(Chicago, IL) — June 21, 2010. With a swift scratch of his pen, Governor Pat Quinn yesterday banished 1,000% interest “pay day loans” in Illinois.
Quinn signed a bill into law that will increase protections for Illinois residents obtaining consumer installment loans–the volume of which has dropped 20% since 2006–cap interest rates charged by consumer finance companies, rates that had been making loan sharks blush bright crimson.
“Many consumers who take out short-term loans are doing so as a last resort to pay their bills and provide for their families.” said Quinn. “It is important that we do everything we can to protect these consumers who are already hurting, by helping to make these loans more affordable.”
The legislation, House Bill 537 sponsored by House Deputy Majority Leader Lou Lang (D-Skokie) and State Senator Kimberly Lightford (D-Westchester) protects consumers by setting “reasonable” interest rates for loans.
Ok, not entirely “reasonable” by any traditional measure, but better than the current financial tar pit.
Payday loan predators have peddled consumer installment loans with interest rates which have averaged 341% in Illinois but have reached 1,000%. Under the new law, rates on consumer installment loans will be capped at 99% for loans $4,000 and less and 36% for loans greater than $4,000.
During February 2006 through December 2008 204,205 payday loan consumers took out 1,194,582 payday loans, or an average of 5.9 loans per consumer, but the transaction volume decreased from year-to-year at an average rate of 20.4 percent according to March 2009 report by the Illinois Department of Financial and Professional Regulation.
“The days of legal loan-sharking are gone,” said Lang. “This new law will end the financial serfdom imposed on struggling, working families by payday loan companies.”
The average monthly gross income of Illinois payday consumers between 2006 and 2008 was $30,460 per year. Approximately 4% of payday loan consumers earn more than $75,000 per year.
The law’s key backer, Attorney General Lisa Madigan, said:
“For too long, Wild West lending practices have dominated the marketplace in Illinois and consumers have suffered as a result – saddled with costly loans that they could never repay. House Bill 537 reigns in abusive and predatory lending practices and protects consumers. I want to thank Senator Lightford, Representative Lang, the Governor’s Office and consumer advocates for their hard work on this important consumer protection legislation.”
Even though payday lenders deserve most of the rhetorical abuse heaped upon them for their abusive interest rates, it is important to note that even they have their limits. In fact, the drive-by lenders, who can dispense a loan in under an hour, rejected 28% of all loan applicants or 274,476 since 2006, according to state data.
For those who, however, secure loans, the new law also includes provisions to help borrowers repay loans more easily:
- Lending is based upon the borrower’s ability to repay the loan.
- Monthly payments on consumer installment loans are limited to 22.5 percent of the borrower’s gross monthly income.
- In order to give borrowers enough time to repay the loan, the new minimum loan term will be set at six months – an increase from the previous four month term.
- The law also eliminates balloon payments and prevents lenders from penalizing borrowers for paying off loans early.
“We look forward to working with licensed lenders and their customers to make sure this law is strictly enforced,” said Secretary of Financial and Professional Regulation Brent Adams.
The law’s enforcement is vital.
But the enforcement of the law’s provisions must wait another nine months. If the Governor fails to defeat pro-business State Senator Bill Brady in the fall, Adams will be gone and so may the strict enforcement, too.