Where do you turn when income is not enough to cover expenses? Even before COVID-19, too many Hawaii residents turned to quick “solutions” that in the end only compound their financial problems — among them, what are called “payday loans.”
The official name for such financial instruments is “deferred deposit agreements.” The customer writes a check to a service, which then gives the customer money equal to the face value of a check, minus any fee charged, and agrees not to cash the check for a specified period. It’s meant to tide the borrower over until payday comes through with the funds for covering the loan.
But it’s long been seen as a predatory transaction, in which lower-income people easily fall into debt, and has been a target of legislative reform for years.
A bright spot in the Capitol calendar was the passage of House Bill 1192, which would press these unlicensed lenders instead toward installment loans that borrowers can manage more sustainably. Especially with the lingering financial gloom that still engulfs families as the pandemic winds down, it is a measure Gov. David Ige should sign into law.
This will benefit a significant number of Hawaii’s people. Citing figures from the Federal Deposit Insurance Corp., state Rep. Aaron Ling Johanson said last week that about 20% of Hawaii’s population take the payday-loan or similar routes to emergency funds.
Johanson, speaking last week to the Honolulu Star-Advertiser editorial board, said the FDIC estimates that a $300 payday loan ends up costing the borrower $520 over five months.
Starting next January, the services would be required to get a license and would shift to installment lending. The client would have two to 12 months to pay off a loan of up to $1,500, he said, ensuring that they would then have the opportunity to build their credit score.
The annual interest rate would top out at 36%. The total due in loan charges will be capped at 50% of the principal loan amount, including fees ranging from $25 to $35 that could be assessed monthly.
The financial-risk landscape around the payday loan business has become increasingly hazardous since last year. That’s when the federal Consumer Financial Protection Bureau rescinded its 2017 rule limiting harmful lending practices, according to the Pew Charitable Trusts, the nonprofit research organization that has been tracking these single-payment loans.
Among its most recent findings published last December, the trust concluded that states that do not establish standards around pricing and affordability wind up with borrowers shouldering loans that cost three to four times more than necessary to have access to the equivalent credit.
Included in Hawaii’s new reform package are requirements that lenders contract for payments collected once every two weeks, monthly or twice-monthly. For each payment made, the lender must give the borrower a written receipt with full details of the payment.
These provisions seem so basic that it’s almost unbelievable the industry has carried on for years without such guardrails.
The industry submitted some vociferous opposition to the bill. James Odell, general counsel and executive vice president of Dollar Financial Group, said in prepared testimony that the market needs “a prudent and staged transition to a more effective credit market for these consumers, rather than an immediate repeal of deferred deposit transactions.”
Lawmakers rightly saw through that argument, at last standing firm on behalf of struggling borrowers. These Hawaii consumers endure enough, even without the added financial strain of a pandemic, to have to wait any longer.
