Independent payday lenders in Illinois say a new state law that caps fees on payday loans could wind up driving many of them out of business.

Steve Brubaker, the executive director of a trade group that represents independent payday lenders, said that the law, which takes effect Dec. 1, favors large national chains such as Advance America, which has dozens of outlets in Illinois. The law would lower lenders’ fees by more than 25% — a hit Mr. Brubaker said many smaller lenders could not absorb.

“It is a law that helps national chains,” said Mr. Brubaker, the executive director of the Illinois Small Loan Association. “They can, just by volume, make a profit at a lower rate.”

The Illinois law will be one of the most restrictive in the nation. It limits fees on payday lenders to $15.50 per $100 and caps total loan amounts at $1,000 or 25% of the borrower’s monthly salary, whichever is less.

It also specifies that borrowers cannot have outstanding payday loans for more than 45 consecutive days, and requires that payday lenders give delinquent borrowers a 56-day repayment period with no additional charges. Borrowers will not be allowed to have more than two loans outstanding at any one time.

Payday lenders will further be required to report customer loan information to a central database and to consult the database before making a loan.

Illinois will be the third state with such a database, after Florida and Oklahoma, said Tony Colletti, an executive vice president at the Community Financial Services Association of America, which represents large payday lenders.

Mr. Colletti said his members are on board with the law, signed June 9 by Gov. Rod Blagojevich, a Democrat. His group worked closely with the governor and consumer advocates to write a measure that protected consumers but recognized a marketplace need for short-term credit, he said.

“The key in Illinois was when the industry accepted the concerns of the consumer groups and decided to deal with them and when the consumer groups accepted that payday lending was an option that gives consumers flexibility,” Mr. Colletti said.

To be sure, consumer groups would have preferred an outright ban on payday lending. But Lynda DeLaforgue, the co-director of Citizen Action Illinois, said that instead of fighting them, her group “has taken a position that we want to work with the payday lenders to make sure that the products are not abusive and they are a short-term loan product that should only be used as a last resort.”

Mr. Brubaker said the Illinois Small Loan Association, which represents about half of the 1,000 or so payday and other short-term lenders operating in the state, would track how many independent lenders are forced to close or sell as a result of the new law.



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