Governor Quinn has closed a gaping loophole in the laws regulating payday loans by signing H.B. 537. Beginning in March, 2011 nearly every short-term credit product sold in the state of Illinois will be regulated.
Governor Quinn, Senator Lightford, Representative Lang, and the members of the Monsignor John Egan Campaign for Payday Loan Reform should be congratulated for the bill’s passage. In particular, the new regulations for loans with terms of six months or more will provide crucial protections for Illinois borrowers. However, the new law is not perfect. The 99% interest rate cap on some loans falls far short of the 36% that is considered safe for consumers. Even with the new protections, payday and consumer installment loans are still best used only as emergency loans of last resort.
As we have discussed in previous posts, H.B. 537 mandates significant reforms. Loans with terms of less than six months have rates capped at $15.50 per $100 borrowed every two weeks. Longer term loans over six months are capped at 99% APR for loans less than $4,000 and at 36% APR for loans more than $4,000. The rates will be calculated in accordance with federal Truth in Lending legislation that ensures lenders cannot use hidden fees to deceptively increase the cost of the loan.
Just as importantly, the new law prohibits balloon payments for all consumer credit products, regardless of the term. With a balloon payment structure, a borrower is typically not allowed to make a partial payment and must either pay the loan in its entirety at the end of the term or, as is often the case, roll the loan over and continue paying interest. Soon all short-term consumer loans in Illinois will allow borrowers to make equal payments over the term of the loan, paying down the principal over time, so that consumers are debt-free at the end of the term.
Lenders will also have to consider a consumer’s ability to repay the loan before extending credit. Monthly payments will be limited to between 22.5% and 25% of a borrower’s gross monthly income. Lending money without taking into account an individual’s ability to repay is a hallmark of predatory lending practices. Finally, and because these regulations will be meaningless if they are not enforced, H.B. 537 creates a consumer reporting service to ensure that lenders comply with all consumer protections.
The hard work of the Monsignor John Egan Campaign for Payday Loan Reform has finally paid off for Illinois consumers.
Hannah Weinberger-Divack co-authored this article.