Eye on the States: 500%-Interest Payday Loans May Get 36% Cap in Illinois
Woker, Craig, American Banker
Illinois lawmakers are mulling a proposal that would stiffen regulations on payday lenders.
The Illinois Bankers Association says it's about time.
Payday lenders offer short-term loans by taking postdated personal checks as collateral. For this service, lenders in Illinois generally charge interest rates of more than 500% per year.
But pending bills in both houses of the Illinois General Assembly would cap the annual interest rate at 36% and, most important to the banking industry, force lenders to disclose their rates on in-store posters and in pamphlets.
"The banking industry is highly regulated by state and federal law and must disclose rates," said Linda Koch, senior vice president of government relations with the Illinois Bankers Association. "Many payday loan companies, while they face some regulation by the Illinois Department of Financial Institutions, don't comply with truth in lending."
Payday lenders typically lend only a few hundred dollars to customers for a two-week period -- until their next paycheck when they, in theory, should be able to repay the loan. The loan companies charge a fee of about $20 per $100 borrowed -- an annual rate of 521.4%, according to the Illinois Department of Financial Institutions.
Payday lenders generally are willing to accept the disclosure provision. But the proposed 36% cap would make it difficult for many to stay in business, because an average of up to one-fifth of their customers default, according to the Community Financial Services Association of America, a Washington-based payday lender trade group. …