates reach current criminal loan-sharking levels of 72 percent.
Rep. Carey Hamilton, D-Indianapolis, said the groups opposing the bill have boots on the ground in these communities and can vouch for the damage these loans will create.
She said of course the industry says there's a demand for the product. “There's always a demand for easy cash,” Hamilton said. “That doesn't mean it's good.”