Predatory lenders want Pritzker to veto triple-digit interest rate limit
Among the flurry of bills passed during January’s five-day lame ducks session in Springfield was the Predatory Loan Prevention Act, a move that would cap consumer loan interest rates below $ 40,000, such as payday loans, installment loans, and auto title loans. at 36 percent. These types of loans often trap consumers in debt cycles, worsen bad credit, lead to bankruptcy, and deepen the racial wealth gap. Some 40 percent of borrowers ultimately fail to repay these loans. The new regulations were part of a package of bills introduced by the Legislative Black Caucus as part of its “four pillars” of racial justice reforms in the areas of economic policy, criminal justice, education and health care.
According to a report on payday loans, securities and installments released by the State Department for Financial and Professional Regulation, between 2012 and 2019, “1,365,696 consumers took out 8,696,670 loans, an average of 6.4 loans per consumer. In Illinois, the average annual percentage rates (or APRs) for small consumer loans range from 297% for payday loans to 179% for title loans. The new cap would bring interest rates in line with those already in place for active-duty military personnel across the country. Illinois would join 17 other states and the District of Columbia in setting limits on the amount of profit the small dollar lending industry could generate from usurious interest rates imposed on some of the poorest consumers. The industry’s last chance to stop the cap is Gov. JB Pritzker’s veto, and they’ve gone out of their way to convince him to do so.
The predatory lending industry did not exist in Illinois until 1985, when it was a crime to lend money at interest rates above 20%. Currently, there are approximately 1,500 lenders offering payday, installment and auto title loans to clients who, on average, earn approximately $ 33,000 per year. Almost 60% of consumers who use these loans earn less than $ 30,000. Payday loans tend to be small loans (usually less than a thousand dollars) secured by the borrower’s next paycheck (in the form of a post-dated check or electronic access to the borrower’s bank account. the borrower). Paying off $ 10 on a $ 100 loan due in two weeks may not seem like much, but in reality, most borrowers are unable to repay the loans in such a short period of time, causing the loan to “roll over”. And accumulate. additional interest, origination fees, and other charges that end up far in excess of the loan amount. Stories like a borrower taking an initial loan of $ 300 and liquidating a debt of $ 15,000 abound.
Installment loans are often also taken out for small amounts, but the borrower agrees to repay them in installments over a longer period of time, from a few months to a few years. However, these loans can also have triple digit interest rates and hidden charges. Auto title loans (which are prohibited in many states) require a consumer to secure the loan with the title of their vehicle. In the event of a default, the lender retains title to the car and can sell it, pocketing the payments the consumer has made in addition to the car’s value. While there are already interest rate caps for various types of payday and installment loans in Illinois (ranging from 99-404% APR), there is no cap for title loans.
In 2019, the Center for Responsible Lending calculated that payday lenders and securities lenders took more than $ 500 million in fees from Illinois annually. Regulation of these financial products in the state is a ‘mishmash,’ says Brent Adams, senior vice president of the Woodstock Institute, which has championed the new bill and researched the consumer loan industry. For years. “There are a handful of products that are separately codified under the law. . . It’s a regulatory mess and it makes it more difficult to enforce, to explain and, therefore, more difficult to protect consumers. ”
The predatory nature of these loans is so widely recognized that the cap on interest rates has received bipartisan support across the country; the red and blue states implemented the 36% interest rate cap, modeled on the Military Loans Act, which already sets the maximum interest rate for lenders who can charge servicemen on active duty any type of loan or credit card.
The Predatory Lending Prevention Act, passed by State House 110-0 and State Senate 35-9, has received approval from dozens of organizations, including consumer protection groups, labor unions, clergy, social service providers, racial justice advocates, AARP, banks, universities, veterans groups and even the Marketplace Lending Association, which represents tech companies like Avant , Lending Club and SoFi, which provide unsecured personal loans and already voluntarily adhere to the 36% interest rate cap.
“We are trying to get to the heart of systemic racism,” said State Senator Jacqueline Collins, one of the bill’s main co-sponsors. “Those who do not have access to credit and banking should not continue to fall victim to this exorbitant usury. She said payday lenders are proliferating in her district, which covers portions of the south side and the southern suburbs. State data shows that 72 percent of Chicago payday loans come from black and brown neighborhoods.
As might be expected, those targeted by this regulation, commonly known as predatory lenders, have rallied to pressure Pritzker to veto the bill. Collins said his office and those of his colleagues were inundated with daily calls and meeting requests from industry lobbyists. In a letter to the governor, the American Financial Services Association, the Illinois Financial Services Association, the Independent Finance Association of Illinois, and the Illinois Automobile Dealers Association predict a dire situation for consumers who use their products if the proposed law becomes law.
“The proposed rate cap would worsen the situation for Illinois consumers and immediately cut off access to credit for those who need it most,” the letter said. “The idea that banks and credit unions can take over from established licensed non-bank lenders is a pipe dream. Because loans to people with bad credit who need to borrow smaller amounts do not fit into the business models of large commercial banks, the industry argues that consumers will have to turn to clandestine deals with loan sharks. Industry predicts the new law would shut down some 1,200 of its 1,500 lenders.
However, in states that have interest rate caps in place for these financial products, dire predictions for consumers have simply not come true. A 2017 study by the Center for Responsible Lending found that in states with interest rate caps, consumers used strategies to address cash shortages that did not involve turning to loan sharks or loan sharks. ‘enter into debt cycles. In fact, consumers have had an easier time recovering from financial setbacks than those who have turned to predatory loans in a pinch. They also saved some $ 2.2 billion in fees that otherwise would have gone to these lenders. In a 2018 study by the National Consumer Law Center, borrowers from states with similar restrictions expressed relief that payday loans were no longer as widely available.
As the representatives of predatory lenders assert, exceeding the limits and thus limiting the amount of profit that lenders can make in this sector can indeed put some of them into bankruptcy. “In states that have rate caps, lenders that charge triple-digit interest rates typically choose to go out of business rather than grant loans at 36% or less,” says Adams. “They may very well choose to do this [in Illinois]. But our position is that it is a business decision for them to make loans safe and affordable or not, but the bill would end the predatory lending business. He points out that according to the industry’s own forecasts, at least 300 of these lenders are expected to continue operating in the state despite the rate caps. “This shows that it is not impossible to make money by charging more reasonable and affordable prices for consumers.”
Some argue that reducing predatory lenders will create more space for those willing to lend more responsibly and at less usurious interest rates to reach consumers. Some of these lenders will be among the 500 community development financial institutions certified by the US Treasury, such as the Capital Good Fund.
The Fund, which began lending in Illinois a year ago, is a nonprofit and provides low-value loans to consumers with an average credit score below 600, with a maximum APR of 24%. Only 5% of its borrowers default on their loans. “We are confident that this legislation would both protect those we serve and make it easier for us to reach them,” said CEO Andy Posner. “Lenders who charge these high interest rates won’t have so much money to blow up [consumers] with advertising. He predicts that this would “create a level playing field so that we can reach the communities we want to lend to.”
If Pritzker does not veto or sign the bill, it will automatically become law on April 6. The coalition supporting the measure is currently planning a day of action to raise awareness of the benefits of the Predatory Lending Prevention Act. More information can be found on the Woodstock Institute website. v