Brett Kepley | Illinois has limitations on payday loans

Brett Kepley | Illinois has limitations on payday loans

A couple weeks ago, the administration of the 45th president announced it is reversing a regulation devised by the Obama administration on payday lenders to make the loans less risky and onerous on the borrowers.

What is a payday loan anyway?

It is a loan designed to be repaid in a relatively short term (a few days, perhaps a few weeks). While easy to obtain, it comes at the cost of enormous interest.

Each state regulates (or not) the terms of such loans Perhaps as much as 400 percent of the principal is charged as interest.Illinois has restrictive limitations on such loans which have annual interest rates of more than 36 percent. Generally, the total principal loaned cannot be more than the lesser of $1,000 or 25 percent of the borrower's gross monthly income, or 22.5 percent of the gross monthly income if the loan is payable in installments. Generally, such loans may not have a payment due less than 13 days nor exceed 120 days.

No loan may be made where the borrower becomes indebted to one or more payday lenders for longer than 180 consecutive days. Interest cannot be charged for greater than $15.50 per $100 loaned, and must be fully amortized. No finance charge may be imposed after the final scheduled maturity date.

Most states have similar limitations on the amount of principal loaned and/or interest charged. Several states prohibit payday loans entirely.

The purpose of these loans is short-term cash availability. The name originally derives from the idea that repayment will be made when the borrowers get their next paycheck.

The problem is that borrowers might become buried in the interest should they lose their job, or have other emergencies they spend their next paycheck on. These include uninsured medical bills; student loans not coming through in a timely manner to cover housing; or unanticipated repair expenses on an auto. Many federal employees recently turned to payday loans to try to survive the government shutdown.

The Obama administration restrictions that were to be implemented by the Consumer Financial Protection Bureau, which is the federal agency tasked with protecting consumer financial rights, were to mandate that no consumer could qualify for such loan unless shown that the applicant has the ability to repay the loan under its proposed terms. This was based on a formula of income and expenses of the applicant.

This regulation arose from research suggesting that one in four loans were not paid back in the original term, and such loans were reborrowed on average nine times before being paid off. This resulted in an average cost of $520 in charges per consumer. The criticism is that payday lenders are predatory. There are twice as many such lenders in the nation than there are McDonald's.

The CFPB response to the regulatory rollback is that the restriction would cut down on the amount of payday lending, thereby impairing competitiveness in the industry.

In effect, the CFPB is suggesting it is protecting consumers by removing a protection.

Excuse me while I fall out of my chair in hysterical laughter.

Brett Kepley is a lawyer with Land of Lincoln Legal Aid Inc. You can send your questions to The Law Q&A, 302 N. First St., Champaign, IL 61820. Questions may be edited for space.