SOUTHERN INDIANA — A bill that passed the Senate on February 1 is heavily criticized by a coalition made up of 97 groups statewide.
Senate Bill 352 is intended to make changes to the Indiana Uniform Consumer Credit Code regarding supervised consumer loans. The changes have several stakeholders concerned about the effect on low-income people in the state.
Under the bill now headed to the House, loans made pursuant to the changes will be exempt from the usury laws outlined in the Indiana Code.
The code describes a predatory lender as “a person who, in exchange for the loan of any property, knowingly or intentionally receives or contracts to receive from another person any consideration, at a rate greater than twice the specified rate.”
The offense is a Level 6 felony in the state and applies to all loans except payday loans, according to Andy Nielsen, senior policy analyst at the Indiana Community Action Poverty Institute.
Indiana Habitat for Humanity State Director Gina Leckron wondered how the state could justify exemption from usury laws for these specific consumer loans.
“We don’t think it’s necessary to change that existing law. Why can’t they operate within the limits of the existing usury law? And if they can’t, it begs a question: Should this be allowed if it’s currently illegal?” she said.
Nielsen said it’s not surprising lenders want to be exempt from the law because it’s easier than lowering rates and fees.
“[The bill] sets an interest rate of 36% and sets an interest rate of 13% on the original loan balance, and then also imposes a subscription fee of up to $50 above $400. On a $400 4-month loan, the APR [annual percentage rate] it could be 315%,” he said.
Habitat for Humanity and the Indiana Community Action Poverty Institute are two of the 97 members of the Hoosiers for Responsible Lending coalition opposing this bill.
Habitat for Humanity clients could be greatly affected by this bill, according to Leckron. The nonprofit organization helps low-income people build their own homes and make a monthly mortgage payment with 0% interest.
“We think this really threatens not only our current owners, but also our applicant families. Because we’re dealing with people who have 30% to 60% of the median income,” he said, “It seems like this is aimed squarely at our key customers,” Leckron said.
Before clients move into their new homes, they attend financial education classes, according to Leckron, where they are educated about the downsides of these types of loans.
New Albany Floyd County Habitat for Humanity Executive Director Jerry Leonard said they try to offer all the necessary resources for their new owners to make responsible financial decisions.
In financial education classes, Leonard said they teach clients how to create and follow a budget. Leonard tries to follow up with clients once a month before they move in to see how the budget has gone.
However, for people living on low incomes, a problem could set them back significantly in terms of their finances. Leonard gave several examples of people who could easily find themselves in the position of making rent or mortgage payments or paying to get their car repaired.
Leckron said it can feel taboo or embarrassing for people to talk about their financial struggles with other people.
“It seems easier to go to these outsiders, but then when you do that, if you don’t fully read what’s in that contract, it ends up being a devastating decision,” he said.
One rationale behind this bill that Nielsen has heard is that it will increase competition in the installment loan market, though he disagrees that this is an outcome.
“Subprime borrowers don’t have many options. It’s not like they go to the market and shop around like people who maybe have better credit… Anything the market provides and those prices is really their only option,” he said.
When someone is desperate in a time of emergency or need, people don’t think with the most reasonable set of assumptions, Nielsen said.
Because these borrowers often don’t have the means to shop around for different loans, Nielsen said lenders often charge the maximum legally allowed.
“When a buyer, or a borrower in this case, only has one option, there is no expectation that it will really encourage competition,” he said, “[Lenders] will charge as much as the law allows, and we have some data to back that up because that’s exactly what payday lenders are doing now.”
“About [an] on average, they are charging up to the legal limit, like the penny,” Nielsen said.
The bill has been referred to the House Insurance and Financial Institutions Committee for review before it goes to the floor.
Rep. Ed Clere of District 72 said that as the bill stands now, he doesn’t see himself voting for it.
“These products are aimed at people who are in financial trouble and don’t have good options,” he said.
“I would like to see the discussion turn to finding ways the state can help people get out of the cycle of high-interest debt and living paycheck to paycheck. I would like to see a focus on financial education, family budgeting, self-sufficiency, saving and investing, debt reduction, things that would help people break the cycle,” Clere continued.
Nielsen also referred to this cycle, noting that you can’t build credit without having credit.
“If you come from a household where you’ve never had someone who’s been able to co-sign a loan for you or co-sign a credit card, and you also have generational issues, which we see because we know that these loans are disproportionately offered in the communities of color,” he said,
Because of how these loans disproportionately affect communities of color, Nielsen said more racial equity in these policies is needed.
“It’s a self-fulfilling cycle of good: Are borrowers risky because they don’t have good credit, or are they risky because the loans offered to them are never affordable?”