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New rules seek to reform small loans

April 5, 2006 - Aurora, Illinois

The recent allegations against the Payday Loan Store of Illinois Inc. are merely the latest step in an effort by the state to reform short-term lending practices.

At the center of this effort is the Payday Loan Reform Act, passed last year to regulate loans with terms of 120 days or fewer. Stores like the ones owned by Payday Loan generally give short-term, high-interest loans, usually for less than $1,000, and the new law is meant to protect consumers who enter into such contracts.

However, according to Dean Martinez, secretary of the Illinois Department of Financial and Professional Regulation, some vendors are finding a way around the new law, which provides many restrictions for short-term loans, including capping finance charges at $15.50 per $100.

"The Payday Loan Reform Act refers to loans that last 120 days or less," he said. "So one could argue that anything over 120 days is not under the PLRA. We're trying to rectify that."

Before the Payday Loan Reform Act, loans were only regulated by the Consumer Installment Loan Act, a relatively permissive law. The act, for example, does not mandate verifying Social Security numbers before accepting a loan application, while the Payday Loan Reform Act does.

Consequently, Martinez said, many lenders are switching to 130- or 140-day loans to circumvent the provisions of the new law.

According to the state, a recent analysis of consumer loans showed that many companies, including Payday Loan, offer 121-plus-day loans almost exclusively. The study showed Payday Loan in particular offering "Smart Loans," which last 140 days and have terms well beyond the reform act limits.

In response, Martinez has proposed new rules to govern Consumer Installment Loan Act loans, and provide further protections to consumers. The new rules would prohibit lenders from accepting post-dated checks, debit authorizations or wage garnishing for any loan with an interest rate higher than 36 percent.

Many smaller loan vendors, Martinez said, offer rates ranging from 700 percent to 1,300 percent.

Gov. Rod Blagojevich supports the proposed rules.

"We passed payday loan reforms last year to put an end to the exploitation of consumers," he said. "But now, many of those same companies are using bait-and-switch tactics to get around the law and charge customers unaffordable, astronomical fees."

Payday Loan Store owner Bob Wolfberg, who is also president of the Illinois Small Loan Association, has opposed reform measures in the past, including the Payday Loan Reform Act, which he has said would destroy the small-loan business and eradicate Illinois jobs. The Illinois Small Loan Association represents, by its count, 80 percent of the small-loan business in Illinois.

Wolfberg said he is in favor of 90 percent of the proposed rules, but takes issue with those regarding post-dated checks and other forms of debt collection.

"We believe those violate the law," he said, "and department rules can't violate state-mandated law. We hope to sit down with the department and show them that these rules are illegal."

News Source

The Beacon News, Andre Salles, Staff Writer

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