When Alfred Kalaau and his wife Pebbles found a $1,200 per month home to rent in Waianae, they jumped at the chance to leave their small apartment in Kalihi.

Their landlord had told them to move out because their 3-year-old son’s beloved dog had grown too big, violating the rules of the apartment complex.

Even though the West Oahu home would mean a long daily commute to their jobs in Hauula and Waikiki, they couldn’t pass up the affordable two-bedroom house with a yard, a rare find on Oahu where the fair market rent is over $1,800.

But Alfred, a U.S. Navy veteran and special education teaching assistant, and Pebbles, a maintenance worker at Goodwill Industries, didn’t have enough money to pay the deposit and half of the first month’s rent.

They asked for a loan at three banks and were denied. They called friends and family, but no one could help.

Worried that they were going to lose the house, Alfred took out two payday loans from lenders in Waianae and Kalihi. Pebbles, who had already taken out one payday loan to cover car payments, borrowed another $500.

It was easy, and Alfred felt relieved. All they needed were pay stubs to get approved, and the promise to pay the money back within two weeks.

That was six months ago. Since then, the family has been stuck in a cycle of debt and have paid twice as much in fees than the initial cost of their loans. They had to stop sending their son to daycare, and were constantly late on rent and other bills.

Now, thanks to assistance from the nonprofit financial organization Hawaiian Community Assets, only one payday loan is still outstanding and things are finally getting better.

But the Kalaau family is just one of many Hawaii families who have fallen into a cycle of debt precipitated by deceptively easy payday loans.

The industry was legalized in 1999 when the Legislature passed a law exempting it from the state’s usury law, which caps the interest rate for loans at no more than 24 percent each year.

“You’re asking people to pay a high interest rate that 30 years ago was illegal almost everywhere in the U.S.” — Stephen Levins, Hawaii Office of Consumer Protection

Unlike regular loans, payday lenders in Hawaii can charge an annual percentage rate of 459 percent for a 14-day loan, according to a 2005 analysis by the State Auditor.

Hawaii now has one of the most permissive laws in the country and a higher-than-average rate cap.

Nationally, states are cracking down on the industry, which many critics argue preys on the poor. The Hawaii Senate recently passed a bill that would cap the annual percentage rate at 36 percent.

The House Consumer Protection and Commerce Committee plans to meet Monday to consider the bill. But similar measures have died in the House so far this year, and representatives are reluctant to strengthen regulations because payday lenders say that will put them out of business.

Jeff Gilbreath, executive director of Hawaiian Community Assets, believes it’s an issue of economic justice.

“These guys are making outrageous amounts of money off the backs of the poorest folks,” Gilbreath said of payday lending companies. “There is no good reason why these folks should be paying predatory rates of 400 percent APR when they could be paying 36 percent or less.”

How it works

Hawaii has regulated usury since 1859, long before the islands became a state. The current usury law caps the annual percentage interest rate for loans at 12 percent or 24 percent, depending on what kind of institution is giving out the loan.

But lawmakers passed a bill in 1999 that created a loophole for “deferred deposits,” opening the door for the payday lending industry to thrive.

Lenders can give loans up to $600 with a 15 percent fee. Borrowers must pay the money back within 32 days. A typical loan lasts two weeks, or until your next paycheck.

It seems reasonable, if the loans are paid off right away.

But numerous studies have shown that’s often not the case. More than 80 percent of payday loans are rolled over or renewed within two weeks, according to a report by the federal Consumer Finance Protection Bureau.

Far from being short-term loans, the report found that payday loan borrowers are indebted a median of 199 days per year.

Many of the borrowers are low-income people who have limited access to traditional lines of credit. A national analysis by Pew Charitable Trusts found that most borrowers, like Kalaau, use payday loans to cover ordinary expenses like rent, utilities, or food.

Courtesy of Hawaii Appleseed Center for Law and Economic Justice

Hawaii’s industry grows as others scale back

The state doesn’t keep data about how many payday companies there are or where they’re located.

But they’re easy to find throughout the state, especially in low-income neighborhoods like Waianae and Kalihi on Oahu. And the industry is growing: Over the last 10 years, the number of Money Mart stores tripled from three to nine.

According to a 2013 survey from the Federal Deposit Insurance Corporation, only 1.4 percent of Hawaii households use payday loans, lower than the national average of 2 percent. But that percentage grew from just 0.5 percent in 2011, faster than the national growth rate.

The percentage of Native Hawaiian and Pacific Islander households in Hawaii taking out payday loans tripled from 0.8 percent in 2011 to 2.4 percent in 2013.

That’s not surprising, given that the high cost of living coupled with Hawaii’s relatively low salaries means many local residents are living paycheck-to-paycheck.

The Maui chapter of the faith-based advocacy group Faith Action for Community Equity has interviewed dozens of families, most of them recent immigrants from islands in Micronesia, who have struggled to get out of a payday loan debt trap.

For some people, it lasts years. Wendy Burkholder, executive director of Consumer Credit Counseling Services of Hawaii, worked with one client on Maui who paid $50 every two weeks to borrow $100.

“In her state of mind, she needed it back in order to make rent, buy food, live,” Burkholder said. “The problem was the cycle went on for close to five years.”

Stephen Levins, the state’s director of the Office of Consumer Protection, hasn’t received any official complaints about payday lending. Burkholder said that’s not surprising.

“The shame and the stigma attached to not being able to manage your debt or be a good money manager is enormous,” she said. “It’s not something that you run around bragging about and you file complaints over.”

Despite the lack of official complaints, Levins has been increasingly concerned about the growth of the industry and wants the state to limit the annual percentage rate to 36 percent.

“This is an industry that’s just grown up from nothing in the past 20 years,” Levins said. “You’re asking people to pay a high interest rate that 30 years ago was illegal almost everywhere in the U.S.”

He points to numerous efforts throughout the country to crack down on the practice.

“If it’s good for the military, it should be good for the civilian population.” — Sen. Rosalyn Baker

In 2006, Congress passed a law to limit interest rates for loans to active military service members and their families to no more than 36 percent APR. A follow-up study by the Consumer Federation of America found the law had been largely successful in curbing abusive lending practices and recommended that it be expanded to help all service members, veterans and retirees.

As of 2014, payday loans were effectively banned in 14 states and the District of Columbia, according to Pew Charitable Trusts. Concerns about payday loans are so great that the Consumer Finance Protection Bureau announced this year that it is planning to create federal rules regulating the industry.

But so far, reform efforts in Hawaii have failed. The Senate passed a bill in 2013 to impose stricter regulations on the industry, but Rep. Clift Tsuji, who chaired the economic development committee, didn’t call a hearing for it. Rep. Mark Nakashima introduced a measure last year to limit the annual percentage rate to 36 percent, but House Consumer Protection Committee Chairman Angus McKelvey killed it.

Aggressive Senate bill meets strong opposition

That’s something that Sen. Rosalyn Baker from Maui wants to change.

The influential senator who chairs the consumer protection committee introduced Senate Bill 737, which would cap the annual percentage rate at 36 percent.

“If it’s good for the military, it should be good for the civilian population,” Baker said.

The measure passed the Senate almost unanimously, with Sen. Sam Slom, the chamber’s sole Republican, voting no.

Philadelphia-based Dollar Financial Group, a subsidiary of the multibillion-dollar private equity firm Lone Star Funds LLC, owns Money Mart and is taking the threat of stricter regulation seriously: For the second year in a row, it has enlisted one of the state’s top lobbying firms, Capital Consultants, to fight proposed rate caps.

A payday lending shop in Kalihi is only a block away from its competitor. Social service organizations say that in Hawaii, the payday loan debt trap contributes to the high rate of homelessness among local residents.

Cory Lum/Civil Beat

So far they’ve been successful. Baker’s is the last payday lending measure still alive, and its prospects don’t look good in the House.

One of the company’s lobbyists is Bruce Coppa, former Gov. Neil Abercrombie’s chief of staff. Coppa said the problem with payday loans is the lack of enforcement of the state’s existing law, which prohibits companies from rolling over loans.

Coppa declined to comment further, and Dollar Financial Group’s representative Kerry Palombo didn’t return a request for comment.

But in written testimony against SB 737, Palombo said that if interest rates are capped at 36 percent, the company will close all nine of its Hawaii stores and terminate 35 employees.

Palombo wrote that a 36 percent APR is a de facto ban on the industry, and called the existing law “consumer friendly.”

SB 737 “would eliminate a regulated environment and take away their access to a much-needed credit option at a time when families are finding their access to traditional forms of credit limited or cut-off entirely,” she wrote.

Poor prospects in the House

That argument resonates with Rep. Justin Woodson from Kahului, vice chair of the House consumer protection committee.

He said he has been heavily lobbied from both sides on the issue, and wants to create a compromise bill that will put more restrictions on the payday lending industry without quashing it.

He said his main concern is whether low-income people have enough financial options if the payday lending companies shut down.

“I’ve got children and grandchildren, I don’t like being called a predatory anything.” — Richard Dan, president of Maui Loan

Advocates for the 36 percent rate cap argue that they do, pointing to credit unions and organizations like the Office of Hawaiian Affairs and Hawaiian Community Assets.

“The sky hasn’t fallen in the states where they’ve cut back on that (rate) significantly,” argues Levins from the state consumer protection office.

But Woodson isn’t convinced. He agrees with the payday lending companies that the annual percentage rate isn’t an appropriate way to measure the cost of the loans. He said Friday that he and the committee chairman McKelvey plan to amend Baker’s bill to require payday lending companies to register with the state and impose a mandatory waiting period before consumers can take out a second loan.

He wants leave it up to House Finance Committee Chair Sylvia Luke to decide how much the interest should be.

Luke deferred a similar measure, House Bill 228, earlier this year. But she said she did so because she was waiting to hear SB 737. She expects the measure will make it to conference committee, the end-of-session period when lawmakers haggle over bills behind closed doors.

Concern from small businesses

Richard Dan, who lives in Woodson’s district, is glad he and other House lawmakers are more receptive to the payday lending industry’s concerns.

The president of Maui Loan in Kahului has been working as a lender in Hawaii for nearly four decades, and has been offering payday loans since 1999.

Dan is frustrated with the bad rap payday loan companies get. He said only a small portion of the customers at his family-owned business fall into a debt trap.

“I’ve got children and grandchildren, I don’t like being called a predatory anything,” he said, adding that he is willing to agree to a cooling-off period between loans.

Capping the annual percentage interest at 36 percent would make it impossible to run a brick-and-mortar store, he said. Right now, he receives $15 on every $100 loan; cutting that to $3 per loan wouldn’t allow him to cover his costs.

He also argues that eliminating payday loans would push consumers toward using predatory lending sources on the Internet and that allowing payday lending companies to compete with one another leads to cheaper rates.

But the Pew Charitable Trusts study discounted both of those claims, finding that 95 percent of consumers in places that banned payday loans didn’t turn to Internet sources, and that the cheapest interest rates were in states with the toughest regulations.

Still, Dan believes Hawaii is different. He supports a House resolution that would simply create a task force to study the industry’s impacts. For his perspective, while predatory lending may be an issue in Texas or other states, it’s not a problem in Hawaii.

But Levins from the state consumer protection office disagrees.

“People are people,” Levins said. “If it’s a problem in other states, you’re going to find it here. I don’t think the aloha spirit trumps the problems that are inherent with this industry.”