New Illinois Predatory
Loan Prevention Act Leaves Lenders and Borrowers with Uncertain Future
04.20.21
Authors:
Benjamin
L. Bevilacqua
James Stevens
Rick Eckman
Illinois Governor J.B. Pritzker signed the Illinois Predatory Loan
Prevention Act (Act) into immediate effect on March 23. The Act imposes
sweeping changes and contains broad language, leaving the state’s lenders and
borrowers with an uncertain future.
To understand this new law, one must recognize that Illinois based
the Act on the federal government’s Military Lending Act (MLA), which
instituted an annual percentage cap for loans to service members by stating
that “lenders could not charge active duty, guard, or reserve service members
or their dependents an interest rate higher than 36%.”[1] The
MLA contains an inclusive definition for calculating the APR, typically
referred as the MAPR. In addition to the interest rate, the MAPR includes fees,
and charges imposed for credit insurance, debt cancellation and suspension, and
other credit-related ancillary products sold in connection with the
transaction. If voluntary, these are excluded from the calculation of the
normal APR.
These measures intended to provide extra protection from lending
practices that “could pose risks for service members and their families,” while
also promoting military readiness and service member retention.[2] In
other words, Congress attempted to set the MAPR to meet the needs of a
particular group. With respect to loan products under the MLA, lenders cannot
charge interest and fees that, when added together, would exceed a 36% MAPR.[3]
The Act applies the MLA’s lending rules to all Illinois consumers
and drastically increases the scope beyond that of the MLA. The Act reads, ”[t]he purpose of this Act is to protect consumers from
predatory loans consistent with federal law and the Military Lending Act which
protects active duty members of the military. This Act shall be construed as a
consumer protection law for all purposes. This Act shall be liberally construed
to effectuate its purpose.”[4] Far
from limiting the application to a group with specific gaps in its coverage,
the Illinois law grants the MARP to all consumers and applies the Act to all
transaction types. In doing so, the Act has left lenders scrambling to create
agreements that not only benefit their borrowers, but also keep the
transactions profitable.
The Act also applies to all parties that offer or make loans in
the state of Illinois, and it attempts to make banks and other regulated
financial service providers involved in partnership arrangements with nonbanks
the true lender under Illinois law.[5] While
”[b]anks, savings banks, saving and loan
associations, credit unions, and insurance companies … are exempt from the
provisions of this Act,”[6] the
Act is drafted to make it very difficult for nonbank lenders to partner with
these institutions by including “true lender” concepts to these arrangements, including
the nebulous predominant economic interest theory. The Act does this by stating
that it applies to nonbank partners or regulations institution if ”(1) the
person or entity holds, acquires, or maintains, directly or indirectly, the
predominant economic interest in the loan; or (2) the person or entity markets,
brokers, arranges, or facilitates the loan and holds the right, requirement, or
first right of refusal to purchase loans, receivables, or interests in the
loans; or (3) the totality of the circumstances indicate that the person or
entity is the lender and the transaction is structured to evade the
requirements of this Act. Circumstances that weigh in favor of a person or
entity being a lender include, without limitation, where the person or entity:
(i) indemnifies, insures, or protects an exempt
person or entity for any costs or risks related to the loan; (ii) predominantly
designs, controls, or operates the loan program; or (iii) purports to act as an
agent, service provider, or in another capacity for an exempt entity while
acting directly as a lender in other states.”
Unable to justify the risks related to a loan or navigate the
limitless true lender language, many lenders will refuse to make loans to
Illinois consumers because of the Act, either directly or through a bank
partnership model since it is not possible for them to make profitable loans at
the restricted rate. Future studies will no doubt document how the Act
negatively affects Illinois consumers.[7]
[1] 10 U.S.C.A. § 987
(West).
[2] FDIC Consumer
Compliance Examination Manual – September 2016.
[3] FDIC Consumer
Compliance Examination Manual – September 2016, page 1. “For covered
transactions, the MILA and the implementing regulation limit the amount a
creditor may charge, including interest, fees, and charges imposed for credit
insurance, debt cancellation and suspension, and other credit-related ancillary
products sold in connection with the transaction. The total charge, as
expressed through an annualized rate referred to as the Military Annual
Percentage Rate may not exceed 36%. The MAPR includes charges that are not
included in the finance charge or the annual percentage rate disclosed under
the Truth in Lending Act.”
[4] Igla,
Amendment to Senate Bill 1792, page 54.
[5] Igla,
Amendment to Senate Bill 1792, page 55.
[6] ”…organized,
chartered, or holding a certificate of authority to do business under the laws
of this State or any other state or under the laws of the United States…” Id.
[7] Lisa Chen and Gregory
Elliehausen (2020). “The Cost Structure of Consumer
Finance Companies and Its Implications for Interest Rates: Evidence from the
Federal Reserve Board’s 2015 Survey of Finance Companies,” FEDS Notes.
Taskforce on Federal Consumer Financial Law Report, Volume II, page 94. Online
Lenders Alliance letter of disapproval to Governor Pritzker.