This guest blog was prepared by steering committee member Marie Morse, Executive Director, HomesteadCS

As we start our new year, HomesteadCS announced that we are also starting a new program.  HomesteadCS along with our Fort Wayne partners, Brightpoint, and with the help of Prosperity Indiana received a grant from JPMorgan Chase Foundation to begin a small dollar loan program.  We have partnered with three organizations in Texas that already had small dollar loan programs.  This grant will expand their programs and allow both Lafayette and Fort Wayne to open Community Loan Centers for the counties we serve.

Why would a housing agency offer small dollar loans, you ask?  Good question.  First we are also a Community Development Financial Institution (CDFI), so doing loans isn’t out of our realm of expertise.  Second, we have spent the last several years saving a lot of homes for a lot of families.  Unfortunately, just saving their homes is not all the financial help they need.  We came to realize that most families spent all their savings, all of their retirement, and all the help available from family and friends to save their home.  Now that they have no safety net, any unexpected expense, such as a medical bill, a home repair, or a car repair can put our families back in a financial crisis.  Because their credit also suffered while saving their homes, borrowing from conventional lenders is not an option.  Many of our families have had to choose payday lending for small loans and if our families were going to payday lending, we were sure families that didn’t use our services were borrowing in even higher numbers.

As we looked into payday lending in Indiana, it is not a pretty picture.  Indiana citizens pay $70 million dollars in fees to payday lending in a single year.  The average interest rate is 382% APR,  they do not report to credit bureaus, so credit scores don’t get better and the entire amount is due within weeks. Now tell me, if you don’t have $500.00 on Wednesday for an unexpected expense, are you really going to have $500.00 out of your next paycheck to pay this back?  I know, I wouldn’t.

So our new program will partner with local employers to offer their employees small dollar loans at 18% interest rate, a 12-month term, and will be reported to credit bureaus.  While they are making affordable payments, we will encourage them to take our financial education classes and if needed, help them open a checking account through our Bank On program.  I think this is going to be a win-win for all involved.  More people will know about our free educational classes, employers can offer their employees a new benefit and best of all, our families can begin to build back their credit and have access to an affordable loan product. 

This blog was prepared by our partners at the Indiana Institute for Working Families (IIWF)

Last fall, the Indiana General Assembly’s Interim Study Committee on Fiscal Policy discussed the Legislative Services Agency’s most recent review (herein referred to as the Tax Review) of Indiana’s state tax incentives, including the state’s Earned Income Tax Credit.  On the whole, the findings of this review were very favorable to the state’s refundable Earned Income Tax Credit, declaring that it did in fact make an (albeit in some cases small) impact on both reducing poverty and incentivizing work. But there are two steps Indiana can take to simplify the state’s EITC and make it work better for more Hoosiers.

This comes as no surprise, as the Indiana Institute for Working Families has testified before the General Assembly and its study committees many times; the Federal Earned Income Tax Credit is our nation’s most successful anti-poverty program, and the State EITC, although much smaller, is part of the EITC’s success story. 

During this Week of Action for Prosperity Now partners, the Indiana Institute for Working Families and the Indiana Asset and Opportunity Network are focusing on expanding and amending the Earned Income Tax Credit in Indiana. To learn more about the EITC and the condition of Indiana’s economy, please visit the Prosperity Now’s 2016 Assets and Opportunity Scorecard.

The Earned Income Tax Credit (EITC) is a federal tax credit for low- to moderate- income working individuals and families. The credit reduces the tax burden placed on workers by offsetting payroll and income taxes. The credit is refundable, meaning that if the credit exceeds the amount of taxes owed, the difference is given back to the taxpayer. Thus, earned income is put back into the pockets of working individuals and families.

Indiana has a state refundable credit that is partially based on the federal credit. Previous to 2011, Indiana’s credit was a simple 9% of the federal credit; however, in the 2011 session of the Indiana General Assembly, the credit was “decoupled” from the federal credit, and set to be 9% of what a taxpayer’s credit would have been if it were calculated based on the federal formula prior to the EITC expansion in the American Recovery and Reinvestment This means that the Indiana credit no longer provides larger benefits for families with 3 or more children and does not have extended income eligibility thresholds for married couples, as the federal credit has since 2009, an expansion made permanent in 2010.

Despite decoupling, the Indiana EITC works with the federal credit to lift families out of poverty.  Nationwide the federal EITC lifted 6.2 million people out of poverty, making it the most effective anti-poverty tool in our arsenal.  In 2012, the Indiana and federal credit together lifted more than 65,000 people out of poverty; nearly 6,000 of those that moved above the poverty line can be attributed specifically to Indiana’s credit (Tax Review, p. 14). This reduction in poverty results in meaningful improvements for children in poverty.  A recent Center on Budget and Policy Priorities report cites a variety of studies showing the positive impacts of the credit on everything from higher test scores and greater college enrollment to a greater likelihood of working and having higher earnings when the children enter adulthood.

The reason the credit is effective at promoting work is in its design. For families with very low earnings, the value of the EITC increases with each additional dollar earned, up to a maximum benefit. This structure encourages folks earning the least to work more by letting them keep more of what they earn to cover their basic needs. Once taxpayers reach the maximum benefit, the benefit level plateaus and eventually phases out for those with higher incomes; however, this phase out is well-designed to extend into self-sufficiency, meaning that this is one of the few anti-poverty programs that does not have a ‘benefits cliff’.  Indiana’s Tax Review cited studies that showed this increases labor participation, particularly for single mothers. (pp. 13-14)

Just over half a million Hoosiers claim the Indiana credit, the number of claimants has increased an average of 2.6% a year between tax years 2004-2013. This interactive county-level map shows the number of state claimants, the median amount of the credit per claimant and the total amount of state EITC claims.

In the 2015 Status of Working Families report, the Institute set out recommendations related to Indiana’s Earned Income Tax Credit. Enacting these two proposals for the EITC will simplify the tax code, eliminate the marriage penalty, and address the regressivity of Indiana’s tax policies.

·         Eliminate the Marriage Tax Penalty by returning the state credit to a simple percentage of the federal credit.  Recoupling would also reinstate the expansion of the credit for larger families.

·         Increase The State’s Earned Income Tax Credit from 9% to 25% of the Federal EITC. A stronger EITC will help bring balance to Indiana’s regressive tax system and help to reduce income inequality in Indiana.

Guest blog written by: Clint Kugler, Promise Indiana

Ask Alexis, a 7 year old first grader in Wabash County, what she wants to become when she grows up and she will tell you an “eye doctor.” Alexis is not the daughter of a doctor, but rather one of five kids in a low income, single-parent household. The tremendous pressures families face today make it difficult to prepare for their children’s futures. Fortunately, communities are harnessing the power of asset building and employing children’s savings accounts (CSAs) as a fiscally and socially responsible strategy. With community support, CSAs can help kids around our state and nation—kids like Alexis—pursue their dreams.

Promise Indiana, currently operating in eight Indiana counties, is a community-driven CSA program that helps youth increase hope and build the assets they need to pursue education beyond high school. Students with a dedicated college savings account in their name are three times more likely to attend college and four times more likely to complete college.[i]Account ownership helps youth build “college saver identity.”[ii] These findings and other asset research have significant implications for educational attainment, workforce development, and community well-being. 

Currently, 11.7% of youth in Indiana have a 529 college savings account, and that rate varies widely by county. Only eight counties have a savings rate of 15% or higher of youth under 18 with a 529 account. Almost half our counties have a savings rate of 6% or fewer youth with 529 accounts.

Prosperity Now recently released its 2016 Assets & Opportunity Scorecard. The Scorecard identifies a barrier which affects the rates at which Hoosier families build assets: asset limits on public assistance programs like SNAP and TANF. “Personal savings and assets are precisely the kinds of resources that allow people to move off public benefit programs. The existence of asset limits can discourage families considering or receiving public benefits from saving for the future.”[iii] Prosperity Now’s recommended policy change for Indiana would help Alexis’ family and thousands like it to take important steps toward a better future.

Eighteen months ago Alexis’ mother had never heard of a 529 and establishing a college savings account was not on her mind. At registration, her school made it easy to learn about the Wabash County Promise and start a 529 account for her daughter, right next to the table to sign up for the bus. In less than four minutes, Alexis had a College Choice 529 with the initial $25 investment in that account from Parkview Health. Alexis left the registration event that day with a certificate—a physical reminder that she has a college savings account. 

Throughout the fall, Alexis and her classmates in Wabash County, all kindergarten through third grade students, explored what they want to be, discovered the education they need to get there, and identified the champions in their lives who will help them along the way. Following an exciting field trip to Manchester University with 1600 other kids from around the county, Alexis was off to share her future plans with her champions. By raising deposits totaling $25 or more from her champions—family, neighbors, teachers and her grandmother’s co-workers—Alexis received an additional $75 as a match from her community. Throughout October, six important adults in her life provided words of encouragement and made deposits into her Promise account totaling $135. Today, just 18 months after her 529 was established, Alexis has over $315 in her college savings account!  With support from the Indiana Education Savings Authority (IESA), Parkview Health and Lilly Endowment Inc., even more communities will make it easy for families and champions to support youth like Alexis by making a local “Promise”.

The Promise helps communities leverage support for families to begin saving for higher education and for youth to begin college and career discovery. To learn how your community can become one of the pilots selected for the 2016-2017 school year, visit www.PromiseIndiana.org or view and complete the application at http://bit.ly/PromiseIndiana. Communities selected to pilot will have a unique opportunity to be one of the first in the state to receive operational support to launch the initiative and create meaningful outcomes for youth and families.

For Indiana to thrive, we need to harness the potential of every young Hoosier. CSAs provide a low-cost, high-return strategy that communities can use to help kids develop the hope, support and assets needed to pursue their dreams. Let’s build a stronger Indiana!

[i] Assets and Education Initiative, Building Expectations, Delivering Results: Asset-Based Financial Aid and the Future of Higher Education, 2013

[ii] Elliott, W. (2013). Small-dollar children’s savings accounts and children’s college outcomes. Children and Youth Services Review, 35(3), 572–585

[iii] Prosperity Now. The steep climb to economic opportunity for vulnerable families, 2016.

Guest blog written by: Justin Barker, HomeOwnership Center Coordinator, Pathfinder Services, Inc.              

While some may be beginning to celebrate in the continued rise of our economy, far too many Indiana residents still suffer from financial instability due in large part to subprime credit. A new report from the Prosperity Now reveals that 51 percent of Hoosiers have a EquiFax Risk score below 720. Our state ranks 46th in the nation for rate of bankrupt consumers.

Many of these families are not poor in the traditional sense. With the average annual pay for an Indiana worker hanging around $45,730, households that may have a decent income still fall further behind because of battered credit or lack of credit. These situations result in consumers having to engage with predatory lending practitioners. Pay day loans with an APR cap of 391% wreak havoc on Hoosier families. With this being the only credit options available to such a large percentage of Indiana consumers, our state will continue to suffer.

Our current state’s policies are not doing enough to help the situation. Prosperity Now's 2016 Assets & Opportunity Scorecard found that Indiana ranked 20th in policy rankings revolving around financial assets. Only 19 out of 67 policies, that could give struggling Hoosiers a footing financially, have been adopted; and only 1 of those 9 policies dealt with predatory lending protections.

Thankfully there are some in our state battling these issues. Non-profit organizations and networks are working tirelessly to help consumers improve their financial situation. The Indiana Assets & Opportunity Network is a statewide coalition working to increase asset acquisition for low-wealth Hoosiers and to strengthen local economies through policy advocacy and capacity building. Pathfinder Services, Inc. is one such partner. Pathfinder Services has created opportunities for families to grow in their financial knowledge and capacity as consumers. Participants of Pathfinder’s programming receive sound credit building education and counseling from nationally certified professionals in the field. We’ve also formed partnerships with local banks to offer innovative credit building opportunities for participants with little to no risk for all parties involved. We have seen hundreds of cases where program participants have raised credit scores from the mid-low 500’s to a median score of over 700. When crisis hits, that difference in credit score could make or break a family financially for years to come. The low fee, low interest credit options available to a consumer with a 725 credit rating can be exactly what a family needs to allow them to adequately handle medical bills flooding in from an unexpected illness. A good credit rating can enable a family to buy a home at a lower monthly cost than renting; saving them money while also building a big asset. The benefits of strong credit ratings are endless.

However, currently these options are simply not a reality for a large percentage of Hoosiers.

There is much more that we can provide to all Indiana residents, giving them an opportunity to take charge of their financial lives and plan for a more prosperous future. The policies adopted by our state will help Indiana’s families pull themselves out of the downward spiral of predatory debt – and provide a foundation for our state’s long-term economic health. For example, policymakers should:

Significantly lower the APR cap on pay day loans. Many states have already lowered their cap to the 30%-40% range. Arkansas has even lowered its payday loan APR cap down to 17%.

The same policy alteration should apply to short-term installment loans. 16 states have placed an APR cap on short-term installment loans between 30%-40%. These decreases in APR could help consumers who have been trapped in hopeless debt situations.

If policymakers choose not to act, thousands of Indiana residents will have little hope of moving up the economic ladder and contributing to the state’s long-term growth. That would be the wrong choice for families and the wrong choice for our state.

This blog was prepared by our partners at the Indiana Institute for Working Families (IIWF)

Payday lending gets a bad rap, with just cause. The payday lending industry’s shady business practices are well known, ranging from usuriously high interest rates to a repayment structure that traps many borrowers in a cycle of unaffordable debt. With lax or no underwriting standards, payday lenders can make loans with minimal consideration of the borrower’s ability to repay the loan due to lenders’ preferred repayment position, often resulting in overdraft fees. Because Hoosier payday borrowers are still vulnerable to these practices despite some consumer protections, the state could better prevent debt traps with more robust truth-in-lending disclosures and capped no-fee installment plans.

The need to protect consumers from predatory loans is so strong that Prosperity Now has made it a priority during its Week of Action. Please visit this website for more information about the Prosperity Now Week of Action and its annual Assets and Opportunity Scorecard.

The federal Consumer Financial Protection Bureau currently has a payday lending regulatory framework pending implementation that offers consumer protections to borrowers nationwide. To supplement the framework, the Institute for Working Families and the Indiana Assets and Opportunity Network support legislation at the state level that informs borrowers of the lending patterns at the lender from which they borrow and requires lenders to offer an installment plan on the initial loan. These protections are proposed in Senate Bill 99 in the Indiana General Assembly.

For markets to function fairly and efficiently, borrowers must have detailed information about a loan product they purchase. While Indiana statute requires a warning statement explaining that payday loans should only be used for short term cash needs, borrowers may be unaware of the strong likelihood for payday loans to become long-term commitments. To bridge this knowledge gap, payday lenders should be required to publicize the median number of loans taken during a year and the median of days indebted during the year. Armed with this knowledge, consumers can make sound decisions about whether or not they choose to take the risk of falling into the debt trap.

Indiana’s regulation offers borrowers some protection from taking out loans that exceed their ability to repay by restricting a loan’s value to 20 percent of the borrower’s income. However, a 20 percent loan may still be too high an amount for the typical borrower to repay in a lump sum. The Pew Charitable Trusts estimates that the typical borrower can afford to pay only 5 percent of their income, while still having enough left over to meet all recurring expenses, without having to borrow again. According to a different Pew study, 49 percent of payday borrowers said they could not afford to pay more than $100 per month. In another Pew study, respondents believed a four to six month repayment period is reasonable for a $500 loan, which equates to about $100 per month.

By requiring lenders to offer an installment repayment plan after three consecutive loans, the state implicitly acknowledges an installment plan is needed to get out of the debt trap. But why not tackle the debt trap problem in the first place by requiring lenders to offer an installment plan for the initial loan? We support legislation that requires lenders to offer an installment plan, with no extra fees, that limits loan repayments to $100 per month for borrowers paid monthly or $50 for borrowers paid biweekly. Not only does an installment plan make repayment more affordable, it also organically reduces the number of loans borrowers can take out during the year due to statutory prohibition of taking out multiple loans with the same lender at one time.

Hoosiers cannot wait until the Consumer Protection Financial Bureau implements its regulatory framework. During this Week of Action for Prosperity Now partners, we call upon the Indiana General Assembly to pass Senate Bill 99 this session in order to inform borrowers about the debt trap and make loan repayment more affordable.

Payday loans are marketed as a quick financial fix but in reality create an inescapable debt trap.  Payday lenders charge  excessive rates, take access to a borrower’s bank account for repayment, and make loans with no regard for a borrower’s ability to repay without refinancing or defaulting on other expense.   As a result, they lead to harms such as overdraft fees, bank account closures, and bankruptcy.

Payday lenders already charge low-income Hoosiers rates at as 317% annual interest!  And, yet, tomorrow the IN House will hear a bill in which out-of-state payday lenders will seek permission to make another, even more dangerous payday loans.

HB 1340 will legalize a new type of predatory payday loan in Indiana.  Under the proposal, the rates on the loan reach as high as 288% APR for a 24-month payday loan.  As an another example,  a $600 loan due in 12 months, will cost $2,040 to payback – more than three times the original loan amount. Here is link to the bill:  https://iga.in.gov/legislative/2016/bills/house/1340#document-f0dbae5a

These types of high-cost loans are so unsafe, the U.S. Department of Defense prohibits them from being made to active duty military by imposing a cap of 36% for these types of loans.   However, this protection does not extend to veterans.   Thus, HB 1340 exposes veterans and other Hoosiers to these harmful loans.  
 
The bill sponsor is Rep. Woody Burton, and it scheduled for a hearing during the Committee on Financial Institutions at 3:30pm tomorrow, Wednesday, January 27, 2016. 

We need to take action now.  Our legislators should be reining in predatory payday lending practices, not expanding it.

There are two actions to take now:

1.     Come to the Committee Hearing tomorrow at 3:30.   RSVP to Kelsey Clayton at kclayton@prosperityindiana.org if you can come.

2.     Call members of the House Committee on Financial Institutions.   Contact information is below.  Tell them to vote no to the payday lenders, vote no on HB 1340 orclick here to send a composed message to your Representative. Click on the advocacy campaign button when you land on the policy center page.

You can also use the list below to contact the committee directly.

Payday loans are marketed as a quick financial fix but in reality create an inescapable debt trap.  Payday lenders charge  excessive rates, take access to a borrower’s bank account for repayment, and make loans with no regard for a borrower’s ability to repay without refinancing or defaulting on other expense.   As a result, they lead to harms such as overdraft fees, bank account closures, and bankruptcy.

Payday lenders already charge low-income Hoosiers rates at as 317% annual interest!  And, yet, tomorrow the IN House will hear a bill in which out-of-state payday lenders will seek permission to make another, even more dangerous payday loans.

HB 1340 will legalize a new type of predatory payday loan in Indiana.  Under the proposal, the rates on the loan reach as high as 288% APR for a 24-month payday loan.  As an another example,  a $600 loan due in 12 months, will cost $2,040 to payback – more than three times the original loan amount. Here is link to the bill:  https://iga.in.gov/legislative/2016/bills/house/1340#document-f0dbae5a

These types of high-cost loans are so unsafe, the U.S. Department of Defense prohibits them from being made to active duty military by imposing a cap of 36% for these types of loans.   However, this protection does not extend to veterans.   Thus, HB 1340 exposes veterans and other Hoosiers to these harmful loans.  
 
The bill sponsor is Rep. Woody Burton, and it scheduled for a hearing during the Committee on Financial Institutions at 3:30pm tomorrow, Wednesday, January 27, 2016. 

We need to take action now.  Our legislators should be reining in predatory payday lending practices, not expanding it.

There are two actions to take now:

1.     Come to the Committee Hearing tomorrow at 3:30.   RSVP to Kelsey Clayton at kclayton@prosperityindiana.org if you can come.

2.     Call members of the House Committee on Financial Institutions.   Contact information is below.  Tell them to vote no to the payday lenders, vote no on HB 1340 or click here to send a composed message to your Representative. Click on the advocacy campaign button when you land on the policy center page.

You can also use the list below to contact the committee directly.

Representative Woody Burton (Chairperson)

317-881-0400 (District)
317-232-9648 (Statehouse)

 Email This Person

Representative Robert Heaton (Vice Chair)

812-249-6889 (District)
317-232-9671 (Statehouse)

 Email This Person

Representative Greg Beumer

(317) 234-9447 (Statehouse)

 Email This Person

Representative Wes Culver

317-232-9678 (Statehouse)

 Email This Person

Representative Richard Hamm

765-935-1568 (District)
317-232-9769 (Statehouse)

 Email This Person

Representative Sharon Negele

317-232-9816 (Statehouse)

 Email This Person

Representative John Price

317-882-6478 (District)
317-232-9769 (Statehouse)

 Email This Person

The Honorable Donna Schaibley

317-234-2993 (Statehouse)

 Email This Person

Representative Thomas Washburne

317-232-9863 (Statehouse)

 Email This Person

Representative Justin Moed (Ranking Minority Member (RMM))

317-997-4914 (Business)
317-232-9834 (Statehouse)

 Email This Person

Representative Philip GiaQuinta

260-456-6412 (District)
317-233-5248 (Statehouse)

 Email This Person

Representative Gail C. Riecken

317-234-9048 (Statehouse)

 Email This Person

Representative Robin Shackleford

317-201-3403 (District)
317-232-9798 (Statehouse)

 Email This Person

Guest blog written by: Justin Barker, HomeOwnership Center Coordinator, Pathfinder Services, Inc.               

While some may be beginning to celebrate in the continued rise of our economy, far too many Indiana residents still suffer from financial instability due in large part to subprime credit. A new report from the Prosperity Now reveals that 51 percent of Hoosiers have a EquiFax Risk score below 720. Our state ranks 46th in the nation for rate of bankrupt consumers.

Many of these families are not poor in the traditional sense. With the average annual pay for an Indiana worker hanging around $45,730, households that may have a decent income still fall further behind because of battered credit or lack of credit. These situations result in consumers having to engage with predatory lending practitioners. Pay day loans with an APR cap of 391% wreak havoc on Hoosier families. With this being the only credit options available to such a large percentage of Indiana consumers, our state will continue to suffer.

Our current state’s policies are not doing enough to help the situation. Prosperity Now’s 2016 Assets & Opportunity Scorecard found that Indiana ranked 20th in policy rankings revolving around financial assets. Only 19 out of 67 policies, that could give struggling Hoosiers a footing financially, have been adopted; and only 1 of those 9 policies dealt with predatory lending protections.

Thankfully there are some in our state battling these issues. Non-profit organizations and networks are working tirelessly to help consumers improve their financial situation. The Indiana Assets & Opportunity Network is a statewide coalition working to increase asset acquisition for low-wealth Hoosiers and to strengthen local economies through policy advocacy and capacity building. Pathfinder Services, Inc. is one such partner. Pathfinder Services has created opportunities for families to grow in their financial knowledge and capacity as consumers. Participants of Pathfinder’s programming receive sound credit building education and counseling from nationally certified professionals in the field. We’ve also formed partnerships with local banks to offer innovative credit building opportunities for participants with little to no risk for all parties involved. We have seen hundreds of cases where program participants have raised credit scores from the mid-low 500’s to a median score of over 700. When crisis hits, that difference in credit score could make or break a family financially for years to come. The low fee, low interest credit options available to a consumer with a 725 credit rating can be exactly what a family needs to allow them to adequately handle medical bills flooding in from an unexpected illness. A good credit rating can enable a family to buy a home at a lower monthly cost than renting; saving them money while also building a big asset. The benefits of strong credit ratings are endless.

However, currently these options are simply not a reality for a large percentage of Hoosiers.

There is much more that we can provide to all Indiana residents, giving them an opportunity to take charge of their financial lives and plan for a more prosperous future. The policies adopted by our state will help Indiana’s families pull themselves out of the downward spiral of predatory debt – and provide a foundation for our state’s long-term economic health. For example, policymakers should:

Significantly lower the APR cap on pay day loans. Many states have already lowered their cap to the 30%-40% range. Arkansas has even lowered its payday loan APR cap down to 17%.

The same policy alteration should apply to short-term installment loans. 16 states have placed an APR cap on short-term installment loans between 30%-40%. These decreases in APR could help consumers who have been trapped in hopeless debt situations.

If policymakers choose not to act, thousands of Indiana residents will have little hope of moving up the economic ladder and contributing to the state’s long-term growth. That would be the wrong choice for families and the wrong choice for our state.

Indiana Ranks 30th Overall in Financial Security of Residents;
Households of Color Face Huge Uphill Climb

WASHINGTON, D.C. – Even though the national unemployment rate has dropped to five percent in recent months, the underemployment rate in Indiana remains stubbornly high with only negligible improvement in the number of state residents stuck in low-wage jobs, according to a new report from the Prosperity Now.

Indeed, 43% of Indiana’s households are locked into a “new normal” of perpetual financial insecurity, unable to build the savings needed to last even three months in the event of an emergency. The research, reflected in Prosperity Now’s 2016 Assets & Opportunity Scorecard, also found that state policies are doing little to improve Hoosiers’ financial security.

The situation is most dire for households of color. African-American and Latino households in Indiana are significantly more likely to live below the federal poverty line compared to white households. Even more startling, new data show that businesses owned by whites in Indiana are valued more than five times higher than businesses owned by African-American residents.

“Indiana needs more economy boosting jobs that help working families reach financial security by providing wages that ensure they can meet more than their basic needs,” said Kelsey Clayton, Indiana Assets & Opportunity Network Manager.

Published annually, the Assets & Opportunity Scorecard offers the most comprehensive look available at Americans’ ability to save and build wealth, stay out of poverty and create a more prosperous future. This year’s Scorecard assesses all 50 states and the District of Columbia on 61 outcome measures spanning five issue areas: Financial Assets & Income, Businesses & Jobs, Housing & Homeownership, Health Care and Education. It also ranks the states on 69 policies that promote financial security. When it comes to outcomes, Vermont ranks at the top of the country overall, while Mississippi ranks last.

Indiana received a “C” in all five outcome categories and ranked 30th overall (up from 34th last year). A high bankruptcy rate, (4.4 per 1,000 people; ranked 46th), contributed to a “C” in Financial Assets & Income. The state’s low microenterprise ownership rate (13.8%) led to its “C” grade and 32nd-place ranking in Businesses & Jobs. The Hoosier State had its highest ranking in Housing & Homeownership (23rd), but nonetheless ranked 45th in the percentage of mortgage loans considered to be high cost (9.6%). Finally, the state’s low educational attainment (ranking 42nd and 43rd, respectively) in two- and four-year college degrees, as well as its high percentage of residents defaulting on their student loans (14.8%) led to Indiana’s 31st-place finish in Education.

The Scorecard also evaluates 69 different policy measures to determine how well states are addressing the challenges facing their residents. Having adopted less than a third of the policies assessed available to the state, Indiana is among the bottom half of states in overall policy adoption (ranked 37th) and is among the lower half of states in three of five policy areas, including Businesses & Jobs (where it passed none of the assessed policies and ranked 46th), Housing & Homeownership (41st), and Education (31st). The state fared slightly better in Financial Assets & Income and Health Care, receiving a ranking of 20th in both areas.

Across the nation, the Scorecard found scant evidence that federal and state governments were willing to embrace policies that would open new doors to greater financial security for those struggling the most in the American economy. Without such commitments, most low-income individuals—particularly people of color—find themselves falling farther behind.
 

Among the key findings from this year’s Scorecard:

●      Homeownership rates remain at historic lows, falling to 63.1% for the eighth consecutive year of decline and contributing to crowding and rising costs in the rental market.

●      Fully 14.3% of adults say there was a time in the past year that they needed to see a doctor but could not because of cost. The statistics are worse for individuals of color with one in four Latino adults and one in five African-American adults saying money concerns prevented them from seeing a doctor.

●      Although both high school graduation rates (82.3%) and four-year college degree attainment (30.1%) increased from 2013 to 2014, racial disparities remain severe. Less than 20% of African-American adults and fewer than 15% of Latino adults hold four-year degrees.

●      While the national unemployment rate has dropped to 5%, the underemployment rate is twice as high, at 10.8%. What’s more, one-in-four jobs is in a low-wage occupation.

●      Building up even a small amount of savings is a challenge for almost half the country. Some 44% of households are “liquid asset poor,” meaning they have less than three months of savings to live at the poverty level if they suffer an income loss.

●      Business ownership among both men and women (21.4% and 17.1% of the labor force, respectively) declined from 2007 to 2012, even as average business value for both groups increased. Yet female-owned businesses still are worth only a third the value of the average male-owned business—$239,486 to $726,141, respectively.

“There certainly are positive signs that the nation’s economy is improving,” noted Andrea Levere, President of Prosperity Now. “But there also is very compelling evidence that many households are stuck in a financial hole and are struggling to dig themselves out. State governments can play a critical role in helping them move on to firmer ground and a more prosperous future.”

To read an analysis of key findings from the 2016 Assets & Opportunity Scorecard, click here. To access the complete Scorecard, visit http://scorecard.prosperitynow.org.

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Prosperity Now's work makes it possible for millions of people to achieve financial security and contribute to an opportunity economy. We scale innovative practical solutions that empower low- and moderate-income people to build wealth. We drive responsive policy change at all levels of government. We support the efforts of community leaders across the country to advance economic opportunity for all. Established in 1979 as the Corporation for Enterprise Development, Prosperity Now works nationally and internationally through its offices in Washington, DC; Durham, North Carolina, and San Francisco, California.

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This policy brief was prepared by our partner the Indiana Institute for Working Families (IIWF).

What is Payday Lending?

Payday loans are small dollar loans that are generally repaid as a lump sum within a short period of time, typically on the borrower’s next payday. To secure collateral, lenders require borrowers to provide either a post-dated check for the principal and finance charges or authorize lenders to withdraw the amount due directly from the borrower’s bank account. By having a preferred repayment position, lenders can withdraw funds before the borrower pays for other regularly occurring expenses, often leading to overdraft charges when borrowers have insufficient funds to cover the amount deducted from their bank account.[1] In Indiana, borrowers’ ability to repay the loan in the prescribed time period is not assessed beyond ensuring the borrower has an income and bank account and the loan does not exceed 20% of the borrower’s income.

 “With a short duration, [small loans] are portrayed as a bridge to cover short-term needs. Many consumers, though, wind up reborrowing many times, with successive finance charges eventually eclipsing the original loan amount, before they are able to retire their debt.”

     - Consumer Financial Protection Bureau -

Payday loans provide a service for underqualified borrowers at a steep cost. On the one hand, payday lending provides a credit market for people in need of immediate funds, thereby serving a segment of the population that would otherwise be shut out of mainstream financial institutions. On the other hand, research consistently shows payday lending leads to debt traps, where borrowers are unable to repay their initial loan and re-borrow to service their debt.[2]

Payday Lending in Indiana

Payday lenders have a deep and wide footprint across Indiana.  A 2013 Center for Responsible Lending report estimated there were 4,220 originated loans per store in Indiana, averaging $317 per loan.[3] The total payday loan volume for the state was $502.9 million, with $70.6 million in finance charges. As of October 2015, there were 27 active small loan lenders licensed with the State of Indiana operating 347 storefront branches.[4] The number of branches operated by a single lender ranged from one to 86. Payday loan branches were found in 96 towns and cities, with 92 branches in the state capital alone. Indiana allows online payday lenders to operate in the state, which must follow the same laws as storefront lenders. Unlike other states, Indiana does not permit vehicle title loans – small dollar loans that use vehicle titles as collateral.

Even though Indiana’s regulatory framework addresses some of the worst abuses associated with the payday lending industry, it still has room for improvement. Key features of Indiana’s payday lending regulatory framework include:[5]

●      Borrowing limits – Lenders can make loans between $50 and $605, not exceeding 20% of the borrower’s monthly gross income. The upper borrowing limit can be adjusted to keep up with inflation. Borrowers may have two outstanding loans at a given time, but the loans must be lent by different lenders.

●      Finance charges – Finance charges essentially function as interest rates. Indiana Code restricts finance charges to 15% of the first $250; 13% of the loan amount between $251 and $400; and 10% of the loan amount between $401 and $605. The interest rates are blended, meaning the rate applies to the amount borrowed within the dollar range for each finance charge. For example, a $400 loan would have finance charges of 15% for the first $250, equaling $37.50, and the next $150 would have finance charges of 13%, equaling $19.50. In total, a borrower would pay $400 for the principal and $57 in finance charges. While the Indiana Code does not statutorily limit payday loans’ annual percentage rate (APR), the finance charges essentially cap APR at approximately 391%.

●      Loan terms and repayment – Minimum of 14 days. Lenders vary the term length based on the borrower’s pay period. A borrower may rescind the loan without cost within one business day following the day the loan originated. After three consecutive loans, a lender must offer the borrower an extended payment plan without any additional fees.

●      Rollovers, renewals, and consecutive loans – Indiana Code prohibits loan renewals, defined as “a small loan that takes the place of an existing small loan by renewing, repaying, refinancing, or consolidating a small loan with the proceeds of another small loan made to the same borrower by a lender.”[6] To receive another loan from the same lender, the borrower must pay in full the principal and finance charges of the outstanding loan. After paying the loan in full, the borrower may take out another loan. Following five consecutive loans, a borrower must wait seven days to receive a sixth loan.

The most important statutory protection is requiring a loan’s principal and finance charge be paid in full prior to taking out a subsequent loan with the same lender. This prevents borrowers from rolling over their initial loan and paying a new set of finance charges to avoid having to pay the principal in full. The Pew Charitable Trust found that in states where rollovers, also called renewals, are permitted, the typical borrower rolls the loan over multiple times, extending the loan’s term to five months and paying $520 in finance charges for loans averaging $375.[7] There is no cooling off period between loans in Indiana until after the fifth consecutive loan, making it possible for a borrower to repay a loan on his or her payday and then borrow another loan shortly thereafter to cover regularly recurring expenses. This usage pattern effectively traps borrowers in a debt cycle, in which they pay finance charges biweekly or monthly to meet their basic needs.

Unlike many states, Indiana does have an ability-to-repay (ATR) requirement, though it offers insufficient protection to borrowers. The state requires lenders to verify that a loan does not exceed 20% of the borrower’s next paycheck. However, the extent to which this regulation is adhered to in practice is unclear. A Pew study estimated that a loan payment in Indiana consumes 36% of the typical borrower’s biweekly gross income.[8] Indiana’s ATR regulation does not account for the other side of a borrower’s budget: expenses. Without reviewing borrowers’ outstanding debts and living expenses, lenders cannot get a true sense of a borrower’s ability to repay a loan. And because default rates on payday loans are low due to lenders’ preferred repayment positions, lenders have little incentive to do thorough and potentially costly underwriting to ensure borrowers truly have the ability to repay the loan.[9]

Aside from allowing a usuriously high APR of 391%, one of the greatest shortcomings of Indiana’s regulatory framework is the lack of a provision requiring lenders to offer an installment repayment plan for the initial loan. The typical borrower can afford to use only 5% of their paycheck to repay a loan without having to re-borrow.[10] By allowing borrowers to take out up to 20% of their paycheck, a borrower may receive a loan that is four times as large as their ability to repay. Consequently, borrowers fall into a debt trap. Indiana statute offers repeat borrowers an avenue out of the debt trap by requiring that lenders offer an installment plan after the third consecutive loan. But by not requiring lenders to offer an installment plan for the initial loan, the state effectively condones a payday loan usage pattern that traps some people in a cycle of high-priced borrowing.

Recommendations

“WARNING: A small loan is not intended to meet long term financial needs. A small loan should be used only to meet short term cash needs. The cost of your small loan may be higher than loans offered by other lending institutions.”

- Statutorily required payday loan disclaimer (IC 24-4.5-7-301) -

The Indiana General Assembly should require additional truth-in-lending disclosures. For financial markets to function fairly and efficiently, consumers must have adequate information about loan products. Payday loans are marketed as short-term alternatives to tide people over until their next payday but often end up being longer-term commitments.[11]  Prospective borrowers should have access to information about the borrowing trends of customers at the lender from which they intend to borrow. By seeing that repeat and longer term borrowing is prevalent, prospective borrowers will better understand that they may also fall into the debt trap. The statistics proposed below will empower consumers to make sound financial decisions.

In addition to the statutorily required disclaimer above, lending companies should publicly display the median number of days their clients are indebted during a calendar year and the median number of loans taken by consumers during the year. These statistics would illustrate the tendency for payday loans to become longer-term commitments. Lenders are required to maintain their records in a third-party database, making the burden of collecting these data minimal.

Payday lenders should offer installment repayment plans to all borrowers, using the repayment model described below. Currently, installment repayment plans are only available to borrowers who have at least three consecutive loans. To make loan repayment more feasible, borrowers taking out an initial loan should have the option to make installment payments of no more than $100 per month, without higher service fees or additional charges. While the extended payment plan will lengthen the total time a borrower is indebted during the year, it will also limit the total amount a borrower can receive during the year, due to the requirement that a loan must be paid in full before another can be provided. For example, a borrower who takes out the maximum loan ($605 in principal + $77.50 in service fees) would amortize the loan over a seven-month period, during which the borrower could not receive another loan from the same lender. This repayment system organically limits the number of loans and amount of money consumers can borrow.

The $100 monthly limit is supported by typical borrowers’ stated ability to repay and survey research. According to a Pew survey, 49% of respondents said they could not afford to pay more than $100 per month.[12] A different Pew survey found that Americans believed a four-to-six-month repayment period is reasonable for a $500 loan, which equates to about $100 per month.[13] Offering longer repayment periods reduces the likelihood of borrowers falling into the debt trap, while still allowing the payday lending industry to operate.

Indiana should cap the maximum allowable APR at 36%. This rate has been deemed affordable by the Center for Responsible Lending and the National Consumer Law Center.[14],[15] Three federal government agencies –Department of Defense, Federal Deposit Insurance Corporation, and National Credit Union Administration – support an APR of 36% or lower for small dollar loans.[16] Even Congress acknowledged 36% as a reasonable APR when it passed legislation in 2006 preventing lenders from offering small loans to military service members at more than 36% APR. If a 36% cap is necessary to protect service members, it should also be instituted for all Hoosiers.

[1] Montezemolo, S. and Wolff, S. Payday Mayday: Visible and Invisible Payday Lending Defaults: http://bit.ly/1QrE4bS

[2] Consumer Financial Protection Bureau. Factsheet: The CFPB Considers Proposal to End Payday Debt Traps: http://1.usa.gov/1xBGqy9

[3] Montezemolo, S. Payday Lending Abuses and Predatory Practices: http://bit.ly/1Cqs4zy

[4] Indiana Department of Financial Institutions. Depository Database: http://bit.ly/1SFB7DW

[5] IC 24-4.5-7

[6] IC 24-4.5-7-107

[7] The Pew Charitable Trusts. How Borrowers Choose and Repay Payday Loans: http://bit.ly/1HF6Qyz

[8] The Pew Charitable Trusts. Payday Lending in America: Policy Solutions: http://bit.ly/1MxKX9Y

[9] Montezemolo, S. and Wolff, S. Payday Mayday: Visible and Invisible Payday Lending Defaults: http://bit.ly/1QrE4bS

[10] The Pew Charitable Trusts. Payday Lending in America: Policy Solutions: http://bit.ly/1MxKX9Y

[11] Consumer Finance Protection Bureau. Payday Loans and Deposit Advance Products: http://1.usa.gov/NssoJ1

[12] The Pew Charitable Trusts. How Borrowers Choose and Repay Loans: http://bit.ly/1HF6Qyz

[13] The Pew Charitable Trusts. CFPB Proposal for Payday and Other Small Loans: http://bit.ly/1Y2fC2V

[14] Montezemolo, S. Payday Lending Abuses and Predatory Practices: http://bit.ly/1Cqs4zy 

[15] Saunders, L. Why 36%? The History Use, and Purpose of the 36% Interest Rate Cap: http://bit.ly/1iRiGPu

[16] Ibid