By Jamey Dunn
Gov. Pat Quinn signed legislation today that is intended to keep payday lenders from slipping through a regulatory loophole.
The bill changes both the Consumer Installment Loan Act and the Payday Loan Reform Act. The General Assembly passed the latter in 2005 to place tighter controls on payday lenders.
The Payday Loan Reform defined such loans as lasting only 120 days. The idea being that a customer, who might be in a financial pinch, takes out the loan and pays it off out of his or her next few paychecks.
But according to consumer advocates, some in the industry used that definition as a way to skirt regulation. Extending the terms of payday loans meant they no longer fell under the regulatory power of the 2005 act. Instead, they could be defined as installment loans, which are regularly secured with collateral such as a car title and had no interest caps.
The legislation, which Quinn signed at a Chicago news conference, caps interest levels for installment loans at 99 percent for loans under $4,000 and 36 percent for loans above that threshold.
Payday lenders will not be able to charge more than $15.50 per $100 loaned out every two weeks. Brent Adams, secretary of the Illinois Department of Financial and Professional Regulation, says that is the most important aspect of the law because no matter how a loan is categorized, there will be limits on what lenders can charge for it.
Companies offering loans will have to determine a customer’s ability to repay the debt. They will also no longer be able to penalize customers for paying off loans early or require large lump-sum “balloon” payments at the end of a payment cycle.
During the news conference William McNary, co-director of the advocacy group Citizen Action Illinois, held up a contract for a loan at what he said was made at 700 percent interest. He said the new law will “set the stage for bringing an end to the era of legalized loan sharking here in Illinois.” McNary ripped the contract to pieces while concluding his statement.
Maywood Democratic Sen. Kimberly Lightford and Skokie Democratic Rep. Lou Lang, sponsors of the bill, said the negotiation process was long and arduous, but they were able to garner support from lenders. “The industry, I’ve got to tell you, wow, they’re tough. And we were able to negotiate and bring them all on board,” Lightford said.
However Attorney General Lisa Madigan said those strapped for cash still need to be wary of payday and installment loans and should exhaust all other options first.
“This law will help consumers who find that there is nowhere else to turn except a payday or installment loan. But please remember, extreme caution still has to be exercised when taking out a short-term high-cost loan. … People should only consider those types of loans in an emergency as a last resort.”
The new regulations take effect nine months from today.