In June of last year, Kevin Johnson needed some quick cash for an emergency. He stopped by an Americash Loans outlet in his Chicago neighborhood and did what many Illinois consumers do daily: took out a short-term $700 loan. Under the agreement Johnson signed, Americash required him to pay back the loan in 24 semi-monthly installments of $105.30 for one full year, totaling $2,611 dollars, equivalent to a 365 percent annual interest rate. After making steady payments for 6 months, Johnson just couldn't dig up the necessary funds to pay off his increasing debt. So Americash provided him a second loan in February of this year for $400 dollars and with virtually the same terms. Now, if he pays off both loans on time and in full, he will have forked over almost $3,500 to Americash, all for $700 in short-term financial assistance.

In a state with payday lending regulations on the books, how did Americash manage to trap Johnson in this cycle? They simply stretched the terms of his loan beyond the 120-day limit by which the state defines a "payday loan," instead distributing the funds as a consumer installment loan, which are virtually unregulated here*.

To Johnson, that difference is meaningless. Last Thursday, he filed a class action complaint (PDF) against Americash in a Chicago circuit court. He, along with attorneys Tom Geoghegan and Mike Persoon (of Despres, Schwartz, and Geoghegan) and Robert Cohen and Scott Frankel (of Frankel and Cohen), argue that evading the payday lending legal definitions doesn't change the nature of the loan. As such, it should be subject to the provisions of the 2005 Payday Loan Reform Act. "They have no legitimate economic purpose for stretching out these loans except to avoid the act," Geoghegan tells us. "It's just a subterfuge."

Geoghegan has a point. Prior to the 2005 law, it was common for payday loans providers to roll over a borrower's initial loan, essentially allowing the consumer to re-borrow enough money to pay off the original debt if they needed to. The loan period, in other words, would start at 14 days and extend considerably longer, often in excess of 120 days. While PLRA explicitly banned this practice, consumer installment loans just institutionalize it. And that's more dangerous for the consumer. "It's actually a grosser violation to lock people into these long-term agreements than for a shorter period of time, as they did before 2005," says Geoghegan.

Johnson also contends that Americash violated the state's Consumer Fraud and Deceptive Practices Act, which prohibits the use of business practices that "violate the public policy of Illinois, or are unconscionable or unfair or inflict substantial injury upon a consumer." Specifically, the suit argues that when Johnson signed his loan contract, it contained an arbitration clause -- nearly impossible to read without a magnifying glass -- that misleadingly suggested he would not be charged legal fees in the event that the loans needed to be settled in an arbitration negotiation -- this despite the fact that Americash knew he could not afford such expenses. If their suit succeeds, Johnson and other Americash customers who paid more than five percent interest on their loans would be reimbursed.

Meanwhile, legislators in Springfield are still working to close the loophole that led to these abuses. Rep. Julie Hamos (D-Evanston) told bloggers on a conference call last Thursday that she expects her bill aimed at reforming the Consumer Installment Loan Act -- which passed the Senate in April -- to come up for a vote in the House this week. If approved, it would cap interest rates on installment loans at 99 percent APR, index the loans based on a borrower's ability to pay, and would require loans to be paid off in equal monthly installments with no balloon payments.

As that 99 percent rate cap indicates, the lawmakers are going well out of their way to assuage the industry.  Nonetheless, Americash -- which donated $81,000 in state campaign contributions between 2005 and 2008 -- is working hard to block the bill. "When you put us out of business," Americash CEO Jill Gruchot told the Pantagraph a few weeks ago, "where are these consumers going to go?"

Gruchot's question spurs a more relevant one: Should all "consumers" -- regardless of income or credit histories -- have access to immediate credit?

UPDATE: We got the following email from Steven Schlein, spokesperson for the Community Financial Services Association, a national association of payday lenders, in response to our original headline (which read "Chicago Files Class Action Suit Against Americash"):

Americash is NOT a payday lender.  It is a company that makes installment loans.  These are an entirely different service.

That's technically true under the definition of payday loan set out in the 2005 law.  But the whole point of the Johnson suit is that these are the same lenders and the same class of customers -- all under the guise of a "different service."  Indeed, Americash issued payday loans in Illinois prior to 2005.  (Schlein confirmed in a subsequent email that they were previously a CFSA member.) After the new law was enacted, they reworked their lending model -- switching to installment loans -- to evade the reform.  But their marketing, application criteria, and sky-high interest rates are all extremely similar.  The same goes for the devastation they cause.

*CORRECTION: This post originally stated that Americash stretched the terms of Johnson's loan "one day" beyond 120 days.  In fact, Johnson's payment schedule was laid out over 12 months.  We apologize for the error. Thanks to reader AL for pointing it out.