South 51 Development Corp. v. Vega, No. 1-01-3251

CourtUnited States Appellate Court of Illinois
Citation269 Ill.Dec. 731,781 N.E.2d 528,335 Ill. App.3d 542
Docket Number No. 1-01-3260., No. 1-01-3255, No. 1-01-3251
PartiesSOUTH 51 DEVELOPMENT CORPORATION, d/b/a Cash Express of Southern Illinois; Midwest Title Loans, Inc.; Cottonwood Financial, Ltd.; Advanced America, Cash Advance Centers of Illinois, L.L.C., d/b/a National Cash Advance; Check Into Cash of Illinois, LLC; and Check `N Go of Illinois, Inc., Plaintiffs-Appellants, v. Sarah D. VEGA, as Director of the Illinois Department of Financial Institutions, Defendant-Appellee.
Decision Date26 November 2002

Winston & Strawn (Dan K. Webb, Bruce R. Braun and Raymond W. Mitchell, of counsel); Thomas Rakowski & Associates, Chtd. (Thomas R. Rakowski, of counsel), Chicago, for Advance America, Check Into Cash and Check 'N Go.

Lord Bissell & Brook, Chicago (Terrence P. Canade, Hugh C. Griffin and Hugh S. Balsam, of counsel), for Cottonwood Financial.

Schiff, Hardin & Waite, Chicago (Ronald S. Safer, of counsel), for South 51 Development.

Law Offices of Lance T. Jones, Springfield (Lance T. Jones, of counsel), for Illinois Small Loan Association.

Atlantic Legal Foundation, New York City (Briscoe R. Smith, of counsel), for Community Financial Services Association of America.

William J. Harte (William J. Harte, Special Asst. Attorney General, of counsel); Williams, Collins & Bax, P.C. (David W. Ellis, Special Asst. Attorney General, of counsel); Office of the Attorney General (Deborah L. Ahlstrand, Assistant Attorney General, of counsel), Chicago, for Sarah D. Vega.

Richard A. Devine, State's Attorney of Cook County, Chicago (Robert J. Ruiz, Thomas A. Riech and Frank J. Parkerson, of counsel), Amicus Curiae.

Tabet, DiVito & Rothstein, LLC, Chicago (Gino L. DiVito, Cesar A. Tabet, Karine H. DeHayes, of counsel), for Amici Curiae Monsignor John Egan Campaign for Payday Loan Reform and fellow Amici.

AARP, Washington, DC (Deborah M. Zuckerman, AARP Foundation, Michael Schuster, AARP, of counsel), Amicus Curiae for AARP.

Justice CERDA delivered the opinion of the court:

This case involves a challenge by plaintiffs, South 51 Development Corporation, d/b/a Cash Express of Southern Illinois, Midwest Title Loans, Inc., Cottonwood Financial, Ltd., Advanced America, Cash Advance Centers of Illinois, L.L.C., d/b/a National Cash Advance, Check Into Cash of Illinois, LLC, and Check `n Go of Illinois, Inc.1, to the validity of legislation amending the Consumer Installment Loan Act (the Loan Act) (205 ILCS 670/1 et seq. (West 2000)), and certain short-term lending rules promulgated pursuant to the amendatory legislation by defendant, Sarah Vega, as Director of the Illinois Department of Financial Institutions (Department). Upon the Director's motion, the circuit court dismissed plaintiffs' lawsuit. Plaintiffs now appeal and, upon leave from this court, several amici briefs were filed in support of each party's respective positions. For the reasons that follow, we affirm.

The Department is the Illinois agency responsible for regulating the practices of certain financial lending institutions conducting business in this state. Lenders specifically engaged in the business of extending loans in principal amounts not exceeding $25,000, and charging a rate of interest greater than that permitted by State usury laws, are regulated by the Department under the Loan Act and departmental regulations promulgated in accordance with the Loan Act's statutory scheme. One type of lender falling within the Department's oversight includes so-called "short-term lenders," which are generally characterized by the small dollar amount and short duration of their loans.

In mid-1990, the Department was commissioned by our General Assembly to conduct a study of the short-term lending industry in Illinois. The Department's findings and analysis were published in a formal report, entitled Illinois Department of Financial Institutions Short Term Lending Final Report (hereinafter, the Report), issued in September 1999. According to the Report, the number of short-term lenders operating in Illinois has increased dramatically over the past two decades. The State's industry is generally comprised of two types of lenders: payday lenders and title-loan companies. Payday lenders are individually licensed offices that lend relatively small amounts of money to the consuming public for terms not usually exceeding two weeks, to coincide with the borrower's pay cycle. A general lack of preloan procedures allows borrowers to obtain cash quickly and easily. The borrower secures her loan by providing the lender a postdated check, covering the amount financed plus a finance charge, which is held until either the loan is satisfied or the check is cashed. On average, payday lenders charge $20 per $100 borrowed for the typical two-week period. Computed over a one-year period, the lender's fee translates to an annual percentage rate (APR) of 521.43%.

Title-loan companies are also individually licensed offices offering single-payment loans, usually for a term of 30 days, that are secured by the customer's automobile title. Like payday lenders, title lenders provide consumers ready access to cash and charge annual interest rates well in excess of 100%.

While acknowledging that short-term lenders fill a credit void for a segment of the borrowing public, much of the report highlights the pitfalls encountered by borrowers in using short-term loans. Citing the ease and expediency in which cash can be obtained, the Report found consumers are willing to incur higher borrowing costs in exchange for the convenience offered by short-term loans. Contrary to industry claims that the market is primarily comprised of individuals who, due to some unforeseen circumstances, need immediate access to cash until their next payday, the Department found that the typical customer, who according to a Department survey earns just over $24,000 a year, is not a one-time borrower occasioned by some unexpected financial obligation. According to the Report, customers "rarely" borrow a single time and, in many cases, are repeat borrowers. The Department's survey found that the typical borrower remains a customer for at least six months following consummation of the original loan and has an average of nearly 11 loan contracts with a single short-term lender. The explosive growth and financial success within the industry, the Report explains, are largely attributed to the repeat business of borrowers.

Most customers, the Department found, do not, or cannot, repay their loans when they become due. As a result, many customers are required to refinance their original loan by either (1) extending the initial period of the loan (referred to as "rolling over"), or (2) securing a new loan to cover the amount of the original sum. In both instances, the cost of the original loan increase to the borrower.

The Report identifies two types of borrowers who are particularly susceptible to experience problems with short-term loans. The Report deems these individuals "captive borrowers" and describes the first type of borrower as one who, due to limited financial resources and availability to other credit options, has no choice but to borrow from short-term lenders. Due to their financial circumstances, these borrowers are considered a high risk to lenders which, in turn, charge higher fees than those usually charged in other loan transactions. Not being constrained by any sort of rate cap, lenders typically seize the opportunity to maximize revenues by setting rates greater than the actual risk assumed.

The other type of borrower identified is one who gets entrapped in a cycle of debt caused by an inability to pay off the original loan due to excessive costs. These borrowers, according to the Report, "consider the use of * * * [short-term] loans to be a cash-flow decision rather than a loan or credit decision." Unable to timely satisfy their original obligations, these individuals frequently renew their loans, incurring added costs. Further unable to pay each renewal when they become due, these individuals become stuck in a cycle of unmanageable debt.

The Report recognizes short-term borrowing may prove more economical for consumers than accessing cash or credit from traditional financial institutions like banks and credit card issuers. The Report, however, feared most consumers are not financially astute and, consequently, are unable to truly understand the costs associated with their borrowing activities. Given the short maturation periods of the loans, borrowers principally concern themselves with the periodic fee charged by the lender and pay scant, if any, attention to the loan's APR. The Report posits that since most consumers fail to satisfy their initial obligations when they become due, borrowers would be better served if they concentrated more on the APR and its effect over the life of the loan.

When utilized properly and responsibly, short-term lenders, the Report recognizes, provide a needed and beneficial service to certain segments of the borrowing population, especially to those "people with questionable credit or those that have incurred unexpected expenses." Only when borrowers use short-term loans for extended periods of time or for reasons other than financial hardship do problems arise.

While cognizant of borrower misuse and imprudence, the Report does not exculpate short-term lenders for the ills associated with the industry. Suggesting short-term lenders hold the upper hand in many of their loan transactions, the Report indicates lenders foster borrower irresponsibility in order to maximize revenues, most notably by allowing financially strapped consumers to roll over their existing obligations. The Report expressly notes that departmental regulations have proved ineffective "in stopping people from converting a short term loan into a long term headache" and suggests actions aimed at curbing lender profits...

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6 cases
  • Mauvais-Jarvis v. Wong
    • United States
    • United States Appellate Court of Illinois
    • March 28, 2013
    ...punish those who fail to report. Accordingly, the duty to report here is not mandatory. Cf., South 51 Development Corp. v. Vega, 335 Ill.App.3d 542, 560–61, 269 Ill.Dec. 731, 781 N.E.2d 528 (2002) (“No universal formula exists for differentiating between mandatory and directive statutory pr......
  • Chicagoland Chamber of Commerce v. Pappas
    • United States
    • United States Appellate Court of Illinois
    • December 14, 2007
    ...the validity of the statute to demonstrate clearly a constitutional violation"); South 51 Development Corp. v. Vega, 335 Ill.App.3d 542, 549-50, 269 Ill.Dec. 731, 781 N.E.2d 528, 535 (2002) ("Statutes are presumed constitutional [citation] * * *. [Citations.] A party challenging a statute's......
  • Doe v. Biang
    • United States
    • U.S. District Court — Northern District of Illinois
    • May 4, 2006
    ...not be particular — it need only state the tools by which the harm will be prevented (see S. 51 Dev. Corp. v. Vega, 335 Ill. App.3d 542, 553-54, 269 Ill.Dec. 731, 781 N.E.2d 528, 538 (1st Dist.2002)). criterion is clearly met here. Consequently, Doe's claim that Section 120(b) impermissibly......
  • Read v. Sheahan
    • United States
    • Illinois Supreme Court
    • July 13, 2005
    ... ... South 51 Development Corp. v. Vega, 335 Ill.App.3d 542, 560, 269 ... ...
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1 provisions
  • IL Register Vol.30 issue 42. Issue 42 October 20, 2006 Pages 16504-16681
    • United States
    • Illinois Register
    • Invalid date
    ...state." The Illinois Appellate Court has upheld the Department's interpretation of this provision. South 51 Development Corp. v. Vega, 335 Ill. App. 3d 542, 781 N.E.2d 528 (1st Dist. 2002) (upholding rules that placed restrictions on short-term, high-interest loans), appeal dismissed, 211 I......

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