A bill to end payday loans in Hawaii and replace them with lower interest installment loans is on its way to the full House and Senate for a vote after legislative negotiators reached an agreement on the measure Tuesday afternoon.

The final version of House Bill 1192 allows consumers to take out an installment loan as high as $1,500 with a 36% annual interest cap, Rep. Aaron Johanson said, adding that lenders can also charge a monthly fee up to $35 depending on the size of the loan.

“This is really a huge sea change in the world of economic justice. We know that there are so many people who are struggling in Hawaii living paycheck to paycheck, especially exacerbated by the pandemic,” Johanson said after the hearing.

“This is going to ensure that from a lending perspective we are going to be able to help those people go through those unforeseen financial issues,” he continued. “To me, this is going to be one of the biggest economic justice wins from this session.”

HB 1192 would phase out Hawaii’s statutory structure for payday loans — a short-term, high cost loan — by the end of this year and replace the product with more regulated, lower interest rate installment loans in 2022.

“The installment loan is much better for the consumer with much less accrued debt and interest over time,” Johanson said. “The current payday loan system is set up against them.”

Sen. Rosalyn Baker has for years been pushing to regulate payday loans in Hawaii, where a 2005 analysis by the state auditor found a 14-day loan might have so many fees that if renewed over the course of a year, the annual interest could legally be as high as 459%.

“What Hawaii was charging was three times higher than what the same lender was charging consumers in other states. We had a really, really dysfunctional market,” she said.

As other states cracked down on high interest rates, Baker’s reform efforts consistently met resistance in the House in the face of critical testimony from payday lending companies.

This year, Pennsylvania-based Dollar Financial Group, which owns Money Mart, supported the creation of installment loans while Maui Loan Inc., a locally owned company that offers payday loans, continued to oppose getting rid of payday loans.

Johanson said the version of the bill approved in conference committee Tuesday was inspired by recent reforms in Virginia and Ohio and research by the Pew Charitable Trusts.

Johanson and Baker both credited Iris Ikeda, ‎commissioner of financial institutions at the state Department of Commerce and Consumer Affairs.

One of the concerns with Baker’s reform proposals in previous years was that cutting the interest rate from 459% to 36% would cause payday lenders to go out of business. Lawmakers said lenders can choose to offer installment loans instead and noted the product is important to ensure people who don’t or can’t get loans from banks still have options if they need money.

A 2019 survey by the Federal Deposit Insurance Corp. found 3% of Hawaii households are unbanked, up from just 0.5% in 2011.