States Trying to Rein In Payday Loans
Illinois is the latest state to attempt to put a cap on consumer loans, responding to federal agencies easing regulations on predatory, high-cost lending including payday and car title loans. The measure had enjoyed strong backing from the Illinois Black Caucus and consumer groups.
“The efforts of legislators to pass this important bill will put a limit on cruel and exploitative lending practices that cause significant damage to the financial security of older Illinoisans and lead to significant problems paying for essential items like food, health care and medicine,” said AARP Illinois State Director Bob Gallo.
The Predatory Loan Prevention Act passed by the Illinois General Assembly last week would put a 36% interest rate cap on consumer loans. Seventeen other states and Washington, D.C., have imposed new interest rate limits with backing from more than 50 consumer, faith, labor, community, and civil rights organizations.
The state efforts follow rollbacks by federal regulators including the Consumer Financial Protection Bureau (CFPB), which cut back protections against payday loans, and the Office of the Comptroller of the Currency (OCC), which issued a regulation that eviscerates the power of state interest rate caps.
“We applaud the Illinois General Assembly for this much-needed legislation which will protect consumers from triple-digit interest rates that cause devastating cycles of debt,” said Rachel Gittleman, Financial Services Outreach Manager with Consumer Federation of America. “Consumers are facing unprecedented financial challenges, and we know that these lenders prey on communities of color and financially vulnerable consumers. Illinois is on track to become the most recent state to put a stop to these predatory practices.”
Payday loans are sold as a lifeline to consumers in desperate need of cash, but carry an average interest rate of nearly 400%. They are heavily marketed to financially vulnerable consumers who often do not have the means to pay them back and are thus forced to take out new loans, skip other financial obligations, or default on the loan.
The CFPB found that more than 80% of payday loans are re-borrowed within a month, effectively trapping consumers in a cycle of debt.
Consumers advocates say that, nationwide, 70% of voters across party lines support rate caps, especially in light of the COVID-19 pandemic. In Illinois, the average APR on a payday loan is 297%, and the average APR on a title loan is 179%, AARP said.
“In the face of overwhelming public support for rate caps and the lack of regulatory oversight, Congress must act to protect consumers from high-cost lending schemes,” stated Gittleman. “Congress must pass the Veterans and Consumers Fair Credit Act, to cap interest rates at 36% for all consumers,” she concluded.