As I continue my transition from a bank executive to a non-profit leader, there are moments that make me pause, scratch my head, and question whether the world is wired correctly. One such moment occurred in early January when the Illinois Pawn Association (IPA ... and not the beer) successfully used horribly flawed research to sow enough doubt among Illinois legislators to effectively block legislation that would close a loophole allowing pawn shops to disregard the state interest rate cap of 36% on loans.
Instead, pawnbrokers can charge interest of as high as 243%.
Pawnbrokers and their lobbyists descended on the Capitol Building in Springfield like locusts, presenting themselves as versions of George Bailey or Jimmy Stewart, small family-run businesses that have been in their communities for generations. Notably, pawn shops operated under a 36% rate cap from 1909 to 1991.
This raises an obvious question: why were their parents and grandparents smart enough to thrive in a 36% rate environment, but this new generation can’t (or won’t) figure it out?
No matter how you slice it, the current pawnbroker generation’s 243% rates are predatory.
The pawn lobby relied on stories from clients captured in a cycle of debt who felt they didn’t have any other options (which they do); pawn shop owners who said the entire industry would shut down under this rate cap (which it won’t); and a research paper from two professors in Mississippi and a rogue economist from the Federal Reserve that is so flawed it would fail peer review from a high school economics class.
Protect existing law against predatory loans
There’s currently a national movement led by the predatory lending industry to make sure that laws like the Predatory Loan Prevention Act (PLPA) don’t spread throughout the country. In Illinois, this law is saving borrowers at least $400 million a year, so there’s a lot at stake for them and for us. Our opponents are trying to make the case that the reduction in predatory lending in Illinois following the PLPA is hurting people. But putting an end to this type of lending was the whole idea! In reality, people are no longer getting gouged by financial predators and they are finding safer alternatives when they need cash.
The narrative that getting a loan at 200% APR or higher is a sign of economic prosperity needs to be called out for what it is — a selfish lie. The truth is that saddling a person who is struggling financially with high-cost debt is like tossing a brick to a drowning person.
The PLPA is working, we need to protect it, and the pawn industry must be included.
Public support, fewer bankruptcies
We’re not alone in our belief that this law is working. Our organization commissioned a professional and academically valid poll asking Illinoisans about how they’re doing now that rates are capped. The results showed overwhelming support for the PLPA — 86% of adults to be exact — and its ability to lower the cost of credit to those who can afford it the least.
Since the law took effect, Illinois is outperforming all of our neighboring states (which don’t have this rate cap) in the decline of bankruptcy filings. Consumers who are struggling are being effectively guided to more responsible and affordable alternatives at the expense of the enormous profits the predatory lending industry has sucked out of our state for a generation.
The average person rightly thinks even 36% is high. The pawnbrokers have been effective in presenting an alternative view of reality — one in which a loan charging 243% APR is aiding low-income consumers.
The reality is that pawnbrokers are not part of the solution. They’re part of the problem. We believe the money spent lining the pockets of pawnbrokers can be better spent on food, rent and other necessities. Consistent with our mission, we will continue the fight to make lending more affordable in Illinois, and this includes closing the pawnbroker loophole.
Horacio Mendez is president and CEO of the Woodstock Institute.
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