Payday loan rules could stop ‘debt trap’ in Indiana, advocates say

Indiana advocates for low-income people say proposed federal rules aiming to tamp down on the payday loan industry would be a good first step at stopping the “debt trap.”

The Consumer Financial Protection Bureau’s rule—released Thursday, though it is open for public comment through September—would force payday loan providers to determine if the borrower has the ability to repay short-term advances and debts. It would also restrict lenders from making repeated debits from delinquent borrowers’ bank accounts.

“This is a great first step about opening up a discussion about reasonable lending,” said Kelsey Clayton, manager of the Indiana Assets & Opportunity Network. “The CFPB should require payday lenders to do what other lenders do, which is to make loans that borrowers can afford to repay.”

Payday loan borrowing is widespread in Indiana, with high-interest loans—sometimes carrying the equivalent of a more than 300 percent interest rate—draining $70 million in fees from Indiana residents each year, according to the Center for Responsible Lending.

The average payday loan borrower in Indiana takes out nine of the loans a year, according to Indiana’s Access and Opportunity Network. The average loan is just $317. The payday lending industry is particularly strong in Indianapolis, where there are more than 90 storefronts across the city.

Todd Roberson, a senior finance lecturer at the Indiana University Kelley School of Business, said he believes payday lenders should be required to disclose what these loans cost as an effective annual rate.

He said the consequence of these new federal rules is it’s going to “dry up that form of credit for people who need that type of credit.”

“If the CFPB really wants to solve some of these problems in lending, I think money would be better spent on financial literacy and disclosure than on setting arbitrary bureaucratic and regulatory thresholds that lenders have to meet,” Roberson said. “You’re not eliminating one of the core problems, which is that people buy a lot of stuff they don’t really need.”

But if the payday loan sector dries up, Roberson said there is an opportunity for community organizations and not-for-profits to come together to make safe and relatively low-interest small loans “for the benefit of the community.”

Clayton said her organization is trying to bring an alternative lending model to central Indiana: employer-based small-dollar loans. Those loans have much lower default rates, Clayton said, because they go through payroll deduction and have lower interest rates and fees.

“We’re currently working to find a lender in central Indiana and southern Indiana,” Clayton said. “This opens up conversations about other alternatives.”

The faith community, including the Indiana Catholic Conference, has been involved in advocating for changes in the payday loan industry. Usury is strongly condemned in the Bible, said Glenn Tebbe, executive director of the Indiana Catholic Conference.

“The role of the government is to protect vulnerable people,” Tebbe said. “The weakest members should be helped to defend themselves.

Tebbe worked this year to fight against proposed state legislation that would have allowed payday lenders to offer six-month loans of up to $1,000 at an annual percentage rate of 180 percent. He said he would continue to fight against expansions in the industry.

“Whether another bill is proposed next year remains to be seen,” Tebbe said. “My guess is it’s likely.”