Credit: Unsplash / The New York Public Library

Among the flurry of bills passed in the five-day January lame duck session in Springfield was the Predatory Loan Prevention Act, a measure that would cap interest rates for consumer loans under $40,000—such as payday loans, installment loans, and auto title loans—at 36 percent. These types of loans often trap consumers in cycles of debt, exacerbate bad credit, lead to bankruptcy, and deepen the racial wealth gap. Some 40 percent of borrowers ultimately default on repaying such loans. The new regulation was in a package of bills advanced by the Legislative Black Caucus as part of its “four pillars” of racial justice reforms in economic policy, criminal justice, education, and health care.

According to a report on payday, title, and installment lending released by the state Department of Financial and Professional Regulation, between 2012 and 2019 “1,365,696 consumers took out 8,696,670 loans, or an average of 6.4 loans per consumer.” In Illinois average annual percentage rates (or APRs) for small consumer loans range from 297 percent for payday loans to 179 percent for title loans. The new cap would bring interest rates in line with those already in place for active-duty military members across the country. Illinois would join 17 other states and the District of Columbia in setting limits to the amount of profit the small-dollar lending industry could generate through usurious interest rates imposed on some of the poorest consumers. The industry’s last chance to stop the cap is through a veto from Governor J.B. Pritzker, and they’ve pulled out all the stops to convince him to do that.

The predatory lending industry didn’t exist in Illinois before 1985, when it was a felony to lend money at interest rates above 20 percent. Right now, there are about 1,500 lenders providing payday, installment, and auto title loans to customers who, on average, make about $33,000 a year. Nearly 60 percent of the consumers who turn to these loans make less than $30,000. Payday loans tend to be small-dollar loans (usually under a thousand dollars) secured by the borrower’s next paycheck (in the form of a postdated check or electronic access to the borrower’s bank account). Paying $10 for a $100 loan due back in two weeks may not seem like a lot, but in reality most borrowers aren’t able to repay the loans in such a short amount of time, leading the loan to “roll over,” and accrue additional interest, origination fees, and other charges that end up far outstripping the amount of the loan. Stories such as a borrower taking out an initial $300 loan and winding up $15,000 in debt abound.

Installment loans are often also taken out in small-dollar amounts but the borrower agrees to repay them in installments over a longer period of time—a few months to a few years. However, these loans, too, can have triple-digit interest rates and hidden fees. Auto title loans (which are prohibited in many states) require a consumer to secure the loan with the title to their vehicle. In case of default, the lender gets to keep the title to the car and can sell it, pocketing the payments the consumer did make in addition to the value of the car. While there are interest rate caps already in place for various types of payday and installment loans in Illinois (ranging from 99 to 404 percent APR), there are no caps at all for title loans.

In 2019, the Center for Responsible Lending calculated that payday and title lenders drained more than $500 million in fees from Illinoisans every year. Regulation of these financial products in the state is a “hodgepodge,” says Brent Adams, a senior vice president at the Woodstock Institute, which championed the new bill and has been researching the consumer lending sector for years. “There are a handful of products that are codified separately under the law . . . It’s a regulatory mess and it makes it more difficult to enforce, to explain, and correspondingly more difficult to protect consumers.”

The predatory nature of these loans is so widely recognized that capping interest rates has had bipartisan support across the country; both red and blue states have implemented the 36 percent interest rate cap—modeled on the Military Lending Act which already sets that as a maximum interest rate, lenders can charge active-duty military members for any types of loans or credit cards.

The Predatory Loan Prevention Act—which passed the State House 110-0 and the State Senate 35-9—received the endorsement of dozens of organizations, including consumer protection groups, unions, clergy, social service providers, racial justice advocates, the AARP, banks, universities, veterans’ groups, and even the Marketplace Lending Association, which represents tech companies such as Avant, Lending Club, and SoFi, which provide unsecured personal loans and already voluntarily adhere to the 36 percent interest rate cap.

“We’re trying to get to the heart of systemic racism,” says State Senator Jacqueline Collins, one of the chief cosponsors of the bill. “Those who have a lack of access to credit and banking should not continue to be victimized by this exorbitant usury.” She said that payday lenders proliferate in her district, which covers portions of the south side and south suburbs. State data shows that 72 percent of Chicago’s payday loans originate in Black and Brown neighborhoods.

Predictably, those targeted by this regulation—commonly known as the predatory lenders—have mobilized to pressure Pritzker to veto the bill. Collins said her office and those of her colleagues have been flooded by daily calls and meeting requests from industry lobbyists. In a letter sent 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 doomsday situation for consumers who use their products if the bill becomes law.

“The proposed rate cap would leave Illinois consumers worse off and immediately cut off access to credit for those most in need,” the letter states. “The idea that banks and credit unions can pick up the slack from established licensed non-bank lenders is a pipedream.” Because lending to people with bad credit who need to borrow smaller amounts doesn’t fit into major commercial banks’ business models, the industry argues consumers will be left to turn to back-alley deals with loan sharks. The industry predicts that the new law would shut down some 1,200 of its 1,500 lenders.

However, in states that have implemented interest rate caps for such financial products, the dire predictions for consumers just haven’t come true. A 2017 study by the Center for Responsible Lending found that in the states with interest rate caps, consumers were using strategies to address cash shortfalls that didn’t involve turning to loan sharks or entering cycles of debt. In fact, consumers had an easier time recovering from financial setbacks than those who turned to predatory loans in a pinch. They also saved some $2.2 billion in fees that would otherwise have gone to these lenders. In a 2018 study by the National Consumer Law Center borrowers in states that passed similar restrictions expressed relief that payday loans were no longer as widely available.

As the predatory lenders’ representatives argue, passing the caps and thus limiting the amount of profit lenders can make in this sector may indeed put some of them out of business. “In the states that pass rate caps lenders that charge triple-digit interest rates by and large choose to close shop rather than make loans at or below 36 percent,” Adams says. “They very well may make the choice to do that [in Illinois]. But our position is that it’s a business decision for them to make loans safe and affordable or not, but the bill would stop the business of predatory lending.” He points out that according to the industry’s own predictions, at least 300 of these lenders are expected to continue operating in the state despite the rate caps. “It goes to show that it’s not impossible to make money by charging rates that are more reasonable and affordable for consumers.”

Some argue that the scaling down of the 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 U.S. Treasury-certified Community Development Financial Institutions such as the Capital Good Fund.

The Fund, which began lending in Illinois a year ago, is a nonprofit and provides small-dollar loans to consumers with average credit scores below 600 at a maximum of 24 percent APR. Only 5 percent of its borrowers default on their loans. “We believe strongly this legislation would both protect those we serve and make it easier for us to reach them,” says CEO Andy Posner. “The lenders that charge these high interest rates won’t have as much money to blast [consumers] with advertising.” He predicts that would “create a more level playing field for us to reach the communities we want to lend to.”

If Pritzker doesn’t veto the bill or sign it into law, it’ll automatically become law on April 6. The coalition backing the measure is currently planning a day of action to raise awareness about the benefits of the Predatory Loan Prevention Act. More information can be found on the Woodstock Institute’s website.   v