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Pay Day Loan Reform — and Alternatives

Two members of the Illinois congressional delegation are offering competing legislation to address predatory pay day lending, and local consumer advocates are lining up in support of Senator Richard Durbin’s bill and against one authored by Representative Luis Gutierrez.

Meanwhile, community organizations that provide financial counseling say much stronger protection against predatory lending is needed — while community credit unions are pioneering affordable alternatives to pay day loans.

Gutierrez’s bill, HR 1214, would limit interest and fees to $15 on a $100 loan, but since that applies to a single pay period, it amounts to an annual rate of 390 percent for a two-week loan, advocates point out. Durbin’s bill, SB 500, would cap interest for all consumer loan products at a 36 percent annual rate.

The House Subcommittee on Financial Institutions, which Gutierrez chairs, will hold a hearing on HR 1214 tomorrow (April 2).

That bill would provide congressional authorization “to a product that is not good for low-income borrowers,” said Lynda DeLaforgue of Citizen Action Illinois. “It sends a signal that this is a legitimate product.”

The cap on interest and fees, similar to one passed by Illinois in 2005, includes the same loopholes that have allowed pay day lenders to develop new predatory products, said Tom Feltner of the Woodstock Institute. In Illinois, after caps were instituted on loans up to 120 days, pay day lenders developed longer-term pay day loans.

And like the Illinois law, the optional repayment plan mandated in HR 1214 would “do little to break the back-to-back refinancing that keeps borrowers on the hook for interest payments, while never reducing the principal,” Feltner said.

Also opposing HR 1214 are the National Community Tax Coalition, a project of the Chicago-based Center for Economic Progress, and the Illinois Asset Building Group.

Gutierrez has argued that Durbin’s bill lacks the votes to pass and that his own bill would establish protections in states that have no regulation of pay day lending. “I fear that both extremes in this debate do prefer the status quo,” he said in a statement.

“The practical impact of Congressional passage of this bill will be to stop the progress of reform in the states,” argue ten consumer groups, including Consumers Union and the Consumer Federation of America, in a letter to Congress (pdf). They add that “the provisions of HR 1214 haven’t worked in states where they’ve been tried.”

“A lot of states are making headway,” said LaForgue. Ohio, Oregon, New Hampshire have capped rates at far lower levels, and Arkansas and the District of Columbia have eliminated pay day loans. “It’s time to start cracking down, not opening the door,” she said.

No Loopholes

The Durbin bill would eliminate all loopholes by covering all consumer loans. It would enact a promise by President Obama to extend to all consumers the 36 percent cap on consumer loans to military families which Congress passed in 2006.

It’s backed by 100 consumer, civil rights, and civic groups, who argue that “cleaning up the finance industry is essential to a sustainable economic recovery” and “will keep billions of dollars in the hands of low and moderate-income consumers, helping to stimulate the economy without costing taxpayers a penny.”

In Pilsen, Little Village, and Back of the Yards, pay day lending continues to plague low-income families, despite the 2005 Illinois reform, said Kristen Kanara, who directs financial counseling for The Resurrection Project. “We need stronger legislation that really goes after the companies that prey on our families,” she said.

Pay day lenders in the Chicago area continue to charge “incredibly high interest rates” with terms that “move people into a revolving cycle that they can never get out of,” she said. “The fees and interest rates build up till they’re so high, it’s impossible to pay off the loan.” Borrowers can end up owing two or three times the amount of the loan they received.

Meanwhile, community credit unions have developed affordable pay day loan products that present an affordable alternative to predatory loans — and prove that such lending can be profitable, according to a 2007 study by Woodstock. It’s an evaluation of short-term loans available from six credit unions, including the South Side Community Federal Credit Union in Chicago. While loan transactions could be conducted in a matter of minutes, “common-sense underwriting procedures” were applied and interest rates were no higher than 18 percent.

Currently North Side Community Federal Credit Union offers a $500 six-month loan to members at 10.5 percent — about $26, in addition to a $30 application fee. Applicants with low credit scores are required to take financial education classes.

“We have the old-fashioned belief that you should make loans that customers will be able to pay back, rather than loans they’ll have to refinance out of,” said North Side manager Ed Jacobs.

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