Payday loans, which offer unsecured, short-term credit at an exorbitant rate, have been shown to target low-wealth communities and trap countless borrowers in a long-term cycle of debt.  It is this cycle of debt that led dozens of community and consumer groups from across the state to demand an end to high-cost, unsustainable payday lending.

For many years, these groups, Woodstock Institute among them, advocated for an across-the-board rate cap of 36 percent for an industry that routinely offers loans at rates in excess of 700 percent.  After years of negotiations with industry representatives and policymakers it became clear that this rate cap would do irreparable harm to the profitability of the industry—a situation that we could live with, but many others clearly could not.

The compromise: slightly higher rates, with strong consumer protections enforced by a third party.  Key among these protections: ensuring borrowers can afford their loans and ending back-to-back loans that trap borrowers in an endless cycle of debt.  No 36 percent rate cap to be sure, but this arrangement assures that every borrower gets every protection on every loan—every time.

It sounds simple, but community and consumer advocates have tried to accomplish similar reforms several times before.  Twice in ten years some payday loan companies in Illinois have to chosen to change the terms and conditions of their products to avoid complying with these simple consumer protections.

Most recently, this occurred in 2005, when the General Assembly mandated a consumer reporting service for all payday loans to enforce limits on aggressive over-lending and back-to-back loans.  Within months, some payday loan companies modified their products to evade these protections, avoiding compliance requirements all together.  The intent of the 2005 law was to cover all payday loans and ensure that every loan was entered into the database, but these maneuvers meant that only a handful ever were.

As we wait patiently for the new law to go into effect in March 2011, it is important to remember the value of applying consumer protections evenly across the entire industry.  Lenders can be assured that there is a level playing field and borrowers will know that every loan they take out has similar protections.  Moreover, compliance fees are paid by the lender, and rightfully so, since every attempt to evade the law makes the process more complicated and more expensive.   Illinois taxpayers, facing record shortfalls, are not, and should not, be on the hook to police an industry that twice before has attempted to avoid any kind of oversight.

Did the General Assembly vote almost unanimously to require thousands of payday loans to be entered into to the consumer reporting service and subject them to new compliance fees?  Certainly.  But let’s not lose sight of the fact that to the purpose of that vote was to close the payday loan loophole and protect consumers from unregulated loans that should have been regulated all along.