In the late 1970’s, as the prime interest rate rose to 21 percent, many states eliminated or relaxed regulation of consumer credit. Some state governments modified their laws so that the rate caps fluctuated with some published market interest rate. Most states raised their caps to around 36 percent, which was a point not binding on traditional lenders. Illinois chose to eliminate rate caps altogether on small loans, setting the stage for our state to become the safe haven for predatory lenders that it is today.
The small loan lending crisis in Illinois, like the national mortgage lending crisis, is the result of a deregulated oversight system, mixed with a lethal dose of greed on the part of the lenders.
In 1999, the Msgr. John Egan Coalition for Payday Loan Reform first took on the small loan industry in Illinois. After a protracted battle, our state finally passed the Payday Loan Reform Act (PLRA) in 2005. PLRA was intended to reign in the most egregious practices of the payday lenders. PLRA works to end the debt cycle by restricting rollovers, limiting how many loans can be taken out simultaneously, and indexing the amount a person can borrow to their gross monthly income.
The work of the Egan Coalition continues in 2009 because lenders of small loans continue to squeeze people. Here’s an example of predatory lending that is still taking place in Illinois.
In November 2006, Mr. Webb took out an installment loan for $250.00. He is 80 years old and lives on $1,300 a month from Social Security. He made five monthly payments which only covered the interest. Then he got to the final payment, where he owed the full principle plus the interest for that month. This is known as a balloon payment and is particularly dangerous for consumers. Mr. Webb couldn’t come up with the $337.50 he needed to pay off the loan. So he was forced to roll it over. He went through this cycle three times. By August of 2008 he had paid almost $2,000 just to borrow $250.
This is usury in Illinois.
Despite the reforms passed in 2005, payday lenders in our state are still making loans over 700% APR and trapping people in long-term debt cycles. They quickly figured out that they could circumvent the definition of a “payday loan” as required by the PLRA law by extending their loan terms over 120 days in length and calling them “installment loans." According to a report issued by national consumer advocates in 2008, Illinois is one of fourteen states which scored straight F’s for protecting consumers from high-interest auto title, payday, and installment loans.
Thus, after a decade of reform efforts and countless proposals before the legislature, Illinois is still the "Wild West of Payday Lending." Could it have anything to do with the fact that according to the National Institute on Money in State Politics, Illinois ranks first in nation for giving by payday lenders to the state legislature? Our state politicians raked in $2.2 million between 2000 and 2006.
A similar report issued in 2008 by the Illinois Campaign for Political Reform (ICPR) showed that the industry's political giving suggests a focus on stalling legislative action, while winning friends among executive branch regulators.
ICPR noted that three out of four sitting senators reported contributions from the payday lending industry since 2005; and four out of five sitting House members reported contributions. They have particularly targeted members of the House and Senate Committees on Financial Institutions.
This legislative session, the Egan Campaign hopes to move a bill (SB 1435) that will regulate small loans under $4,000. Once again our effort has come under fierce opposition by an army of well-paid and politically-juiced lobbyists. However, the Egan Campaign, Attorney General Lisa Madigan, and Governor Pat Quinn have formed a strong coalition to ensure that consumers are protected from the worst practices of high cost loans.
It does not matter if the loan is called a payday loan or installment loan. If it looks like a duck, and quacks likes a duck - it’s a duck. Usury is usury, and it is well beyond time to end it in Illinois.
Lynda DeLaforgue is the co-director of Citizen Action/Illinois, a member of the Msgr. John Egan Coalition for Payday Loan Reform.
jkursman (not verified) on Thu, 05/07/2009 - 09:41
Let's stop looking at "payday and installment" short-term lenders in a vaccuum, and examine the whole picture.
Banks and credit unions charge an average of $27-plus-interest fees on average overdrafts of $36 (APR 1,950%)
The avg. fee on a late credit card payment is $29
NSF and merchant fees on a $100 payment average $51
And, utility companies commonly charge $50 for late/reconnect fee on a $100 bill.
Short-term lending is expensive to offer. Until the Egan Campaign leads a successful effort to change the ENTIRE financial and credit landscape, restricting short-term credit options hurts tens of thousands of Illinois families living paycheck to paycheck who find these products to be an attractive alternative to more expensive products.