Lawmakers face familiar question: How much is too much to charge for small, short-term loan?

How much is too much to charge Hoosiers for small, short-term loans?

At the Indiana statehouse, the answer to that question depends on who you ask — and how you view the pitfalls of financial insecurity.

Sen. Greg Walker, R-Columbus, has filed SB 325 seeking to cap the annual percentage rate on small "payday" loans at 36 percent — a level well below what the industry claims is needed to take on the risky loans. Such loans now carry the equivalent of an APR of more than 390 percent.

A bill submitted by Rep. Martin Carbaugh, R-Fort Wayne, does not address payday loans, which come due in as little as two weeks. But his legislation, HB 1319, would allow lenders to expand the size of loans charging 36 percent interest, and offer new, short-term installment loans at an APR of up to 45 percent, plus additional fees.

The competing bills represent the latest skirmish in a fight that has gone on at the statehouse for the last several years. At the heart of the debate is how to best help Indiana residents who need a small infusion of cash but may not qualify for traditional loans. And it is intensifying in anticipation of new federal regulations, scheduled to take effect later this year, that could push payday lenders out of the market.

The contentious dispute pits a wide-ranging coalition of nonprofits and community service organizations against the payday loan industry. Both claim the same goal: protecting Hoosier borrowers from predators; but their approaches differ greatly.

There are compelling arguments on both sides, and no easy answers. There also is a demand. More than 1.2 million payday loans were made in Indiana in the 12-month period ending Nov. 30, according to the state Department of Financial Institutions.

Still, a new poll shows Hoosiers overwhelmingly support a 36 percent rate cap on payday loans. 

On the other hand, lobbyists for the lending industry citeda 2007 report by the Federal Reserve Bank of New York that indicated households in two states where payday loans were banned "are forced to use costlier credit and suffer greater financial difficulties."

Indiana law currently allows payday lenders to charge the equivalent of 391 percent annual percentage rate, or APR, including both in interest and fees. That's more than five times the amount allowed, without a legislative exemption, under the criminal loan-sharking law in Indiana.

The poll of registered voters released today found 68 percent "strongly favor" and another 20 percent "somewhat favor" the 36 percent cap. The survey also reveals more than three out of four registered voters were "more likely" to vote for a candidate supporting such a cap. 

The poll of 600 registered voters was conducted between Jan. 3-7 by Bellwether Research and Consulting of Alexandria, Virginia, and has a margin or error of plus or minus four percent.

The research was commissioned by Prosperity Indiana, Brightpoint and the Indiana Institute for Working Families. The organizations are part of a broad coalition of more than 200, from faith to veteran groups, who want lawmakers to rein in what they see as predatory rates.

"Predatory loans, offered at triple-digit interest rates, destabilize Hoosier families and communities because this debt trap can lead to bankruptcy and housing instability," said Kathleen Lara, policy director for Prosperity Indiana. “As today's poll shows, Hoosiers understand the inherent problems with this type of high-cost credit. ... We urge lawmakers to stand with us in supporting a 36 percent payday loan cap and opposing efforts to expand the industry." 

Brian Burdick, a payday lending lobbyist with the Barnes and Thornburg law firm, is pushing in another direction. He stressed HB 1319 does not address the current payday loan law. Rather, it would create a new product that payday lenders can offer people who don't have access to small loans. 

The legislation would allow state-licensed lenders to make small installment loans of $550 to $1,500, with terms ranging from 90 days to 18 months, at an APR of up to 45 percent.

He said the new loans offer many benefits over payday loans, primarily that they do not require a lump-sum payoff just days after the money is borrowed. The new loans would come with interest rates "significantly" lower than payday loans. They also would be reported to credit bureaus, which could help borrowers build or repair credit. In addition, the law would require borrowers seeking more than three of the loans over a 24-month period to enroll in a financial literacy program, and generate money for such programs. 

With finance charges, interest and monthly fees, a person who borrowed $1,000 for 12 months would pay back about $2,000.

Erin Macey, policy analyst at the Indiana Institute for Working Families, said nearly one in three Hoosier families is struggling to achieve and maintain economic self-sufficiency. In addition to the new installment loans, she said another provision in HB 1319 would allow all consumer loans up to $54,600 to be subject to a 36 percent interest rate. Currently only loans of $2,000 or less can charge that much, she said. It also increases fees such as finance and delinquency charges, while doing nothing to address the current two-week payday loans made at 391 percent APR.

"Payday lending works against (struggling Hoosiers), pulling families deeper into debt to the point of devastation,” Macey said. “This new product the payday lenders want to legalize is no better and will only prolong and deepen the debt trap.”

If the federal regulations do push out payday lenders, not everyone who could get a payday loan would qualify for the proposed new loans, said Matt Bell of Catalyst Public Affairs Group, who also represents lenders pushing HB 1319.

"We believe that 20-30 percent of the customers served by the payday industry will not be able to qualify for a short-term installment loan,” he said. 

Without access to such loans, Burdick added, people in financial distress could be forced to turn to worse options, such as unregulated, unlicensed online lenders.

As of the end of business Friday, neither bill was been scheduled for a hearing. Walker's bill has been assigned to the Senate committee on insurance and financial institutions. Carbaugh's bill was sent to the House committee on financial institutions.

Tim Evans is IndyStar's consumer advocate. Contact him at tim.evans@indystar.com or (317) 444-6204. And follow him on Twitter: @starwatchtim