By Greg Hinz
March 19, 2008
(Crain’s) — Even as the subprime mortgage meltdown continues to roil the nation’s financial markets, debate is warming up in Springfield over an eerily similar lending matter: payday loans.
At issue is whether to close what some consider a glaring loophole in existing law that arguably subjects tens of thousands of folks who don’t have much money to start with to the kinds of high fees and interest rates (as much as 1,200%) that can destroy a family just as surely as foreclosure on their home.
The issue isn’t exactly the same as the subprime matter. Nor does it affect nearly as many people, though, in a recent 18-month period, a reported 763,000 payday loans involving $269 million were issued in Illinois.
But the fundamental questions in both the subprime and payday-loan cases are the same: Has government dropped the ball? And are the pols now willing to do their job even if that means some would-be borrowers would be shut out of the market as unworthy credit risks?
The payday industry came under public scrutiny a few years ago with a stream of stories about how unsophisticated, low-income folks had effectively been snookered into hocking their souls. In response, the General Assembly imposed some rules, for instance limiting the amount of any single loan and limiting the annual effective interest rate to a mere 435%.
But the rules haven’t worked.
The industry says the law was “too tough,” as Steve Brubaker, executive director of the Illinois Small Loan Assn., puts it. The allowable interest rates aren’t high enough to compensate lenders for a high risk of default, he says, and it’s “almost impossible” to get the courts to order collection. As a result, “It’s hard for these lenders to operate profitably.”
The other side agrees that the law has been at least a semi-flop but points to a different villain: greed. Lenders want to be able reap the profits that come from effective annual interest rates of 300% to 700%, says Lynda DeLaforgue, co-director of Citizen Action Illinois. So they mostly have stopped making loans under the payday law, which covers loans of up to 120 days in term, in favor of slightly longer-term loans, which are regulated under a different (and much looser) law.
The proposed solution on the table is to close the loophole by defining a payday loan not by length of term but by interest rate: anything over 36% a year. The proposal introduced by state Sen. Kimberly Lightford, D-Maywood, also would restrict fees by, for instance, mandating a proportionate rebate of any fee if a loan is paid back early.
The measure has picked up steam in the state Senate. Both Sen. Lightford and Sen. Dan Rutherford, R-Chenoa, the ranking Republican on the Financial Institutions Committee, say Ms. Lightford’s bill will pass unless the payday industry, Ms. DeLaforgue’s coalition and others including Attorney General Lisa Madigan reach a compromise.
That leaves the always interesting House. No word yet on what it will do, but the bill will be sponsored there by miracle worker Rep. Julie Hamos, D-Evanston, who recently overcame a multitude of obstacles to win approval of a sales-tax hike to bail out Chicago area public transit.
And don’t forget our populist hero of a governor, Rod Blagojevich, whose normal tendency is to give everybody everything and let someone else worry about the bill.
Here’s one vote for the Legislature to do something. Plan A didn’t work. Ultimately, though, even the stiffest of regulations will fail unless the politicians involved are willing to recognize the obvious: Some folks just aren’t qualified to borrow, however great their need and however much bubble-building financiers want to throw them cash.
Lack of adequate credit standards just will invite lenders to pass on the costs to other borrowers, in the form of higher fees and interest rates. Lack of adequate credit standards is one of the reasons, and perhaps the main reason, behind the subprime meltdown.
Can Illinois lawmakers mandate both good rules and good credit standards? They better pursue both, unless they want to go to Plan C.
