Chicago Tribune

When a law governing payday loans took effect more than two years ago, Illinois officials ballyhooed the millions of dollars saved and the burdens lifted for cash-strapped borrowers.

But consumer advocates say a major player in the loan industry has used a loophole in the law to shift customers to loans with no caps on interest rates, allowing them to charge an average 279 percent annual interest on loans to mostly female, minority and low-income borrowers.

"They are getting around the act, and it is business as usual," said Tom Feltner of the Woodstock Institute, a Chicago-based research and policy group that has tracked the practices of the loan industry in the state.

Under the 2005 law, the state invoked a wide series of regulations for payday loans under 120 days. So lenders began shifting their customers to short-term loans longer than 120 days, Feltner said.

He pointed to a study of lawsuits against delinquent borrowers filed between January 2007 and March in Cook County Circuit Court by AmeriCash Loans LLC, saying the actions by the large Des Plaines-based firm reflect the industry's overall activity.

The most striking finding, Feltner said, was that half of the suits filed by AmeriCash before the law took effect involved payday loans, while all the cases filed afterward involved short-term loans.

Brian Hynes, a lobbyist for AmeriCash, rebutted the groups' findings, saying the court cases are only a "snapshot" of the firm, which has "thousands of customers."

Begun as a payday lender in 1997, the company shifted several years ago to short-term consumer loans. Only 2 percent of its loans last year were payday loans, Hynes said. Short-term loans, he added, are "much more customer friendly" and have a lower default rate.

As for his firm's customers, Hynes said the average borrower earns more than $35,000 a year.

But Lynda De Laforgue of Citizen Action Illinois, whose research arm took part in the study, disagreed. She pointed out that the latest study matches previous findings that most of the firm's court cases involved women and borrowers from minority and lower-income communities.

So, too, she noted, annual interest rates on the firm's short-term installment loans since 2004 have jumped to 279 percent from around 140 percent, and the amount borrowed has climbed to $1,227 from $784. The latest study will be released Friday.

The biggest problem for consumers facing loans of 120 days or more, Feltner added, is that they often wind up paying far more money because of the length of the loan.

Feltner said the groups studied AmeriCash, one of the biggest lenders in Illinois, with offices also in Wisconsin, Missouri, Oklahoma, Arizona, and Texas, because it is "more aggressive than other lenders" in filing court cases. The groups have relied on court cases, he explained, "because there is no public information on what these lenders are doing."

Shifting the length of the loans to get around state law is not new.

After Illinois in 2001 imposed regulations on payday loans of 28 days or less, "the payday industry responded by extending the length of the loans to 31 days or longer," state officials pointed out two years ago.

As a result of the 2005 law, the state began tracking payday loans, and the latest figures show that the number of loans fell to 382,668 in 2007 from 597,313 in 2006. But the state does not track the number of short-term consumer loans, and the industry has refused to volunteer the figures, said Susan Hofer, a spokeswoman for the Illinois Department of Financial and Professional Regulation.

"There have been some consumers who have called us saying they felt like they were signing a payday loan but ended up with a consumer loan," she said.

The release of the finding comes amid a drive in Springfield to deal with gaps in the 2005 law.

State officials are backing Senate Bill 862, which, said Hofer, would impose the protections and interest rate ceiling on short-term consumer loans.

But consumer advocates are focused on Senate Bill 1993, which recently was approved in the Senate and awaits House action. The bill would amend the 2005 payday law to extend its protections to loans longer than 120 days.

Steve Brubaker, a lobbyist for the Illinois Small Loan Association, which represents about half the state's lenders, said that his group supports the extension, but with compromises expected to be carried out in the House.

The industry's major fear, he said, is that short-term consumer loans would be swept aside, forcing lenders to rely solely on payday loans. If that happens "you will see many stores close," he said.

Illinois is the only state that regulates payday loans but does not apply similar rules to short-term consumer loans. Thirty-seven states allow payday loans.

sfranklin@tribune.com