Indiana organizations share concern about consumer loan bill passed in Senate

Feb. 9—SOUTHERN INDIANA — A bill that was passed by the Senate on Feb. 1 comes highly criticized by a coalition composed of 97 groups across the state.

Senate Bill 352 aims to make changes to Indiana's Uniform Consumer Credit Code regarding supervised consumer loans. The changes have various stakeholders concerned about the effect on low-income individuals in the state.

According to the bill that is now headed to the House, loans made in compliance with the changes will be exempt from loansharking laws indicated in the Indiana Code.

The code describes someone who commits loansharking 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 two times the rate specified."

The offense is a level 6 felony in the state, and applies to all loans except for payday loans, according to Andy Nielsen, Indiana Community Action Poverty Institute's senior policy analyst.

State Director of Habitat for Humanity Indiana Gina Leckron wondered how the state could justify the exemption from loansharking 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 confines of the existing loansharking law? And if they can't then it makes a question: Should this be allowed if it's currently illegal?" she said.

Nielsen said it's not surprising that lenders would want to be exempt from the law because it is easier than bringing down the rates and fees.

"[The bill] sets a 36% interest rate, and sets a 13% interest rate on the original balance of the loan, and then it also imposes an up to $50 underwriting fee in excess of $400. On a 4-month, $400 loan, the APR [annual percentage rate] could be 315%," he said.

Habitat for Humanity and Indiana Community Action Poverty Institute are two of 97 members making up 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 helps low-income individuals to build their own homes and make a 0% interest monthly mortgage payment.

"We feel that this really threatens not just our existing homeowners but our applicant families. Because we are dealing with folks who are between 30% and 60% of the median income," she said, "This feels like it's directly targeted at our key clients," Leckron said.

Before clients are moved into the new homes they do go through financial literacy classes, according to Leckron, where they are informed of the negatives of these types of loans.

The executive director for New Albany Floyd County Habitat for Humanity, Jerry Leonard, said that they try to offer all of the necessary resources for their new homeowners to make responsible financial decisions.

In the financial literacy classes, Leonard said they teach the clients how to create and follow a budget. Leonard tries to follow up with the clients once a month prior to them moving in to see how the budgeting has come along.

For individuals living with a low income, however, one problem could set them back significantly in terms of their finances. Leonard gave several examples of individuals who could easily be put into the situation of making rent or mortgage payments or paying to have their car fixed.

Leckron said it can feel like taboo or can be embarrassing for individuals to talk about their financial hardships with other people.

"It seems easier to go to these outside folks, but then when you do that if you don't fully read what's in that contract it just ends up being a devastating decision," she said.

One justification behind this bill that Nielsen has heard is that it will increase competition in the marketplace of installment loans, though he disagrees that this will be a result.

"Subprime borrowers, they don't have a lot of options. It's not like they go out to the marketplace and shop around like people who maybe have better credit...Whatever is provided by the market and those prices that's really their only option," he said.

When someone is desperate in a time of emergency or time of need, people do not think with the most reasonable set of assumptions, Nielsen said.

Because these borrowers often do not have the means to look around for different loans, Nielsen said that often lenders are charging the maximum legally allowed.

"When a buyer, or a borrower in this case, has only one option there's no expectation that competition will actually be fostered," he said, "[Lenders] will charge up to what is allowable in law, and we have some data to support that because that's exactly what the payday lenders are doing now."

"On [an] average basis they are charging up to the legal limit, like to the penny," Nielsen said.

The bill has been referred to the House's Financial Institution and Insurance Committee for review before it will be brought to the floor.

Rep. Ed Clere of District 72 said that as the bill is now, he does not see himself voting in favor of it.

"These products are targeted at people who are in financial distress and don't have good options," he said.

"I'd like to see the discussion turn to looking at ways the state can help people get away from the cycle of high-interest debt and living paycheck to paycheck. I'd like to see a focus on financial literacy, household budgeting, self-sufficiency, saving and investing, reducing debt, things that would help people break the cycle," Clere continued.

Nielsen also spoke to this cycle, noting that credit cannot be built without having credit.

"If you're coming from a household that you've never had someone that's been able to co-sign a loan for you or co-sign a credit card, and you have generational issues as well, which we see because we know these loans are offered disproportionately in communities of color," he said,

Because of the way these loans disproportionately affect communities of color, Nielsen said that there is a need for more racial equity in these policies.

"It's a self-fulfilling cycle of well: Are borrowers risky because they don't have good credit or are they risky because the loans they are being offered are never affordable?"