The Hawaii Senate voted last week to limit payday loan annual interest rates to 36 percent, down from the current allowable annual rate of 459 percent.

Senate Bill 286 is supported by the state Office of Consumer Protection and numerous organizations that say the high rates are predatory and force some Hawaii residents into a cycle of debt. Despite stiff opposition from the payday lending industry, the Senate approved the measure unanimously.

But it’s unclear whether the proposal has a chance in the House, where similar bills have met resistance. House Speaker Joseph Souki said last week that it was premature to comment on the bill, even though it’s already in the House. He didn’t respond to a follow-up call this week.

Rep. Sylvia Luke didn’t respond to multiple requests for comment. Two years ago, Luke watered down an attempt to cap the interest rates for payday loans.

Money Mart 1734 Kalakaua Ave payday loans. 14 march 2017
Oahu residents can take out payday loans at Money Mart in Waikiki. The company is spending thousands of dollars to fight Senate Bill 286. Cory Lum/Civil Beat

Souki said in 2015 that he didn’t support capping the rates at 36 percent because payday lenders wouldn’t be able to stay in business and consumers would turn to the black market for loans.

But one House lawmaker changed his mind. Rep. Angus McKelvey said after learning about the issue at national conferences, he decided capping interest rates was a good idea and wanted to call a hearing for the bill in his Consumer Protection Committee.

Unfortunately for the bill’s advocates, the House ousted McKelvey from his chairmanship Monday. His successor, Rep. Roy Takumi, has scheduled a hearing for the bill this Friday.

Why Cap The Rate?

Hawaii legalized payday lending in 1999, as part of a national wave of financial deregulation. But the tide has turned against the industry, now worth $30 billion nationally. In 2006, the Department of Defense limited payday loan annual interest rates to 36 percent for active service members. Now, 17 states plus the District of Columbia either ban the loans or cap the rates.

Sen. Rosalyn Baker says it’s especially urgent for Hawaii to pass the bill in light of national politics. Republicans in Congress want to get rid of or weaken the Consumer Financial Protection Bureau, a federal watchdog agency that’s been cracking down on predatory lending.

“It is important to join other progressive states across the country that have made reforms in their payday lending,” Baker said.

Baker’s proposal is backed by the Consumers Union, Hawaii Appleseed Center for Law and Economic Justice, the Office of Hawaiian Affairs, Faith Action for Community Equity Hawaii and the Hawaii Alliance for Community-Based Economic Development.

Senator Rosalyn Baker rises in support of veto in special session at the Legislature. 20 july 2016
Sen. Rosalyn Baker, chair of the Senate Committee on Consumer Protection and Commerce, supports capping interest rates for payday loans. Cory Lum/Civil Beat

Jeff Gilbreath, executive director of the nonprofit Hawaiian Community Assets, supports the bill and says the nonprofit set up a pilot project involving 24 people and loaned them money at 8 percent annual interest rates.

Gilbreath said the pilot showed how it’s possible to loan at lower rates and still earn a profit. He said he’s worked with many low-income people, particularly Native Hawaiians, who have used payday loans and ended up owing exorbitant amounts of money.

That’s convincing to Baker. “We are not trying to get rid of the small loan lenders because there’s a role for them, but it needs to be done in a way that doesn’t trap people in a cycle of debt,” she said.

The Industry Perspective

Craig Schafer runs PayDayHawaii stores that operate on multiple islands. He doesn’t think that the experiment by Hawaiian Community Assets accurately reflects what it would take to give payday loans, in part because the pilot program involved giving out loans over a longer period of time.

“The law as it is currently enacted allows us to only hold a check for 32 days,” Schafer said. “If they took that restriction off there would be a lot more variation and innovation in the industry. If there were an ability to do longer term loans at a rate that would make sense to us.”

He also said that the program didn’t take into account other business costs.

“Where’s the rent? Where’s the insurance? Where’s the electricity? Where’s the general excise tax? Where’s the health insurance? Where’s the telephone?” Schafer asked. “It’s an oversimplified application of (payday lending) and this is why I want the state auditor to do another sunrise analysis.”

Speaker Souki Rep Presser1. 20 july 2016
House Speaker Joe Souki hasn’t replied to questions about where he stands on payday loans. Cory Lum/Civil Beat

The Hawaii state auditor conducted a 2005 study that found little evidence that payday loan companies are harming consumers and advised against capping the rates at 36 percent. But the report said that it’s likely payday lenders could stay in business if the annual percentage rates were cut from 459 percent to 309 percent.

Contrary to the auditor’s findings, churches and nonprofits that work with low-income people say many of them, including recent immigrants, have gotten stuck in a cycle of debt or become homeless after taking out payday loans.

As more states have moved to curb payday lending, national studies have found it’s common for consumers to take out the loans for five to six months. The federal Consumer Financial Protection Bureau found that 80 percent of payday loans are rolled over or renewed, which means a borrower takes out another loan.

“It’s an extraordinarily high rate of interest and it focuses on the people who can least afford to pay the rate of interest.” — Stephen Levins, Hawaii Office of Consumer Protection

Schafer hopes the Legislature asks the state auditor to conduct another study before dropping the rate. He says that he’s open to lowering the annual interest rates for payday loans, but that capping them at 36 percent is way too low.

Schafer doesn’t think that the national studies are applicable to Hawaii. He said in January, his company originated 1,773 transactions and just 40 remain unpaid. More than 60 percent of January loans were renewed, he said.

The renewal rate is concerning to Schafer, who says, “There needs to be a type of credit available for people who are credit-challenged that is something we can transition people into where a 30-day loan isn’t going to work for them.”

He was frustrated that Baker never called a hearing for Senate Bill 869, which sought to create a pilot program for small loans.

“I can see customers who will use our product over and over again because they have a long term issue but … I can’t refer them any place,” he said.

Lobbying To Kill The Bill

Baker says she viewed Schafer’s bill as a stalling tactic, and that her committee preferred to go with SB 286, which had significantly more support than Schafer’s proposal.

The payday loan industry is doing its best to kill the bill. Dollar Financial Group is a Philadelphia-based company that owns Money Mart, which has nine stores in Hawaii. The company has spent more than $20,000 in 2015 and 2016 on lobbying the Legislature, according to financial disclosure reports filed with the state Ethics Commission.

Dollar Financial Group has also hired four lobbyists from Capital Consultants, one of the top lobbying firms in the state.

“No business can survive a 92.2 percent decrease in gross income,” Lester Firstenberger, a senior vice president at the company, said in written testimony. “It doesn’t leave enough revenue to pay the light bill, much less employee payroll and benefits.”

“This bill is definitely pro-consumer and I make no apologies for that,” Baker said in an email.

Stephen Levins, who leads the state Office of Consumer Protection, says consumers have found other loan options in states where the interest rates have been capped. An analysis from Governing, a nonpartisan policy magazine, found that when payday lending was limited in Minnesota, consumers turned to online payday lending temporarily but “eventually weaned themselves off the payday practice.”

“It’s an extraordinarily high rate of interest and it focuses on the people who can least afford to pay the rate of interest,” Levins said. “This was considered usurious 25 years ago in Hawaii … because of all the problems associated with people getting on a debt treadmill. There’s a reason why there’s no consumer protector in the country who thinks these loans are a good deal.”

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