Open Letter: Lawmakers Should Say No to New High-Cost Loan Products

Thursday, February 9, 2017

[Update: On February 16th, the Senate Insurance and Financial Institutions Committee rejected SB 245 by a bipartisan 5-4 vote. Please help us thank Senators Bray, Melton, Mrvan, Ruckelshaus, and Walker for their votes to protect working Hoosier families.]

This year, payday lenders have put heavy pressure on our lawmakers to give them a new carve-out in state statute. SB 245 will allow them to offer 24-month loans of up to $2500 at 240 percent Annual Percentage Rate (APR). While the industry argues that there are “safeguards” in the bill, an individual making just $30,360 – an income $10,000 shy of covering the basics for a single adult with one child in Marion County – would qualify for the full amount and would pay $9652 in interest alone over the two-year loan period.

This represents a radical departure from Indiana's existing 36 percent interest rate cap on installment loans under $2,000. In fact, lending at 72 percent APR is currently considered felony loan sharking; this new language would provide a state sanction of installment lending at more than three times the existing felony loan sharking rate.

Indiana already has a special exemption in statute for payday lenders, who can make loans of up to $605 for 14 days at rates reaching 391 percent APR. Payday lenders get to “cut the line” and withdraw funds when a borrower’s paycheck is deposited, so the borrower does not have enough left over for rent and groceries. This leads to repeat borrowing, allowing lenders to rake in about $70 million in fees a year.

Prohibition of usurious lending practices is a principle embedded in many religions, including Christianity and Judaism. Exodus clearly states, “If thou lend money to any of my people that is poor by thee, thou shalt not be to him as an usurer” (Exodus 22:25;). And according to Pope Francis, “When a family has nothing to eat, because it has to make payments to usurers, this is not Christian, it is not human! This dramatic scourge in our society harms the inviolable dignity of the human person.”

High-cost lending is not only immoral and unethical, it is also bad economic policy. Research suggests that high-cost lending leads to bankruptcy and other economy-damaging consequences. Beyond this, lower-cost alternatives exist. Credit unions, community loan centers, and even subprime credit cards all provide access to credit at less than 30 percent APR.

Because these financial products damage families’ financial well-being and have ripple effects throughout the economy, other states have moved to curb high-cost lending. Last November, South Dakota voters decided to cap all loans at 36 percent by a 3-to-1 margin. Voters in Arizona and Montana did the same. Active duty military are protected as well - in 2006, Congress prohibited loans to active military members (but not veterans, who are more likely to borrow from payday lenders than the average American) in excess of 36 percent APR.

Authorizing new loans at 240 percent APR would be bad for Hoosiers and bad for the economy. We urge the members of the General Assembly to reject the damaging proposal being offered in SB 245.

Signed:

Lisa Wilken, Legislative Director, AMVETS, Department of Indiana

Steve Smitherman, CareSource Indiana

Kelsey Clayton, Indiana Assets and Opportunity Network

Maureen Noe, Indiana Association of United Ways

Glenn Tebbe, Indiana Catholic Conference

Laura Berry, Indiana Coalition Against Domestic Violence

Indiana Coalition for Human Services

Anthony Mason, Indianapolis Urban League

Ed Gerardot, Indiana Community Action Association

Jessica Fraser, Indiana Institute for Working Families

Dr. Bill Chapman, Indiana Friends Committee on Legislation