Hawaii just enacted major legislation to reform the state’s low-cost loan market and ban lump-sum payday loans. House Bill 1192 garnered unanimous support from the state legislature, and Gov. David Ige (D) signed it into law on June 16.
The measure will take effect on January 1, 2022 and will save borrowers in Hawaii 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, Hawaiian law permitted unaffordable lump-sum loans that generally had to be repaid in a single 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 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 payment loans with installment loans for amounts up to $1,500 repayable in 2 to 12 months. They can have annual interest rates of up to 36% plus monthly fees of up to $35, depending on the size of the loan, but the law caps total loan fees at half the amount borrowed. It also allows borrowers to prepay without penalty and deems loans made by lenders without a state license as void and uncollectible to prevent efforts to circumvent the law’s consumer protections.
Table 1
How Borrowing Costs Will Change With Hawaii’s Reforms
Consumer savings under HB 1192 versus personal loan status quo
| Borrowing cost… | 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 Sen. Rosalyn Baker (D) and Rep. Aaron Ling Johanson (D) reviewed evidence from other states — particularly Colorado (2010), Ohio (2018 ) and Virginia (2020) – which have passed payday loan reforms. Hawaii’s approach mirrors reforms in those states, which have incorporated strong consumer safeguards and resulted in widespread access to credit.
Table 2
How Hawaii’s Approach Compares to Other States
The new law is similar to measures adopted elsewhere with some adjustments
| Colorado Law (passed 2010)* | Ohio law (passed 2018) | Virginia law (passed 2020) | Hawaii’s recent legislation (HB 1192, CD1†2021) | |
|---|---|---|---|---|
| Fee 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 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 took effect in 2019.
† Conference Draft 1, the final version of the legislation.
Sources: Pew analysis of Colorado Bill 1351 (2010), Ohio Bill 123 (2018), Virginia Senate Bill 421 (2020), and Hawaii Bill 1192 (2021).
Donors see an important step forward
Senator Baker, chairman of the Senate Commerce, Consumer Affairs and Health Committee and a longtime supporter of payday loan reform, has stressed the need for change, noting that some lenders in Hawaii charged rates “three times higher than what the same lender charged consumers in other states. We had a really, really dysfunctional market.
Rep. Johanson, chair of the House Consumer Protection and Commerce Committee, said the reforms are especially 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 debt and interest accrued over time.”
Legislators credited Iris Ikeda, Commissioner of State Financial Institutions, for her work in crafting the bill. The commissioner collected numerous contributions from stakeholders during the session and testified in support 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,” Rep. Johanson noted“This will be one of the biggest economic justice wins of this session.”
Nick Bourke is the director, Gabe Kravitz is an executive, and Linlin Liang is a senior partner of The Pew Charitable Trusts consumer credit project.
