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Wednesday, April 9, 2008 07:30 am

The payday loan trap

Lawmakers try to close a loophole that left Illinoisans vulnerable to predatory lenders

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All is quiet at a Springfield quick-loan business on a recent Saturday afternoon. The color scheme of the building’s façade resembles that of a popular national chain of fast-food restaurants. Its spacious interior has the look and feel of a neighborhood bank. A woman who appears to be in her late twenties, dressed in a taupe pantsuit, stands behind a counter. Seated at a nearby desk, an older woman is preoccupied with a stack of papers.
The employee at the counter, who is polite but not cheerful, greets a prospective client and explains how the borrowing process works. Seemingly indifferent to whether the customer takes out a loan, the female worker isn’t pushy; nor does she drill into the fine details of Illinois payday lending do’s and don’ts. Along the walls and on countertops, old-fashioned reward posters reading “Wanted: New Customers” promise cash incentives to clients who persuade their friends and family members to also take out loans. The Wild West is an apt analogy for what has happened in terms of the regulation of financial institutions, including payday-loan business, over the past several decades. Thirty years ago, under pressure from the banking lobby, states began dismantling laws that capped the amount of interest banks could charge their customers. Deregulation of the financial-services sector continued through Republican and Democratic presidential administrations alike. Many economists believe that once these longstanding protections had been removed, lenders increasingly engaged in questionable lending behaviors such as underwriting risky subprime mortgages for people who couldn’t qualify for traditional home loans. In some cases, large publicly held banks also backed payday-loan companies, whose customers, like those of the subprime lenders, could be considered high-risk — a fact the cash-advance industry uses to justify triple-digit annual interest rates and the use of extremely aggressive collection practices when people don’t pay up. Business has remained lucrative. Nationwide, the number of payday-loan stores doubled between 2000 and 2003, ballooning to around 22,000 today. In Springfield, their numbers have nearly doubled since 2003, up from 20 locations five years ago to 38 now. Today the capital city’s payday-loan stores outnumber its McDonald’s, Burger King, and Taco Bell restaurants combined. Cash-advance stores and auto-title businesses have proliferated in Illinois even though the state has some of the toughest protections in the nation for payday-loan consumers. This happened, consumer advocates say, because of a gaping loophole in the law. This, on top of the recent collapse of the nation’s housing market, the credit crisis that followed, and a weak U.S. economy in general has lawmakers and consumer advocates scrambling to make more changes.
Just three years after the passage of sweeping statewide small-loan reform, lawmakers have called national and state payday-loan trade groups, consumer-installment-loan operators, financial-services associations, and consumer groups back to the negotiating table. Things are bound to get messy. “The sheer number of players and moving parts in Springfield always makes this complicated,” says Lynda DeLaforgue, co-director of Citizen Action/Illinois, the Chicago-based consumer-rights organization. “We have all of these different players who all have different goals — and they each have their own team of lobbyists who have descended upon Springfield.”

Payday-loan opponents have long believed that the practice takes advantage of the fact that when people feel backed into a corner they’re likely to take desperate measures. Critics also lump payday lenders in the same category as pawnbrokers, rent-to-own centers, and rapid-tax-refund services, all of which, detractors maintain, take advantage of the poorest and neediest of citizens. Many of the industry’s harshest critics have described payday lending as akin to “legal loan sharks” (interestingly, lawmakers amended the state’s criminal code in 1983 to exempt consumer installment loans from the definition of criminal usury, the legal term for loan sharking). Taking out a payday loan is a fairly quick, simple process: A customer presents a photo ID and proof of employment, then writes a postdated check for the loan amount, which is based on the borrower’s monthly income, plus fees. No credit check is performed, and some lenders even allow clients to initiate the application process online for extra convenience. A massive overhaul of the state’s small-loan regulations took place with the passage of the Payday Loan Reform Act in 2005. Before the PLRA, payday lenders were largely unregulated in Illinois. Under the new law, which has oversight of loans with terms of 120 days or less, individuals cannot borrow more than $1,000 or 25 percent of their gross monthly income. Fees are limited to $15.50 for every $100 loaned, and customers may request a repayment plan after 35 days of outstanding debt, during which time they will not incur additional interest, fees, or penalties. PLRA doesn’t allow borrowers to hold more than two loans at once, nor can the loan be rolled over. In the case of a customer default, the lender is not allowed to sue until 28 days after payment was due. Even then, the lender may not charge attorney’s fees or court costs to collect the debt. The PLRA also prohibits members of the military from having their wages garnisheed, permits the deferment of collection activity while members of the military serve on active duty, and makes other provisions. According to Illinois Department of Financial and Professional Regulation records, 474 PLRA-licensed lenders currently operate in the state. As comprehensive as the legislation is, payday lenders have been able to circumvent the law because of the existence of an older state law known as the Consumer Installment Loan Act.
CILA, which prohibits the making of loans greater than $40,000, affords none of the borrower protections mandated by the Payday Loan Reform Act. State records indicate that 1,321 operators currently hold these licenses. Thirty-eight CILA and 12 PLRA licenses have been granted in Springfield. DeLaforgue of Citizen Action/Illinois says that payday lenders have gotten around the 120-day provision in the payday-loan act by offering a new loan that is 121 days in length, but carries a yearly interest rate of 560 percent. To put it plainly, she says: “The industry has driven a Mack truck through a giant loophole in the Payday Loan Reform Act.”

DeLaforgue and others believe the root of the current economic crises, including the subprime mess and payday lending, can be traced to deregulation of banking institutions that began three decades ago. In the late 1970s, Gov. James Thompson suspended for a two-year period Illinois’ usury limits — laws that original in medieval times — which most states had in place to curb lenders from charging exorbitant, or usurious, interest rates. By 1980, several banking trade groups were pushing to remove the state’s interest-rate ceilings altogether. They succeeded the next year with help from a pair of lawmakers, state Rep. William Redmond, D-Bensenville, and state Rep. George Ryan, R-Kankakee, when they sponsored the banks’ bill in the Illinois House. At the federal level, President Ronald Reagan was busy deregulating the savings-and-loan industry. The modern payday-lending industry exploded in the 1990s. Some observers believe that the expansion of the predatory loan business was helped along by the repeal of the Glass-Steagall Act, a post-Depression law designed to separate consumer banks from investment banks.
In a recent speech on the American economy, Illinois U.S. Sen. Barack Obama made mention of the act’s 1999 repeal (which then-President Bill Clinton signed), calling Glass-Steagall “a corrective to protect the American people and American business.”
Soon after, heavyweights such as NationsBank (now Bank of America), American Chartered Bank, Grand National Bank, Corus Bank, CIB Bank, Illinois State Bank, Brickyard Bank, LaSalle National Bank, and Midwest Bank & Trust Co. jumped into bed with Illinois payday-lending firms, providing much-needed financial muscle. Operating under few, if any, state or federal regulations, consumer-installment-loan businesses seemed able to do whatever they pleased. Their critics argue that the lenders did just that. They paint the loan companies as predators that target mainly women, blacks, Latinos, the elderly, and other low-income groups, ensnaring the victims into an endless cycle of debt, harassing collection activities, and a lifetime of misery.
Payday lenders, naturally, refute such claims. Their national trade group, the Community Financial Services Association, reports that that its members extend approximately $40 billion in short-term loans to what the CFSA describes as “millions of middle-class households that experience cash-flow shortfalls between paydays.”
The CFSA’s research, published in 2001, indicates that the average cash-advance borrower earns between $25,000 and $50,000 per year, that 94 percent are high-school graduates, and that a little more than half have some college. They also report that a majority of payday-loan consumers are married, that 42 percent own their homes, that and all of their clients are employed and have checking accounts. Not surprisingly, consumer groups and advocates for the poor disagree. In 2004, the Illinois-based Monsignor John Egan Coalition for Payday Loan Reform studied the lending and debt collection of one Chicago-based lender, AmeriCash LLC. In its report “Greed,” the coalition said that between 2002 and 2003 the average loan of $331 carried finance charges of $144 — nearly 600 percent when calculated as an annual percentage rate. Furthermore, women and minorities represented the bulk of the company’s customer base, the coalition found. Tom Feltner, policy and communications director of the Woodstock Institute of Chicago, a member of the Egan Coalition, says his organization examined small-claims lawsuits filed by payday lenders in Cook County. The data they collected, Feltner says, suggests that payday lenders base loans more on their ability to collect than on a borrower’s ability to repay. In other words, lenders often collect far more than the original loan principal when they take customers to court. This is true in Sangamon County. A check of local court records revealed more than 500 small-claims suits filed in recent years. In most cases, the lenders secured judgments ranging between $300 and $1,200. The pattern in Springfield seems to contradict long-held notions of the predatory behavior of payday lenders. Only seven consumer-installment loan businesses operate in the city’s poorest ZIP code area, 62703, but 14 such operators are located in the Springfield ZIP code area with the highest income level, 62704. “Unfortunately, my guess is that’s a sign of hard economic times in general,” DeLaforgue says.
“Folks that are living paycheck to paycheck — they could be your neighbor living next door.”
Ironically, proponents of toughening payday-lending regulations credit Gov. George Ryan — the very man who, as a state legislator, acted to roll back the state’s usury cap in the first place — with initiating recent efforts for industry reform. At a hearing of the Department of Financial Institutions in 2000, payday-loan customers heckled the then-governor for proposing to take away their financial options by clamping down on lenders. “The industry had spread like wildfire” by the time Democrats assumed control of the Legislature in 2002, says state Sen. Kimberly Lightford, D-Chicago. Lightford, who serves as vice chairwoman of the financial-institutions committee and chairs that body’s subcommittee on predatory lending, says that she understands that many people rely on payday loans for cash emergencies — otherwise she would be inclined to follow the lead of other states that have much more industry regulation than Illinois. Lawmakers in Oregon and North Carolina drove many payday lenders out of those states after passing strict usury caps last year. In March, the Arkansas attorney general issued a cease-and-desist order to 156 lenders who violated that state’s 17 percent usury cap. Payday-loan interest fees in Indiana are pegged to a consumer price index, which allows the rates to fluctuate from year to year. “I would prefer to chop them off at the knees — and I told them that,” Lightford says. “They are a business and they do fill a need, but they don’t have the right to put people in a vicious cycle of debt. You know they can’t pay. That’s why they came to you in the first place.”
Lightford and a fellow Chicago-area Democrat, state Sen. Jacqueline Collins, have sponsored new legislation to close the loopholes in the Payday Loan Reform Act. Their Senate Bill 1993 removes the provision defining a payday loan as one that does not exceed 120 days. Several other payday-lending bills remain in various stages of legislative approval. One measure, sponsored by state Rep. David Miller, D-Dolton, alters the definition of payday loan under the 2005 payday-loan-reform law to include any loan product carrying a finance charge that exceeds an annual percentage rate of 36 percent, as opposed to a finance charge greater than an annual percentage rate of 36 percent.
Another bill, SB 2866, put forth by state Sen. Donne Trotter, D-Chicago, prohibits lenders from charging fees of more than $10 per $100 instead of the current rate of $15.50. Trotter’s measure also prohibits new payday-loan stores within 2,500 feet of any business holding a PLRA license, which some communities have attempted to accomplish by pursuing changes to local laws. Wood River, a town near St. Louis, placed similar limits on payday-loan businesses last year. In addition to the consideration of restrictions on payday loans in Fairview Heights and Belleville, Springfield Ward 7 Ald. Debbie Cimarossa recently proposed changes to Springfield’s zoning ordinance to curb the expansion of quick-cash and car-title-loan companies.
Michael Hough, a task-force director at the Washington, D.C.-based American Legislative Exchange Council, whose members are state lawmakers, says that markets — and not governments — should determine which types of loans consumers can have. Lawmakers in Illinois are seeking to deprive citizens of an economic freedom, he says. “If you get rid of the payday loans, where do people go who need credit? How is it better to take this option away?” Hough says. He adds that the bills under consideration in the Legislature would effectively make payday lending disappear in Illinois. He says lower fees mean that lenders can’t afford to pay a staff member to process loan applications and make it difficult for lenders to recover their investments when customers default. Both Hough and members of the payday-lending industry assert that critics’ characterization of payday loans as annual loans that carry high APRs is “an attempt to misrepresent the truth and to help make their case,” according to a statement on Community Financial Services Association’s Web site. “The only way to reach the triple-digit APRs quoted by critics is to roll the two-week loan over 26 times (a full year). This is unrealistic considering that many states do not even allow one rollover. In states that do permit rollovers, CFSA members limit rollovers to four or the state limit — whichever is less,” the statement reads.
Even if payday-loan fees were expressed as annual percentage rates, the CFSA insists, its clients’ rates pale when compared to the fees charged for other financial services: A $3 ATM transaction fee, for example, is equal to an APR of 1,095 percent. Because banks got out of the business of making small loans years ago, payday lenders maintain that strict laws would force payday lenders to shut down, leaving their clients with few other alternatives for fast cash. Besides, won’t limiting interest rates on payday loans open the doors to the government’s setting limits on credit cards and traditional bank loans? “The industry would like to say that, but let me be clear: there are nine or 10 states that are operating right now right now with usury caps. My guess is that the people of New York are still using credit cards and they’re buying cars and furniture,” says DeLaforgue of Citizen Action/Illinois. “Credit is a good thing. It’s how people put their kids through college,” DeLaforgue says. “As long as there are people with credit challenges out there, you have to have some kind of reasonable regulation that allows the industry to fill a need but also doesn’t put people into these debt cycles that don’t allow them to ever get ahead or allow them to build up assets.” 

Contact R.L. Nave at rnave@illinoistimes.com
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