Editor's note: This story has been updated with comments from State Sen. Andy Zay, R-Huntington.
Several organizations, including the Indiana Institute for Working Families, met at the Indiana Statehouse 3rd floor atrium March 11 to explain their opposition to a subprime lending bill co-authored by Huntington’s state senator.
State Sen. Andy Zay, R-Huntington, co-authored Senate Bill 613, which the Center for Responsible Lending said would allow lenders to exceed for everyone but active military personnel the annual rate cap including fees and charges of 36 percent established in the Military Lending Act.
A coalition of military, faith and community groups wanted to extend protections included in the Military Lending Act to all Indiana residents, but the Indiana Senate narrowly defeated a bill designed to accomplish that, said Erin Macey, a senior policy analyst for the institute.
The 36 percent cap included in Senate Bill 104 was favored by nearly nine out of 10 Indiana voters, according to a January poll conducted by Bellwether Research & Consulting for the institute, Prosperity Indiana, and Brightpoint, she said.
But instead, SB 613 passed the Indiana Senate on a 26-23 vote. “It’s noteworthy the Senate pro tem voted against the bill and so did the chairman of the Financial Institutions committee,” Macey said.
As payday loans exist today, 94 percent of respondents to the poll said they were expensive versus inexpensive, 87 percent said they were a financial burden versus a financial relief and 84 percent said they were harmful versus helpful. And opponents said SB 613 would worsen Indiana’s payday loan situation.
SB 613 “contains massive changes to the consumer lending laws in Indiana; changes the definition of criminal loan sharking; creates two new high-cost installment loan products currently illegal in Indiana, and changes the rules for all consumer credit in Indiana in pretty important ways,” Macey said.
Currently, all Indiana lenders but payday lenders must comply with its long-standing criminal loansharking annual percentage rate of no more than 72 percent.
But the Center for Responsible Lending at the National Consumer Law Center said in a policy brief the same $500, 6-month loan that would today result in charges of $109.18 and a 71 percent APR would under SB 613 result in charges of $219.99 and a 138 percent APR.
“By increasing the amount of the nonrefundable prepaid finance charges, SB 613 would increase lenders’ economic incentive to repeatedly refinance a borrower, prolonging the debt and charging a new set of fees each time,” the brief said.
“The refinancing of these loans increases the costs to borrowers and makes it much more difficult for a borrower to ever climb out of the debt,” it said.
“Additionally, lenders are not required in any case to refund any of the prepaid finance charge upon early prepayment of the loan, and loan charges are pre-computed at the loan’s outset, thus operating as a very high cost prepayment penalty to the borrower.”
SB 613 creates loan products including one installment loan payday lenders can offer for six to 12 months on amounts between $605 and $1,500 with an APR of 192 percent.
Some churches and community groups are concerned that the larger amount of debt that borrowers build up using the new loan products will make it more difficult to “bail people out of a hole,” Macey said.
"SB 613 is the result of an ongoing challenge to meet the sub-prime credit needs of over 1 million Hoosiers accessing over $1 billion in credit," Zay said in a statement. "The current offerings are limited and outdated. SB 613 creates three new lending options at significantly lower rates and creates a pathway to bankability.
"Further, SB 613 includes many new regulations on the companies that offer these products to better protect the consumer.
"Finally, additional fees are assessed on each provider to fund an ongoing financial literacy program through the Department of Financial Institutions.
"Hoosiers will be best served with continued regulation and more options in the sub-prime credit area.
"The legislation has the opportunity to save Hoosiers thousands of dollars in carrying fees and charges over what is presently available.
"The opponents believe that Hoosiers with poor credit do not need access to credit. Their belief is that this will only compound their financial problems and not provide short-term relief of emergency situations or immediate family needs."