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'Outlook good' for payday loan rules - Industry, lawmakers hope to

SPRINGFIELD - Efforts to toughen regulations on the proliferating payday loan industry have failed in recent years in the Illinois legislature, but some of the key players, including consumer and industry representatives, say they are inching closer toward compromise.

Several of them expect a reinvigorated drive for change during the spring 2005 session of the General Assembly.

"I think the outlook for some significant legislation to pass is good," said Rep. David Miller, D-Calumet City, who for the past two years has sponsored payday loan proposals that did not advance. "It's been a long fight."

"I have reason to hope that 2005 will be the year," said Tony Colletti, executive vice president of Community Financial Services Association, an industry trade group whose members include national chains such as Check into Cash and Advance America.

Payday loans allow consumers to obtain quick, short-term loans for a fee.

According to the Illinois Department of Financial and Professional Regulation's Web site, the state is home to nearly 700 short-term lenders that offer payday loans. Payday loan stores started cropping up in the 1990s and now exist all over the state.

Payday lenders say they offer a needed service that customers generally appreciate.

"I think the testament to that is that if payday lenders burned every customer that came in the door, there wouldn't be any payday loan industry," said Steve Brubaker, executive director of the Illinois Small Loan Association, an industry trade group whose members are not associated with the national chains.

Critics, however, say the lenders gouge their customers by charging excessive interest rates and fees and by allowing multiple loan rollovers, which trigger extra fees.

"Payday loans are easy to get into, but they're hard to get out of," said Lynda DeLaforgue, co-director of Citizen Action/Illinois, which is a member of the Monsignor John Egan Campaign for Payday Loan Reform. "We want to make sure that people have an escape from this cycle of debt."

At one Springfield payday loan store on Friday, the fee on a $300 loan was $132, which means a person seeking a loan would write a post- dated check for $432. The check would be cashed in 31 days.

The annual percentage rate, or APR, on that loan amounts to slightly more than 518 percent.

But Bob Wolfberg, president of the Illinois Small Loan Association, said it is unfair to use the APR figure because the loans are short-term, covering a period far less than a year.

Wolfberg also believes one of the misconceptions surrounding the payday loan industry is that it operates without any regulation. It is regulated under the federal Truth in Lending Act and by the state, he said.

"We're not regulated in the way certain consumer groups would like to see us regulated," he said. "We're more than willing to talk about ways to create a better regulatory framework."

State rules passed three years ago capped payday loan amounts at $400 and permitted a maximum of three rollovers for any loan of 30 days or less, said Sen. Jeffrey Schoenberg, an Evanston Democrat who has sponsored proposals to further regulate payday loans.

"At the time, that was thought to be a meaningful change," he said. "They identified a loophole and drove a truck through it."

"What ended up happening is that payday loan operators were able to sidestep this regulation by creating new 31-day products and continuing to assess exorbitant rollover fees as well as the excessive interest rates," Schoenberg said.

Schoenberg thinks heightened regulation of the payday loan industry must meet three goals: cap interest rates, limit the number of times a loan may be rolled over and limit the amount customers may borrow to 15 percent of their monthly gross income. "That's something that would greatly prevent people from defaulting on their loans," he said.

Illinois Small Loan Association officials contend overregulation could cause many payday loan stores to close permanently. Wolfberg said the industry employs more than 4,000 people in Illinois.

While the payday loan industry may take a loss on some of its customers, it also voluntarily gives away some cash to elected officials in Illinois.

According to data compiled by campaign finance expert Kent Redfield, a professor at the University of Illinois at Springfield:

- The industry made more than $346,000 in campaign contributions during the 2001-2002 election cycle, which covers a two-year period.

- The industry made campaign contributions totaling more than $311,000 during the 18-month period that ended June 30. Figures for the complete 2003-2004 election cycle will not be available until early next year.

- The Illinois Small Loan Association led the way during both election cycles, giving more than $217,000 during 2001-2002 and more than $154,000 from January 2003 to June 2004.

David Morrison, project coordinator for the watchdog group Illinois Campaign for Political Reform, said payday lenders tend to give to legislative leaders of both political persuasions and to candidates who are likely to win.

"They don't give just to one party over the other or just to one chamber over the other," he said. "They want to be left alone. It seems to be they're perfectly happy with the status quo, and anything that doesn't draw attention to them makes them happy. They're not looking to make enemies."

Measuring the industry's political influence is difficult, Morrison said. "It seems like donors who don't want much in return are very popular (among lawmakers)," he said. "It's far easier to kill (a piece of legislation) than it is to pass something in Springfield. So if there's someone willing to hand out checks in exchange for killing stuff, that's far easier than giving out checks in exchange for passing stuff."

Wolfberg of the ISLA dismissed that idea. He said his group attends fund-raising events to educate legislators and "clear up misunderstandings" concerning the payday loan industry.