Hawaii just enacted significant legislation to reform the state’s small-dollar loan market and prohibit balloon-payment payday loans. House Bill 1192 garnered unanimous support in the State Legislature, and Gov. David Ige (D) signed it into law June 16.
The measure goes into effect Jan. 1, 2022, and will save borrowers in Hawaii millions of dollars each year by ensuring access to affordable credit from licensed 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.)
Before these reforms, Hawaii law permitted unaffordable balloon-payment loans that were typically due back in one lump sum on the borrower’s next payday. These loans carried annual percentage rates of up to 460%. To borrow $500 over four months, a customer would pay $700 in finance charges, and the lump-sum payment often would consume one-third or more of the borrower’s next paycheck. Such large payments meant many borrowers needed to quickly take another loan to meet other financial obligations.
H.B. 1192 will replace these single-payment loans with installment loans for amounts up to $1,500 that are repayable in two to 12 months. They can have annual interest rates of up to 36% plus a monthly fee up to $35, depending on loan size, but the law caps total loan charges at half of the amount borrowed. It also allows borrowers to repay early without penalty, and deems loans made by lenders without a state license void and uncollectable to prevent efforts to circumvent the law’s consumer protections.
How Borrowing Costs Will Change With Hawaii’s Reforms
Consumer savings under H.B. 1192 compared with the payday loan status quo
|Cost to borrow…||Finance charges before the law||Finance charges after the law||Savings|
|$300 repaid in 2 months||$210||$74||$136|
|$400 repaid in 3 months||$420||$114||$306|
|$500 repaid in 4 months||$700||$158||$542|
Source: Pew analysis of market data and Hawaii House Bill 1192 (2021)
As chairs of the committees of jurisdiction, state Senator Rosalyn Baker (D) and Representative Aaron Ling Johanson (D) considered evidence from other states—particularly Colorado (2010), Ohio (2018), and Virginia (2020)—that passed successful payday loan reforms. Hawaii’s approach mirrors reforms in those states, which incorporated strong consumer safeguards and resulted in widespread access to credit.
How Hawaii’s Approach Compares With Other States
New law is similar to measures enacted elsewhere with some adjustments
|Colorado law (enacted in 2010)*||Ohio law (enacted in 2018)||Virginia law (enacted in 2020)||Hawaii’s recent legislation (H.B. 1192, CD1†, 2021)|
|Pricing 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 greater than $500
|Up to 36% annual interest and $25 maximum monthly fee||Up to 36% annual interest and $35 maximum monthly fee|
|Access to credit widely available||Yes||Yes||Yes||Yes|
|Minimum loan term||6 months||3 months, or shorter if payments are limited to 6% of borrower’s gross monthly income||4 months, or shorter if payments are limited to 5% of borrower’s gross monthly income||4 months, or 2 months if loan amount is $500 or less|
|Maximum loan size||$500||$1,000||$2,500||$1,500|
*The comparison with the Colorado law does not include an amendment that took effect in 2019.
† Conference Draft 1, the final version of the legislation.
Sources: Pew’s analysis of Colorado House Bill 1351 (2010), Ohio House Bill 123 (2018), Virginia Senate Bill 421 (2020), and Hawaii House Bill 1192 (2021).
Backers see important step forward
Sen. Baker, chair of the Senate Commerce, Consumer Protection, and Health Committee and a longtime supporter of payday loan reform, highlighted the need for change, noting that some lenders in Hawaii charged rates that were “three times higher than what the same lender was charging consumers in other states. We had a really, really dysfunctional market.”
Rep. Johanson, chairman of the House Consumer Protection and Commerce Committee, said the reforms are especially important now. “We know that there are so many people who are struggling in Hawaii, living from paycheck to paycheck,” he said. “The installment loan is much better for the consumer with much less accrued debt and interest over time.”
The lawmakers credited Iris Ikeda, the state’s commissioner of financial institutions, for her work in crafting the bill. The commissioner gathered extensive input from stakeholders during the session and testified in support of the measure.
Hawaii’s enactment of H.B. 1192 demonstrates continued support for reining in balloon-payment payday loans and shows how state and federal policymakers can reform consumer finance markets, promoting access to credit while also protecting borrowers.
“To me,” Rep. Johanson said, “this is going to be one of the biggest economic justice wins from this session.”
Nick Bourke is the director, Gabe Kravitz is an officer, and Linlin Liang is a senior associate with The Pew Charitable Trusts’ consumer finance project.