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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
This article appears in Apr 3-9, 2008.
