As we outlined in our recent joint report, we’ve seen these games before in Illinois. Payday regulators must avoid creating such loopholes.
In 2001, the Illinois Department of Financial and Professional Regulations issued consumer protections on payday loans with terms of less than 30 days. Payday lenders simply evaded the rules by offering payday loan products with 31-day terms.
In 2005, the state legislature then passed a law capping fees and loan amounts, limiting concurrent loans, and establishing a cooling-off period for loans with terms of up to 120 days. It didn’t take long for lenders to start offering loans with terms of more than 120 days, thereby avoiding all the new protections of the Payday Loan Reform Act (PLRA) by operating under the Illinois Consumer Installment Loan Act (CILA), which had far fewer consumer protections.
Payday lenders in Illinois repeatedly exploited loopholes in order to charge borrowers loans with rates as high as 700 percent and more.
It took five more years before advocates could close the loopholes exploited by industry. In 2010, the Illinois General Assembly amended the payday and installment loan laws to ensure adequate consumer protections for both types of small-dollar loans. The new law provides clear regulations for payday loans, installment loans, and the newly-created payday installment loans by limiting the number of loans a consumer can have at one time and the amount of the loans, prohibiting balloon payments, mandating cooling- off periods between loans, and requiring lenders to report loans to a state-run database.
Illinois’ payday and installment loan laws could undoubtedly be stronger, but over the course of a decade, we were able to enact rules that protect consumers from the worst abuses of the industry and prevent many borrowers from entering endless cycles of debt.
As federal regulators look to regulate traditional payday loans, as well as bank “deposit advance” products that are similar to payday loans and not subject to state laws, it will be important to ensure there is no room for the industry to get around the rules by making slight modifications or tweaks to their products.
Along with our partners at California Reinvestment Coalition, New Economy Project, and Reinvestment Partners, we recommended specific policy changes to better regulate the entire payday industry at the state and national levels:
- Congress and state legislatures should set a rate cap of 36 percent or lower for all credit transactions to guarantee that all small-dollar loans are safe and affordable,
- The Consumer Financial Protection Bureau should enact strong rules to protect consumers from unfair, deceptive, misleading and abusive payday lending and ensure that the rules cover loans with shorter and longer terms, and
- The Office of the Comptroller of the Currency and FDIC should adopt and strengthen their proposed guidance on bank payday lending, and the Federal Reserve Board should follow suit.
We need a comprehensive solution to end all abusive small-dollar loans and deposit advance products. Whether a loan term is 15 days or 150 days, consumers deserve a safe and affordable product that won’t trap them in a cycle of debt.