Two months after state laws restricting payday loans took effect, some loan stores in Illinois are shifting the way they do business, prompting concern among consumer advocates and state regulators.

Some lenders are now selling five- or six-month installment loans that carry annual precentage rates as high as 400 percent. The loans do not fall under new regulations, which apply to payday loans with terms of 120 days or less.

"We have seen evidence of payday loan lenders creating new products to circumvent the law," said Lynda DeLaforgue, co-director of Citizen Action/ Illinois, a consumer group that lobbied for the reforms after working with legislators and some members of the payday loan industry.

"Sometimes I wonder ... if we shouldn't have just banned payday loans to begin with," DeLaforgue said.

As for the idea of regulating loans by capping rates or banning payday loan shops, "the whole notion flies in the face of what government should be in the business of doing," said Gary Mack, spokesman for the Illinois Small Loan Association, an industry trade group. "It should promote competition and allow the market to determine rates."

The Payday Loan Reform Act, signed by Gov. Rod Blagojevich last summer, limits the amount a company can charge for a payday loan to $15.50 per $100. The law caps the total loan amount at $1,000 or 25 percent of the borrower's monthly salary (whichever is less), and it prohibits borrowers from having more than two loans at a time.

The act also outlines a number of disclosure requirements and requires lenders to set up repayment schedules for borrowers who have problems repaying the loans. Plus, lenders must enter loan information into a database that will allow regulators with the Illinois Department of Financial and Professional Regulation to track a company's loans to make sure lenders are not violating the law.

Several loan companies filed suit last week in Sangamon County, seeking to put on hold the requirement to use the database and the provisions allowing the state to track loans to watch for violations.

The suit says the provisions will harm the companies and that the state failed to follow the correct procedures for issuing rules.

"I think our state legislators, when they voted for this reform bill, didn't intend to see the payday loan morph into another product," DeLaforgue said.

But staff members within the Illinois Department of Financial and Professional Regulation, which is charged with enforcing the new state laws, were not surprised to hear about the five- or six-month loan products being marketed around the state.

"This is something we expected," spokeswoman Sue Hofer said.

In 2001, when the typical payday loan in Illinois was for 14 days, the department set out to enforce then-new rules governing the loans. Those restrictions were for loans with terms of 30 days or fewer. In response, payday loan stores started selling 31-day loans.

Before the new law took effect Dec. 6, the department sent a letter to every consumer installment loan licensee in the state informing them of the new consumer protections, Hofer said.

The letter warned companies that the department has the authority to enforce subterfuge provisions – when a business attempts to skirt consumer protections written into the law.

The department started enforcing those subterfuge provisions Wednesday to make sure there's compliance with the intent of those consumer protections, Hofer said.

Regulators want to make sure firms are not trying to steer people away from loans under which consumers would be protected and instead toward other products, such as five- or six-month installment loans that carry higher APRs and fees, Hofer said.

Although department investigators plan to sweep the state throughout the month to check for compliance, they've already been out in full force.

Since Dec. 6, the department has issued fines nearly every day, Hofer said. The largest fine so far was $10,000, issued to Cottonwood Financial for allegedly not complying with the intent of the consumer protections, Hofer said. Cottonwood, which runs The Cash Store and Cash ASAP and has 45 stores in Illinois, allegedly steered customers toward a 140-day loan product.

"I haven't heard many (lenders) are getting out of the very short-term loan, but it does not surprise me there are more consumer installment loans out there," Mack said.

Some members of the Illinois Small Loan Association always offered products other than payday loans, including five- or six-month installment loans, he said.

Since the law took effect, the state's payday loan lenders have faced financial challenges, such as meeting their expenses, Mack said. Members are concerned national chain operators of payday loan stores will move more rapidly into Illinois and cut out the independent shops.