If you or someone you know has ever considered a payday loan to meet a sudden emergency, please read this first. This summary only recaps approximately 50% of this article, please read the whole article. at: http://www.suntimes.com/output/news/cst-nws-payday15.html. plk
The 'wild, wild west' in loans
August 15, 2004
BY CHERYL L. REED Staff Reporter
When Brenda Spinato's furnace went out on a freezing day in January 2001, she had two choices: Take out a two-week payday loan or borrow from her parents. Spinato was 29 years old and a fiercely independent single mother of three girls. "My pride was a little high," said Spinato as she looked around the immaculate living room of her brick ranch in River Grove. For a quick $1,000 cash loan, Spinato now owes $10,743 -- most of it interest that accumulated for more than three years at 521.43 percent annually. "I feel they waited so long to collect so that they could charge so much in interest," Spinato said.
A payday loan is a short-term loan for a small amount of money, usually $100 to $1,000, from a storefront lender. Borrowers submit a pay stub and a bank statement. The interest charged is an average of 512 percent in Illinois.
Spinato says she got better rates from a neighborhood gang-banger who once loaned her $700 and allowed her to pay it back over time. Street loans with illegal loan sharks in Chicago charge 2 to 5 percent a week, which is 104 to 260 percent annually. Living paycheck to paycheck, Chicago's working class is stung with interest rates on payday loans ranging from 101 percent to 1,541 percent, a Chicago Sun-Times investigation shows.
Only Illinois and six other states allow payday lenders to charge whatever the market will bear. "We're the largest state that doesn't regulate this industry. It's the wild, wild west here," said Michele Latz, director of Illinois' Division of Financial Institutions, which oversees payday lenders.
The industry has fought the state's attempts to regulate it -- hiring former Gov. James R. Thompson to challenge the state's authority before the Illinois Supreme Court last year. Even Supreme Court Justice Mary Ann McMorrow had to recuse herself; she owns an interest in currency exchanges where some payday loans are issued. But Illinois Attorney General Lisa Madigan wants payday loan rates capped at 36 percent -- which payday lenders argue would drive them out of business in Illinois. "It's going to continue to be a battle, but at the end of the day, we're going to win," Madigan insists.
To recoup their high interest, payday lenders use the municipal courts as the ultimate bill collector. They can pass judgments and garnishee wages. Despite thousands of court judgments against defaulting borrowers, Illinois' payday loan industry contends large interest cases, such as Spinato's, are rare.
But the Sun-Times found dozens of big-dollar cases similar to Spinato's, including one in which a 61-year-old Chicago woman took out two $600 loans in 2000 from 10 Minute Payday Loans. With 573.57 percent interest accruing over 18 months, the woman's final bill came to $11,789. That case, says Bob Wolfberg, president of the Illinois Small Loan Association, should never have happened. "The president of the company was shocked," Wolfberg said. As a result of the Sun-Times inquiry into the case, the attorney who pursued such high interest has been fired, Wolfberg said.They are short-term loans for small amounts," Wolfberg said. "A payday loan is similar to using a taxi cab -- good for a short trip across town but not intended to take you to Orlando." Most payday loans are paid back on time, says Wolfberg. They serve a vital need for people requiring emergency cash before payday.
The payday lenders say they have to charge hefty finance fees to turn a profit. Conventional banks have shied away from such low-dollar, short-term loans because their administrative costs make them unprofitable. While some payday loan stores stop charging interest after the due date -- usually two weeks to 31 days -- Wolfberg's association is adamantly opposed to any law that would cap interest and limit loan amounts.
Another payday lender association favors restrictive laws. "We believe a payday loan should be a good loan on the front end," said Tony Colletti, spokesman for the Consumer Financial Services Association, which has been working with community groups to draft a law. "You should not try to make your money on the collection side through triple damages or attorneys fees or interest building up."
Despite opposition to the payday industry that included an influential Catholic priest, legislation to regulate the industry has only met defeat. "I don't have enough fingers or toes to give you all the lobbyists, but it's a $2.4 billion industry," says state Sen. Schoenberg plans this fall to introduce -- for the third time -- a bill that would curb what he sees as predatory practices. "Payday loans exploit people's financial vulnerability and suck them deeper into a whirlpool of debt that they cannot extricate themselves from," Schoenberg said.
At least one Chicago municipal judge has ruled that payday loan interest is "unconscionable" and "obscene." He's ordered the court not to enforce the accrued interest. "Only Tony Soprano gets interest rates like that," Judge Wayne Rhine said in court. Four years after his decision, Rhine remains adamant: "These payday loan folks are predator loan people," he told the Sun-Times.
"You have to be very very desperate to go to them -- so desperate that you'll sign anything to get the money. Usually it's someone who is facing perhaps an eviction, a medical bill or an emergency where the need for cash is urgent and they have no other place to turn."
Such was the case for Amy Peters, who in December 2000 took out a loan for $300 after she had an emergency appendectomy and had missed work as an office temp. Peters was overwhelmed with hospital bills, and her check to E Z Payday Loan in Crystal Lake bounced. Three months later, the store sued her, charging three times the amount of the check -- which is allowed by law -- plus attorney fees. "It's like they are legalized loan sharks," said Peters, a 27-year-old single mother who lives in Wonder Lake. "It was the worst mistake of my life."
Mark Maksymowicz, a 39-year-old father of three girls, says his ability to pay back two $600 loans at 1,541.11 percent interest was complicated by his wife Wendy's illness. She died of a brain tumor last November. "I was missing work left and right," he said. He contends he made payments but they were never credited to his account.
The Payday Loan Store is suing Maksymowicz for $2,010.
Despite the industry's claims, Judge Rhine says payday loans have a high default rate. He and other Chicago municipal judges typically knock off interest over 100 percent. With an annual caseload of 66,000 cases, some payday cases get by, like Spinato's, which came before Rhine in May. "That one must have snuck past me," Rhine said with regret. "The interest should have been knocked off. If I had been aware of it, it would not have gotten through." In July, she filed for bankruptcy court protection from creditors to save her house. She now has to work out a repayment schedule with the loan store.
Spinato insists she tried to pay back the loan after her check bounced in 2001, but she was told she would hear from the store's attorney. Over the years, Spinato admits she received numerous phone calls from collectors, but in each case, she says, they demanded payment in full, which kept going up because the interest kept accruing.
Michael Greene, the bill collector in charge of Spinato's case, details a different scenario. He says Spinato's collection file shows that she agreed numerous times to repayment plans she didn't fulfill. "But she never kept her word on at least six conversations with my agency. He added: "I don't think payday loans are lily white either.
Rochelle, a 40-year-old legal secretary who lives in Glen Ellyn, compared her payday loan to a "death sentence."
"It's like you have to cut off your right leg. They'll stop at nothing," said the mother of two teenagers. Just before Thanksgiving in 2000, Rochelle took out an installment loan from a Payday Loan Corp. store in downtown Chicago.
Rochelle made two payments and then she says she lost her job. This spring, Payday Loan Corp. took Rochelle to court. The judge ordered her to pay $3,477, most of it interest, and garnisheed her wages.
Even when the interest stops after six months -- as some contracts stipulate -- the amount can clobber those who live paycheck to paycheck, as most payday clients do.
Edina, a 26-year-old customer service representative and mother of one, became stretched with bills in 2002.
She took out six loans from several Americash stores totaling $1,500. "I kept trying to pay off a little at a time, and they aren't interested in you paying anything unless you pay the whole amount." After six months, the interest had accrued to $3,954. Americash -- the most aggressive pursuer of defaulted loans in Chicago -- took Edina to court and was awarded a judgment of $6,029. Paying 15 percent of each paycheck, it will take her a year and a half to pay off the judgment.
Half of all bankruptcies involve payday loans, claims bankruptcy attorney Melvin Kaplan. "Payday loan stores aren't interested in working out payment plans," he said.
Since 1995, Chicago mail handler John Gray has filed for bankruptcy protection three times after falling behind in payday loans.
Summarized by Copernic Summarizer