Closing the Payday Loan Loophole Is One Signature Away
Illinois came one step closer to reforming its payday lending laws this week with the passage of H.B. 537.
Currently, Illinois law has a toxic loophole as big as the fissure gushing at the bottom of the Gulf, which payday lenders have used to avoid consumer protections. Previous attempts to reform payday lending in 2005 imposed a cap on interest rates for loans less of than 120 days and restricted the number of loans a borrower could take out to two per year. Payday lenders evaded these restrictions by simply increasing the term of their loans.
Payday loans are predatory short-term, high-interest loans that allow an individual to use a post-dated personal check as collateral. Payday lending is a growing problem; in the mid-1990s there were only a few hundred payday lending stores in the country, and by 2009 over 20,000 payday lending stores were opened in neighborhoods across the U.S.
Measures to limit the cycle of debt that traps many payday loan consumers are sorely needed. An informative and entertaining report from NPR’s Planet Money estimated that 60% of payday lenders’ revenue comes from repeat customers who continuously rollover their loans and rack up huge fees in the process.
On Wednesday, May 26th, a law to close this loophole, H.B. 537, was passed by both houses of the Illinois General Assembly with just one "no" vote. This piece of compromise legislation will overhaul two state laws, the Consumer Installment Loan Act and the Payday Loan Reform Act, to provide strong consumer protections for high-cost installment loans.
H.B. 537 would close the loophole because it:
- Ensures reasonable rates of 36% for installment loans over $4,000, 99% for small consumer loans, and maintains the current rate of no more than $15.50 per $100 per two weeks for payday loans.
- Limits the cycle of debt by ensuring that lenders cannot make a payday loan to a consumer that would result in more than 180 days of continuous indebtedness.
- Establishes a consumer reporting database to ensure that consumer protections for payday loans and small consumer loans are enforced.
Illinois has the chance to correct this mistake and finally rein in the predatory lenders. Consumers should urge Governor Quinn to immediately sign H.B. 537.
This post was co-authored by Hannah Weinberger-Divack.
So you're basing your article on an NPR report??? Hack journalism at best Ms. Harris. Why don't you do some of your own research. You will find that 70-80 percent of business in the "consumer loan industry" (not just the payday loan industry) is repeat business, period, not rollover business. That's because the consumer LIKES THE PRODUCT!!!! Hello, anyone there?? Why do you think, as you documented, there has been such tremendous growth in this business- because every customer is getting ripped off? Good old fashioned competition has also resulted in lower rates throughout the industry. The only result of this legislation will be to eliminate good jobs, and more importantly restrict consumer choices and shrink the economy even further.
Going to a payday lender is not like visiting a favorite restaurant time and again; people take out additional loans because they are trapped in a cycle of debt, not because they love the product. Payday loans are often structured with large balloon payments due at the end of the term, forcing borrowers to rollover or refinance the loan and compounding the effect of already high APRs. In Illinois between 2006 and 2008 payday loan consumers borrowed 5.9 loans on average with a average APR of 341%. As to your contention that competition has resulted in lower rates, a Woodstock Institute study of loan default court cases filed by AmeriCash Loans reveals that borrowers paid on average a $1,769 finance charge to borrow $1,224 for 319 days. Consumers deserve better than triple-digit interest rates that result in the loss of real money and good credit. Furthermore, growth in the payday loan industry does not indicate that the consumer likes the product. Rather, people who use payday loan products, especially those who are low-income or people of color, are faced with a lack of options. However, consumer advocates, financial institutions, and even financial regulators are working together to develop alternative small dollar loan products that meet consumer's needs and protect them from usurious lending practices. No one swims with the sharks unless they have to, and H.B. 537 will ensure that people who have nowhere to turn but payday lenders don't drown in the process.