Illinois issues fines under new payday loan law
December 21, 2005 - Springfield, Illinois
State regulators are moving quickly against payday lenders that they deem are attempting to circumvent the state's new law regulating payday loans.
The Illinois Division of Financial Institutions has fined three firms in the last three days for different infractions. Topping the list is a $10,000 fine--the highest penalty allowed under the new statute--imposed Dec. 19 against Texas-based Cottonwood Financial Ltd., which does business as both the Cash Store and Cash ASAP at 45 locations in Illinois. The division found that the company attempted through misleading advertising to funnel customers into a 140-day loan product that isn't subject to the provisions of the new law. The act covers loans of 120 days or less.
Two other firms were assessed fines of $2,000 and $500, respectively, for less serious infractions, says Jordan Matyas, supervisor of consumer credit for the division.
For Cottonwood, regulators found fault with a "product comparison chart" shown to customers that made its 140-day "installment loan" seem more advantageous than its 14-day payday loan. Specifically, the chart misrepresented the cost of the two loans, Mr. Matyas says. It showed that the longer-term loan was cheaper than the 14-day product if paid off within 10 days--$11.07 per $100 borrowed versus $15.50 per $100 borrowed. But it neglected to disclose that if the longer-term loan were held for 30 days, it would cost $31.50 per $100 borrowed.
"They're marketing the long-term loan as a cheaper payday loan when it's really not," Mr. Matyas says.
A Cottonwood executive didn't immediately return a phone call requesting comment.
But Steve Brubaker, executive director of the Illinois Small Loan Assn., a payday lending industry group, says lenders are offering customers a variety of different products. And providing them information comparing product features makes sense, he says.
"Right now, the agency really is looking for some reasons to beat up lenders," he said. "They want to be seen as the consumer advocate."
Of Cottonwood, he said, "I'm sure they'll challenge the fine and request a hearing."
A consumer advocate who lobbied for the new law is pleased the state appears to be taking a strong enforcement stance.
"We're heartened by the fact that the state has taken early and quick action to expose this obvious attempt to circumvent the new law," says Lynda Delaforgue, co-director of consumer group Citizen Action Illinois.
The payday loan law, which went into effect earlier this month, limits what lenders can charge, restricts customers to no more than two loans at a time and establishes a state database to ensure the law is being followed.
Chicago Business (Crain's), reported by Steve Daniels
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