There are more payday lenders than 7-Eleven stores in Hawaii, according to a local financial services nonprofit. Their loans are in high demand in the Aloha State, where the cost of living is sky-high and residents have the second-highest consumer debt in the nation.

But the small, short-term loans — which are supposed to last only two weeks and not exceed $600 — are risky, and national studies show they trap low-income people in cycles of debt.

That might change under a bill in the Hawaii Legislature that would cap interest rates and restructure how the entire industry operates.

Maui Sen. Rosalyn Baker, a Democrat, has long been an outspoken proponent of limiting annual interest rates to 36 percent. Hawaii currently allows payday lenders to offer loans that have annual interest rates as high as 459 percent.

The leader of the Senate committee dealing with consumer issues has tried for years to limit interest rates but her proposals frequently die in the waning days of the legislative session. Businesses argued her proposed rate cap would put them out of business.

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This year, Baker thinks it will be different. The senator from Maui has crafted a proposal that would completely overhaul payday loan regulations rather than just lowering the interest rate. Lenders could provide loans for as much as $1,000 at an annual interest rate of up to 36 percent. Repayments would be capped at 6 percent of borrowers’ gross income or 5 percent of their net income monthly.

Baker says she’s worked hard to come up with a compromise that will satisfy consumer advocates without putting payday lenders out of business.

“We want to make sure that small-dollar lenders can continue to operate but with the kind of consumer protection that keeps people from getting trapped in a cycle of debt with no ability to get out,” she said.

Many states have capped payday loan interest rates at 36 percent, and the Department of Defense has long imposed the same cap on loans made to active service members. But Baker’s effort comes as the Trump administration has weakened federal regulations regarding short-term loans.

Trump’s latest proposed budget cuts funding for the Consumer Financial Protection Bureau, the federal consumer financial watchdog. The agency recently dropped a lawsuit against online payday lenders, and is reconsidering a rule that requires payday lenders to make sure consumers can pay their loans back.

Mixed Reactions

In addition to lowering interest rates, Senate Bill 3008 would require payday lenders to get licensed by the state and allow them to charge a $25 monthly maintenance fee. Borrowers would only be allowed to take out one loan at a company at a time and the state agency charged with consumer affairs would adjust the loan size and maintenance fee annually based on inflation.

Lenders would have to make sure to disclose all fees to borrowers, and wouldn’t be able to secure loans with real personal property. The latest draft of the bill says the changes would go into effect next year.

So far, Baker’s proposal has gotten mixed responses. Jeff Gilbreath, who leads the nonprofit Hawaiian Community Assets, supports Baker’s efforts at payday loan reform. But his testimony on the first draft of the measure called for even greater consumer protections, such as requiring lenders to offer borrowers loan adjustments in the event of a financial hardship.

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On the other side of the debate, local payday lenders criticized Baker’s reliance on out-of-state data showing that payday loans are predatory.

Richard Dan of Maui Loan Inc. wrote that existing protections in Hawaii law mean that “There is no way a Hawaii payday lender can force a borrower into a cycle of debt.”

Craig Schafer, the head of Money Service Centers of Hawaii, suggested a local study should be done to figure out whether payday loans are actually harmful. In testimony evaluating the first draft of Baker’s bill, he wrote the measure would create “an unproven installment loan scheme that is expensive for the State to administer and enforce.”

Dollar Financial, a Philadelphia-based company that runs eight Money Mart payday lending stores in Hawaii, asked Baker to allow them to make loans as high as $2,500. The company also asked the senator to allow them to continue to make small loans at a higher interest rate — in addition to the bigger $1,000 loans — and later evaluate whether the new fee structure is effective.

Questionable Prospects

To get her bill passed, Baker will have to contend with lobbying not only from the payday lenders but convince her colleagues in the House, who historically have been less inclined to regulate the small loans.

Last year, Dollar Financial spent nearly $15,000 lobbying, according to reports filed with the state Ethics Commission.

In the House, an identical measure to SB 3008 hasn’t had a hearing. The bill was also referred to three committees — a frequent sign that it’s not favored by House leadership, because more referrals means the measure has to pass more hurdles.

Former Speaker Joe Souki consistently opposed payday lending legislation. He has been replaced as speaker by Scott Saiki, and it’s not clear where Saiki stands on this issue. He didn’t reply to a request for comment Thursday about the bill.

Baker says she understands if the House is waiting for her bill to cross over from the Senate before considering the matter. She’s confident that the proposal will make it out of both chambers and be on the negotiation table in April.

“I’m optimistic that both it will be heard in the House and that we will find ourselves in conference to look at some of the finer points,” she said.