Efforts to change state laws surrounding payday loans have made little, if any, progress in recent years.
But a reform bill heard last week and backed by consumer advocates and some lenders could be the best – albeit small – chance payday loan reform has seen in Kansas in some time.
“It has more positives than any I can remember,” said Rep. Jim Kelly, R-Independence, who for many years served as chair of the Kansas House Committee on Financial Institutions. “This I think is more viable than some of the ones that have come over the past few years that I’ve been here.”
Payday loans are relatively small amounts of money that are lent out at high interest rates with the expectation that they will be repaid when the next paycheck comes.
Critics have portrayed these loans as predatory on low-income people who are under pressure, as some may be stuck with high-interest debt. The industry defends them as a necessary option that customers want and demand.
Aside from information hearings, the last time an actual bill on the matter was tabled was in 2017. Kelly had walked away from pushing payday loan legislation even as recently as last year.
There may be a change in tone depending on how things develop.
“We as a committee … we are determined to see if we can find some kind of compromise between this year and next year,” the representative told the Topeka Capital-Journal. The payday loan companies and others “also told us they’re willing to sit down with us and see if we can make a difference.”
One reason this bill is more appealing is because it’s already a compromise between lenders and consumer advocates, said Nick Bourke, consumer finance director at Pew Charitable Trusts.
Currently, payday loans cannot exceed $500, have a maximum term of one month, and must be repaid in a single payment. Interest rates and other terms are negotiated between the borrower and the lender. It’s a structure critics say leads to repeated borrowing and an inability to repay.
“This current average interest rate on a payday loan is 391 percent. 391 percent!” said Moti Rieber of Kansas Interfaith Action in a written statement. “In our system, we expect lenders to charge interest, but the unregulated and astronomical rates charged by the predatory lending industry fall within the definition of ‘usury’. “
House Bill 2189 would create a new structure where payments would be made in installments over a minimum period of three months, “by far the safest structure for consumers,” said Tony Huang, CEO of Possible Finance.
The bill also caps interest rates at 36%, and in return, lending companies can increase their fees and lend more than usual. There could be a maximum monthly fee of $30 and up to $25 in underwriting fees. You can borrow up to $2,500, far more than in other states.
“Repayment over time and in installments is at the heart of this reform. And once you allow the borrower to repay in affordable installments over time, you also allow for larger loans,” Bourke said.
That 36% rate also motivates installment loan companies like Possible Finance to come to Kansas. Small installment companies are required by current law to offer interest rates of 21% or less.
“Kansas … charges extremely low interest rates for the safest type of credit — installment loans,” Huang said. “HB 2189 would harmonize those statutes and allow us enough revenue to operate profitably, much like we do in Ohio.”
But some payday loan companies like Speedy Cash still say this new structure and cap could put them out of business.
“HB 2189 eliminates the payday loan product and provides small dollar loans below $2,500 only for the most creditworthy near-prime borrowers. (The new structure) is not a viable business model for risky borrowers,” said Melissa Soper, who represents Speedy Cash.
She mentioned that for states that enacted similar reforms, Speedy Cash had to withdraw products or operations from those states.
Others opposed the proposed reform on the grounds that it would insult customer decision-making.
“Kansas consumers are empowered to make their own financial decisions without government intervention. Who’s to say that borrowing to meet a short-term need is better for a borrower than the consequences of not borrowing?” said Whitney Damron of the Kansas Community Financial Services Association.
Bourke dismissed those concerns as she did not want more market competition from consumer loan companies.
Kelly, the committee’s chair, said he has no interest in disrupting the payday loan industry.
He said he would lean towards an option that offers the best of both worlds, where there is the installment structure of the bill and the current structure that payday lenders operate under (or at least a structure that payday lenders would be comfortable with).
“My concern is that it’s not a product that some people would qualify for,” Kelly said. “If there’s no other way for them, then they get into back alley lending and get into situations that aren’t favorable.”
If the reform ever gets passed, it will likely be the next session if unpassed bills from this year roll over into this session. This hearing is a good first step, Kelly said.
“Rarely has there been an actual hearing on this issue,” he added. “We had an actual hearing this year which would put us in a position to look for compromises and gain support and try to move something beyond the hearing.”