By Stephen Franklin
Monique Garcia
July 24, 2008

State officials moved Wednesday to close a loophole that has allowed title loan companies to dodge consumer protection rules the state implemented seven years ago.

But the change has no impact on interest rates that typically run at 300 percent annually and higher.

As detailed in a Tribune story last month, consumer advocates in Illinois have been pushing for some time for the state to exert more control over the auto title loan industry.

Wednesday’s action follows a similar effort in 2001, in which the state applied similar protections to title loans spanning 60 days or less. The industry responded by extending the length of loans to 61 days or longer.

"This is something that we’ve been looking at for a while," said Susan Hofer, spokeswoman for the Illinois Department of Financial and Professional Regulation, which filed the new rules on Wednesday.

"We want to make sure borrowers who are forced to use the title of their car as security understand what they are getting into."

The new rules would eliminate the time frame in the definition of title loans so lenders would have to abide by several consumer protection methods, including limiting the number of times a title loan may be refinanced and preventing companies from lending to those who had taken out another short-term loan 15 days prior.

Of the 16 states that allow high-interest auto loans, Illinois is the only one that did not limit interest rates, according to the Woodstock Institute, a Chicago-based community think tank. It is also the only state without a single consumer protection over auto title loans, such as limiting the number of such loans a consumer could obtain or capping the length of the loans.

On Wednesday, consumer groups called the rule changes a "good start," but said they were concerned that officials didn’t seek a cap on fees.

"Without a cap on fees, I am not sure how much this rule can really curb predatory lending practices," said Lynda de Laforgue, co-director of Citizen Action/Illinois.

Laforgue said she was also concerned about a provision in the new rules that would boost the loan amount borrowers could receive from $2,000 to $4,000.

Hofer said the increase was to keep loan amounts in line with the ever-increasing value of vehicles being leveraged. At the same time, she noted that the order doesn’t change interest rates charged by lenders.

In the last decade, auto title loan firms have spread across the U.S. and branched online, where they usually charge interest rates twice the 300 percent annual rate found at most locations, according to the Consumer Federation of America.

Just as states have gone after payday loan businesses in recent years, stirred by consumers’ complaints about high interest rates, several have taken the same tact with auto title lenders. Iowa capped auto title loans at 36 percent annual interest last year following similar actions in Oregon, Florida and Kentucky.

Illinois’ new rules are expected go into effect in about 90 days. There is a 45-day public comment time, followed by 45 more days in which the joint committee on administrative rules can act on proposals.

In a study last year, the Woodstock Institute counted 63 auto title loan companies operating 260 offices across the state.

Looking at cases brought in Cook County courts against borrowers by the auto title loan companies, the organization found that 64 percent of the borrowers live in mostly minority communities.

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