In 2005, Chicago resident Kimberly took out a payday loan to cover some bills. She says the process was easy, after signing a few forms she walked away with the cash. The lenders would simply withdraw her loan payments from her checking account. Little did she know she was ...
In 2005, Chicago resident Kimberly took out a payday loan to cover some bills. She says the process was easy, after signing a few forms she walked away with the cash. The lenders would simply withdraw her loan payments from her checking account. Little did she know she was entering into a cycle of debt and intimidation that continues to this day.
"In order to maintain your bills and try to pay these people off you're coming up short,” Kimberly (who did not want her last name used) told me recently. “So you […] turn around and take out another loan to cover that [first] one. It's just a domino effect to where you've got five, six, seven loans out, and you're just able to pay the interest and they just keep taking."
That’s when the phone calls begin. Payday lenders are notorious for using tactics that skirt or, in some cases, cross the line of legality.
“I’ve been threatened with lawsuits. I’ve been threatened with being arrested. Any type of threat you can think of, I’ve heard it,” Kimberly said. “They know that they’re dealing with low income people, because that’s why they go to them in the first place. They can manipulate them and intimidate them. They know they don’t have money to go get some attorney.”
But finding an attorney is exactly what Kimberly did. After years of paying interest rates that would make a loan shark blush, she sought help at the Legal Assistance Foundation of Metropolitan Chicago. There she met the group’s deputy director, Alan Alop.
In a recent conversation, Alop told me about a legal doctrine in Illinois called "unconscionability." Any contract that includes terms so outrageous they are shocking to the conscience can be rendered void.
"I've gone in and argued that a 400 percent rate of interest is unconscionable." Alop said. "To date, it has always been successful."
It is not surprising that Alop can boast such a track record. What else but "unconscionable" could you call an industry that exploits society's most vulnerable, charging them interest rates as high as 700 percent? The majority of Illinoisans suffering under such debt do so silently, with no recourse to legal representation.
In Illinois, predatory lending is a growing industry. The story of how this came to be begins in 2005 when the government passed the Payday Loan Reform Act (PLRA). The law was meant to curb the worst abuses of predatory lenders. It put an end to damaging rollovers, ensured that people didn't hold multiple payday loans, and required borrowers to have some way of paying off the loans before entering into them. The PLRA still allowed interest rates upwards of 435 percent, but was considered a step in the right direction.
Unfortunately, there was a fatal flaw. The act only applied to loans that had to be paid off within 120 days. To evade the new regulation, the payday lending industry simply stretched the terms of its loans beyond that limit. This extension didn't change the product one bit.
"In the early 90's they were offering 14-day loans, but they'd roll you over 12 times, so you'd been in debt for 180 days," says Lynda DeLaforgue, co-director of the consumer rights group Citizen Action/Illinois. "Essentially they just built in the rollover."
After they realized they could exploit this loophole, payday lenders were back in business and Illinois reformers were out of luck. And there were more clouds on the horizon. As other states started cracking down on predatory lending (many simply capping interest rates at 36 percent) more and more payday loan operations began popping up in Illinois.
"We've become the dumping ground," says DeLaforgue. "It's just the wild wild west. Whatever goes, goes." As of 2005, there were more payday loan storefronts in Illinois than there are McDonald's franchises.
With this growth, the lenders' tactics also appear to be evolving.
"Originally their targets were […] working people, particularly factory workers," says Alop. "But with more competition in the industry I've seen, in the last five or six years, the trend is to go after older people, elderly people who are receiving social security checks."
Alop and DeLaforgue both point to electronic fund transfers as a popular way for lenders to milk interest from their clients month after month.
"Really it's about just churning that monthly cash flow for the industry without any regard with how that person is going to repay that loan," says DeLaforgue.
Perhaps the most troubling development has to do with the state of the national economy. If the U.S. is truly at the precipice of another recession, more and more people will find themselves desperate for a quick cash infusion to pay rent, utilities, or other debts. The country's economic woes will likely mean boom times for payday loan shops.
"The more people who lose their jobs or who are running into financial emergencies, that's the people that are tempted to go into these stores and take a risk," says Alop.
Today, Illinois lawmakers are pushing to close the loopholes left open by the PLRA. But as the industry grows so does its clout in Springfield. Last year, legislators managed to get a new reform bill passed in the Senate, but it was shelved in a House subcommittee. This year, they are pushing a bill which would redefine what constitutes a "payday loan" to anything with an APR of over 36 percent. Alop and DeLaforgue both think the initiative has a good chance of passing the Senate, but still worry about the opposition's influence in the state capital.
"This industry is making millions of dollars every day in Illinois, and they are spreading that money around," said Alop. "They have hired a lot of lobbyists and they have made a lot of campaign donations in Springfield."
The Senate bill is sponsored by Kimberly Lightford (D-Maywood), the same lawmaker who sponsored the initial Payday Loan Reform Act. She says she recognizes the need for people who don’t qualify for a traditional loan to be able to borrow money, but that the interest rates charged by the payday lenders are beyond the pale. She also knows from experience that any reform efforts face an uphill battle.
"A lot of people are afraid to stand up to them because they are this wealthy industry," Lightford told me. "My last election they actually funded my opponent and [this year] I let them know, 'Well, here we are again.' "
Before she introduces the bill this month, Lightford will take input one last time from the payday loan industry. She says she will maintain an open dialogue with the lenders, but admits to a certain degree of "discomfort."
"We negotiated in good faith a couple years ago and we gave them every opportunity, and the first thing they did was cheated on the law and circumvented the law," says Lightford. "Now you want me to come back in good faith and give you that same opportunity again? I don't know if I'm willing to do that."
Sen. Lightford is confident that her bill can be passed in the Senate. From there it will move on to the House where it will be sponsored by Rep. Julie Hamos (D-Evanston).
While the legislative process runs its course, those caught in the cycle of debt continue to suffer with little hope of a way out. Two weeks ago, Alop's client Kimberly got a call on her phone. The man on the other end said he was issuing a warrant for her arrest. He told her if she didn't give him some money, the police would come to her place of employment to arrest her in front of her coworkers. Fortunately, Alop explained to her that the debt collector was lying. But until substantive reform is made into law, more and more Illinoisans will find themselves victims of this unconscionable industry.
(Images used under a Creative Commons license from Flickr users fortinbras, swanksalot, taberandrew, and Geigenot.)