Hawaii has just passed important legislation to reform the state’s low dollar loan market and ban lump sum payday loans. House Bill 1192 garnered unanimous support from the state legislature and Gov. David Ige (D) proclaimed it into law on June 16.
The measure will take effect on January 1, 2022 and will save Hawaii borrowers millions of dollars each year by ensuring access to affordable credit from approved lenders. Under the new law, small installment loans will cost consumers hundreds of dollars less. (See Table 1.) It will make these small loans available with appropriate protections and incorporate proven policies that have garnered bipartisan support in other states. (See Table 2.)
Prior to these reforms, Hawaii law allowed unaffordable lump sum loans that were usually due in one go on the borrower’s next payday. These loans carried annual percentage rates of up to 460%. To borrow $ 500 over four months, a client would pay $ 700 in finance charges, and the lump sum payment would often consume a third or more of the borrower’s next paycheck. Such large payments meant that many borrowers had to quickly take out another loan to meet other financial obligations.
HB 1192 will replace these single installment loans with installment loans for amounts up to $ 1,500, repayable in two to twelve months. They can have annual interest rates of up to 36% plus a monthly fee of up to $ 35, depending on the loan amount, but the law caps total loan fees at half the amount borrowed. It also allows borrowers to prepay without penalty and treats loans made by lenders without a state license as void and uncollectible to prevent efforts to circumvent statutory consumer protections.
How borrowing costs will change with Hawaii’s reforms
Consumer savings under HB 1192 vs. personal loan status quo
|Cost of borrowing …||Financial charges before the law||Financial charges after the law||Savings|
|$ 300 reimbursed in 2 months||210 $||$ 74||$ 136|
|$ 400 reimbursed in 3 months||$ 420||$ 114||$ 306|
|$ 500 reimbursed in 4 months||$ 700||$ 158||$ 542|
Source: Pew analysis of market data and Hawaii House Bill 1192 (2021)
As chairs of the jurisdictional committees, State Senator Rosalyn Baker (D) and Representative Aaron Ling Johanson (D) reviewed evidence from other states, particularly Colorado (2010), Ohio (2018) and Virginia (2020), which have successfully passed payday. loan reforms. Hawaii’s approach reflects reforms in those states, which incorporated strong guarantees for consumers and allowed widespread access to credit.
How Hawaii’s approach compares to other states
The new law is similar to measures adopted elsewhere with some adjustments
|Colorado Law (passed in 2010) *||Ohio Law (passed 2018)||Virginia Law (adopted in 2020)||Recent Hawaii legislation (HB 1192, CD1†, 2021)|
|Tariff structure||Up to 45% annual interest and $ 30 maximum monthly fee|| Up to 28% annual interest and $ 30 maximum monthly fee
Up to 2% origination fee for loans over $ 500
|Up to 36% annual interest and $ 25 maximum monthly fee||Up to 36% annual interest and $ 35 maximum monthly fee|
|Access to widely available credit||Yes||Yes||Yes||Yes|
|Minimum loan term||6 months||3 months, or less if payments are limited to 6% of the borrower’s gross monthly income||4 months, or less if payments are limited to 5% of the borrower’s gross monthly income||4 months, or 2 months if the loan amount is $ 500 or less|
|Maximum loan amount||$ 500||$ 1,000||$ 2,500||$ 1,500|
* Comparison to Colorado law does not include an amendment that came into effect in 2019.
† Conference Draft 1, the final version of the legislation.
Sources: Pew analysis of Colorado House Bill 1351 (2010), Ohio House Bill 123 (2018), Virginia Senate Bill 421 (2020), and Hawaii House Bill 1192 (2021).
Donors see important step forward
Senator Baker, chairman of the Senate Committee on Commerce, Consumer Protection and Health and a long-time supporter of payday loan reform, stressed the need for change, noting that some lenders in Hawaii were charging rates “three times higher than what the same lender was charging consumers in other states.” We had a really, really dysfunctional market.
Representative Johanson, chairman of the House Consumer Protection and Commerce Committee, said the reforms are particularly important now. “We know there are so many struggling people in Hawaii, living paycheck to paycheck,” he said. “The installment loan is much better for the consumer with much less accumulated debt and interest over time.”
Legislators credited Iris Ikeda, State Commissioner for Financial Institutions, for her work in developing the bill. The Commissioner received extensive comments from stakeholders during the session and testified in favor of the measure.
Hawaii’s enactment of HB 1192 demonstrates continued support for limiting lump sum payday loans and shows how state and federal policymakers can reform consumer credit markets, promoting access to credit while protecting borrowers .
“For me”, Representative Johanson noted, “This is going to be one of the biggest economic justice victories of this session.”
Nick Bourke is the director, Gabe Kravitz is an officer, and Linlin Liang is a senior partner in The Pew Charitable Trusts’ consumer finance project.