Illinois lawmakers are mulling a proposal that would stiffen regulations on payday lenders.

The Illinois Bankers Association says it's about time.

Payday lenders offer short-term loans by taking postdated personal checks as collateral. For this service, lenders in Illinois generally charge interest rates of more than 500% per year. But pending bills in both houses of the Illinois General Assembly would cap the annual interest rate at 36% and, most important to the banking industry, force lenders to disclose their rates on in-store posters and in pamphlets.

"The banking industry is highly regulated by state and federal law and must disclose rates," said Linda Koch, senior vice president of government relations with the Illinois Bankers Association. "Many payday loan companies, while they face some regulation by the Illinois Department of Financial Institutions, don't comply with truth in lending."

Payday lenders typically lend only a few hundred dollars to customers for a two-week period - until their next paycheck when they, in theory, should be able to repay the loan. The loan companies charge a fee of about $20 per $100 borrowed - an annual rate of 521.4%, according to the Illinois Department of Financial Institutions.

Payday lenders generally are willing to accept the disclosure provision. But the proposed 36% cap would make it difficult for many to stay in business, because an average of up to one-fifth of their customers default, according to the Community Financial Services Association of America, a Washington-based payday lender trade group.

"If you use 36% as a cap for a bank and allow the loan to go out for a year, it's a great percentage rate," said Abby Hans, president of Superfast Loans in Chicago and Elmhurst. "But 36% only works out to a few cents per day if I'm making on a $100 loan. That doesn't make me enough money to operate."

Even banks are uneasy about capping interest rates if it means putting payday lenders out of business. According to Ms. Koch, the lenders serve a useful purpose because they target customers that banks aren't necessarily interested in.

Twenty-three states have imposed payday loan caps in the past couple of years, according to the Consumer Federation of America, a Washington trade group that opposes payday lenders. Most other states apply existing usury caps to the lenders.

Illinois is one of only seven states without either a payday-lender law or a usury law that applies to payday companies, said Jean Ann Fox, director of consumer protection with the Consumer Federation.

As a result, the number of these lenders has more than doubled since 1997, to almost 1,100 as of June, according to the Illinois Department of Financial Institutions.

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