Gov. Blagojevich urges new protections against abusive short-term loans

Rules would impose tougher regulations on lenders who are trying to get around Payday Loan Reform Act and would help protect working families against exorbitant interest rates and unlawful collection practices

[JULY 1, 2006]  CHICAGO -- On June 15, Gov. Rod R. Blagojevich ordered the Illinois Department of Financial and Professional Regulation to immediately file rules that will extend protections for people who seek emergency short-term loans and are currently forced to pay exorbitant interest rates. The governor's proposed rules would prohibit companies from charging abusive interest rates and would protect families from unlawful collection practices. The rules would impose tougher regulations on lenders who are trying to get around the existing Payday Loan Reform Act by offering 121-day installment loans. The Payday Loan Reform Act applies to loans that are 120 days or less.

"We enacted the payday loan reform to protect consumers from being ripped off. When you see lenders try to get around the laws we passed and still charge consumers unfair, outrageous interest rates, you have to step in and take action," Blagojevich said. "When a lender can issue a $275 loan and then charge the consumer nearly 10 times that in interest, the law clearly needs to be changed. The rules we're proposing are designed to prevent lenders from charging outrageous interest rates or garnishing the wages of hardworking people. They're designed to help protect families from falling into an endless cycle of debt and despair."

"Current practices indicate that most of the loans being offered to Illinoisans are not covered by the Payday Loan Reform Act. It is important that that comparable protections be provided to customers of other short-term loans," said Dean Martinez, secretary of the Illinois Department of Financial and Professional Regulation, who made the announcement on behalf of the governor during a press conference June 15 at St. Procopious Church on Chicago's Southwest Side. "Regulations to provide those protections have been proposed, and I join Governor Blagojevich in urging the Joint Committee on Administrative Rules to act quickly to approve these regulations."

Last June, the governor signed the landmark Payday Loan Reform Act, which for the first time regulated the payday loan industry in Illinois, creating aggressive protections for consumers, especially working families and members of the military, against predatory and abusive practices.

Earlier this year, the governor moved to shut down several abusive short-term lenders and, in response to evidence that lenders were circumventing the strong consumer protections enacted in the payday loan reform, he proposed new rules that would stop unscrupulous lenders from forcing customers into loans that they cannot afford to repay. The rules filed June 15 are the final version of the rules he proposed last February.

Without the protections offered by the governor's proposed rules, short-term lenders can still charge exorbitant interest rates. According to the Illinois Department of Financial and Professional Regulation, these lenders are trying to lure customers to take unprotected, short-term installment loans instead of payday loans.

"Illinois has more payday loan stores than McDonald's restaurants, and it's time to halt the unscrupulous practice of targeting vulnerable families with unfair interest rates and anti-consumer practices," said Lt. Gov. Pat Quinn.

A recent analysis of consumer loans offered to Illinois borrowers after enactment of the Payday Loan Reform Act shows that many companies have begun to sell loans of 121-plus days almost exclusively. This new product allows companies to take a wage assignment and a postdated check -- just like payday loans -- but does not hold lenders to the interest and fee limits included in the Payday Loan Reform Act or protect borrowers from costly rollovers or court costs associated with lender collection activities.

The governor's proposed rules will help protect consumers in two fundamental ways:

• The proposed rules would ban companies issuing short-term loans under the Consumer Installment Loan Act from charging interest rates higher than 36 percent on loans that either garnish wages or allow access to money in the borrower's bank account.

• The proposed rules would prohibit companies from garnishing the wages of members of the military or contacting their commanding officer; prohibit threatening consumers with use of the criminal process if they fail to pay; and prohibit requiring consumers to agree to unfair arbitration proceedings.

The rules filed June 15 must be reviewed and voted on within 45 days by the Joint Committee on Administrative Rules.

"Payday loans trap people already living in poverty and in cycles of debt that are virtually inescapable -- and this is simply immoral," said the Rev. Jennifer Kottler, deputy director of Protestants for the Common Good. "The PLRA changed that, but without stringent rules, this act is meaningless. JCAR must act on these proposed rules, do it now and do it right -- we in the Egan Coalition are unwilling to accept anything less."

"I entered into an 'installment loan' with a loan company in Springfield," said a Springfield loan customer. "I previously had a payday loan with the same company under which I was protected by the PLRA. When I went in to roll over my loan, I was told that my only option was to enter into an installment loan. I wasn't told that I could have 45 days to repay the loan with no additional interest. I was told that if one of my automatic payments of $101 bounced, I would have to come to the store to pay $202, plus the charges for an NSF check."

"I borrowed $150 and will end up paying $1,008 because of interest," added a Marengo borrower. "This interest seems illegal. Every time I make a payment, they say their computer is wrong and that I owe more -- now they need $371 more to finish paying the loan -- which would give them even more money in interest. It's hard to understand what's going on, and I need help."

"Consumer loan companies are preying on my employees," said a Mundelein business owner. "Recently, an employee borrowed $280 in advance of her pay, and we received a notice of wage garnishment. The annual percentage rate was listed at 651.79 percent, with an additional 5 percent fees and late fees of $142.02. I understand that the lack of knowledge of my worker is no excuse for entering such a contract, but such organizations ought to be barred from doing business in this state."

Two separate laws, the Consumer Installment Loan Act and the Payday Loan Reform Act, regulate short-term lending in Illinois. The reform act, which took effect last December, provides important consumer protections for loans with terms of 120 days or less. Under the new rules, Illinois borrowers willing to provide lenders with postdated checks will be able to choose to either take out loans with annual percentage rates of less than 36 percent or borrow money under the reform act, which contains a number of similar consumer protections but also offers customers the right to pay back the loan without being charged additional interest.

"CFSA has always welcomed responsible regulation with strong consumer protections that create a level playing field for all companies providing short-term credit," said Darrin Andersen, president of the Community Financial Services Association, a national trade association of payday advance companies that represents 164 member companies. "That's been the mission of our association. Therefore, CFSA will not oppose Governor Blagojevich's proposal. We will continue to support the governor in his efforts to ensure that all Illinois consumers have access to credit with appropriate consumer protections."

Aggressive enforcement of the reform act has resulted in tens of thousands of dollars in fines during the first few months of the new law. However, lenders making short-term loans are still finding ways to circumvent the hard-won protections enacted last year and offer almost identical loans under the Consumer Installment Loan Act, which currently offers few, if any, consumer protections.

Currently, there are 1,301 payday or other short-term lenders in Illinois, a 21 percent increase over last year. According to industry figures, the average annual percentage rate for short-term loans is 595 percent, and the average amount of a short-term loan is $380. According to the Illinois Department of Financial and Professional Regulation, last year lenders made 1.4 million payday loans, which generated $1.3 billion in receivables.

The state law that covers the rule-making process requires that once a proposed rule has been filed for the first time with the secretary of state, there is a 45-day initial notice period, during which industry groups, advocates and other concerned members of the public may file comments or request a public hearing. The June 15 action starts the second notice period, also 45 days long, in which the rule, and any modifications or amendments, will be reviewed by the Joint Committee on Administrative Rules.

The committee can request additional clarification or information from the Illinois Department of Financial and Professional Regulation, and the information must be supplied during the committee's review. At the end of that 45-day period, if the committee takes no action, the rule becomes permanent and any further changes must be filed through a new rule-making process. In order to stop a rule from becoming permanent, three-fifths of the panel must vote to overturn the rule.

Since 2003, Blagojevich has taken executive and legislative action to protect consumers from predatory lending and identity theft. His actions include these:

• Protecting vulnerable homeowners against unscrupulous mortgage "rescue" firms. Last month the governor signed into law Senate Bill 2349, giving homeowners new rights when dealing with companies that offer financial assistance to help them save their homes from foreclosure. The law also guarantees that homeowners will receive a substantial portion of their equity in the home from the companies.

• Reducing the number of high-risk home loans: In August 2003, the governor signed the High Risk Home Loan Act to protect consumers from predatory mortgage lending practices. As a result of the act, the state has seen both a reduction in the number of high-risk home loans and a change in lenders' business practices, so that lenders they are no longer offering high-risk loans as defined in the act.

• Protecting homebuyers in at-risk communities from predatory lenders: In July 2005, Blagojevich signed into law House Bill 4050, which provides borrowers with critical information on home loans and helps state regulators and law enforcement track and crack down on dishonest lenders.

• Protecting Illinois consumers from identity theft: During his administration, the governor has taken several steps to protect personal information and increase penalties for identity theft in the state of Illinois. Through legislative action, Blagojevich has:

• Required the Illinois Department of Revenue to notify a taxpayer directly if they suspect another person has used a taxpayer's Social Security number to register a business or pay taxes and fees.

• Required companies to notify Illinois consumers if personal information is compromised.

• Allowed victims of identity theft to freeze their credit reports.

• Required the Illinois Department of Natural Resources to phase in new Conservation ID numbers to replace Social Security numbers on hunting and fishing licenses.

• Prohibited insurance companies from printing or embedding Social Security numbers on consumers' insurance cards.

• Increased the penalties for identity theft and aggravated identity theft crimes.

• Defined as a Class A misdemeanor the unauthorized copying and transmitting of any financial transaction devices, including credit and debit cards, or other devices used to make a payment, get cash or make a deposit.

• Prohibited businesses from denying a person credit or utility services, or from increasing a person's credit limits based solely on the person's status as an identity theft victim.

[News release from the governor's office]