Burt Constable
Daily Herald Columnist
July 19, 2008

Arlington Heights business owner Bob Griffith balked as soon as he read the letter from a payday loan company demanding that he garnish the wages of one of his employees.

"Is this even legal?" Griffith wondered. "If it is legal, then shame on our legislators."

Such payday loan tactics are legal, and our legislators apparently have to be shamed into closing the loopholes the companies slip through.

In 2005, Gov. Rod Blagojevich signed a payday loan reform law designed to end what he called "a nightmare for thousands of working families who find themselves trapped in debts they can’t repay."

The law established barriers to protect consumers.

"It went into effect in December and by spring of ’06, the industry had morphed. They drove a Mack truck through the walls," says Lynda DeLaforgue, co-director of Citizen Action/Illinois, the state’s largest public interest organization and a progressive political coalition dedicated to social causes.

"The law only affects loans of 60 days or under, so they all went to 61-day products," Alan Alop, deputy director of the Legal Assistance Foundation of Metropolitan Chicago, says of the payday loan business.

Alop suggests the best way to stop abuses would be to adopt the federal bill introduced late Thursday by our U.S. Sen. Dick Durbin that would cap interest rates nationwide at 36 percent.

"I’ve seen them over 1,000 percent in Illinois," Alop says of payday loan rates. "There’s no rule. They could charge 20,000 percent."

As states such as Ohio cap interest rates at 28 percent, DeLaforgue says Illinois’ inaction "moves us toward becoming the national breeding ground for usury."

Cash Now Loans in Palatine did nothing illegal when a 50-year-old single working woman from Palatine came to them in December seeking a little holiday spending money.

"Usually we get a Christmas bonus every year, and we didn’t get one this year," says the woman, who asked that her identity not be disclosed. "I went to a payday loan, thinking that I knew what the interest would be, but I’d pay it off after I got my tax refund."

She borrowed $700 at 521.47 percent interest – 26 times the high interest rates charged by a typical credit card.

"I didn’t really know how these things worked," says the woman, who doesn’t own a credit card. "I borrowed $700 and I’d be paying back $2,600.14."

She made her first payment of $80.01 on the day after Christmas, but was in default by the time she planned to use her tax rebate and stimulus check to pay off her "balloon" balance of $840 due June 25.

Her tax refund disappeared when "something with the car came up," she says. Bank fees for bouncing checks swallowed a chunk of her stimulus check.

"I still owe the original amount plus interest," she says, adding that the payday loan she saw as an easy solution to a temporary money problem "has made it worse now."

"It really is a debt trap because nobody can make that final balloon payment," DeLaforgue says. "We do believe the business model is to perpetuate the cycle of debt. The customer becomes captive."

Sitting in his Cash Now Loans office in a Palatine strip mall, Henry Magiera counters that charge with testimonials from recovering alcoholics, gamblers, cancer patients and others who say they used his service in the last eight years to keep from falling into further financial problems while they got their lives in order.

"My customers are very happy I’m here," Magiera says. "We’re the last ones on the block who are going to give them money."

When a bank charges $35 for bouncing a $7 check, "I’m the lesser of two evils," Magiera says.

As if on a cue, a former customer comes in, thanking him for lending her some cash when she was down.

"This place has always been great to me," she says.

She’s a success story. Others are not. Designed as a short-term solution, extending payday loans for more time is the equivalent "of putting someone in a cab for a trip to Florida," DeLaforgue says.

One recent study by the Woodstock Institute, a public action foundation that deals with economic development, showed the average borrower in Chicago and the collar counties paid a $1,769 finance charge to borrow $1,224 for 319 days.

For poor people who qualify under poverty guidelines, Alop says he’s had success arguing in court that the interest rates (while agreed to by both parties) are "unconscionably high."

"We negotiate with payday loan companies to get the loans canceled," Alop says, noting the Legal Assistance Foundation (phone 312-341-1070) has won rate reductions and even gotten money returned to borrowers in some cases.

Magiera’s testimonials from happy customers aren’t common in the payday loan industry, Alop says.

"It’s mainly desperate people and desperate people don’t always do the smart thing," Alop says. "There are some folks who it works for, but in my experience … 90 percent regret ever doing it."

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