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
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.
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
Currently the North Side Federal Credit Unions 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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