Illinois Cuts Consumer Loans at 36%, Limiting Consumers’ Access to Credit | Bradley Arant Boult Cummings LLP
Last week, Illinois passed the “Law on the Prevention of Abusive Lending” (SB 1792), which would place a 36% rate cap on almost all non-bank consumer loans. This law will essentially ban small loan amounts in Illinois and could make ancillary auto loan products, such as GAP insurance, unavailable to many consumers. The law allows fines of up to $ 10,000 per violation and cancels all loans that exceed the rate cap. The law came into effect after being signed by Governor JB Pritzker on March 23, 2021.
The scope of the law is extremely broad and will severely limit consumers’ access to credit. First, it covers virtually all types of consumer loans – including closed and open credit, retail installment contracts, and auto retail installment contracts – made to an Illinois consumer. It does not cover commercial loans or loans made by banks, savings banks, savings and credit associations, credit unions or insurance companies, which are exempt from the law.
Second, the law covers not only the lenders who make the loan, but also those who create or buy the loan. The law states that it applies to “any person or entity, including any affiliate or subsidiary of a lender, who offers or makes a loan, purchases full or partial interest in a loan, arranges a loan for a third party or acts as an agent for a third party in granting a loan. The law also allows the Illinois Department of Financial and Professional Regulation to extend coverage to anyone it determines to engage in a “disguised loan” or “subterfuge” to avoid the act. It will be interesting to see how the broad inclusion in the law of any agent of a lender or anyone who purchases all or part of a loan will play out against the definition of the Office of the Comptroller of the Currency real lender.
In addition, the law directly attacks the banking partnership model. It covers “a person or an entity [that]. . . claims to act as an agent [or] service provider . . . for another entity which is exempt from this law, if. . . : (1) the person or entity owns. . . the predominant economic interest in the loan; or (2) the person or entity markets, brokers, arranges or facilitates the loan and holds the right. . . to purchase loans, receivables or interest in loans; or (3) all of the circumstances indicate that the person or entity is the lender and that the transaction is structured to avoid the requirements of this Act. Because of this legislation, potential banking partners are prohibited from participating in the granting of loans that would otherwise be legally granted by a bank.
The law also adopts an “all inclusive” method for calculating the rate of a loan. Instead of employing the most widely used method of calculating the Annual Percentage Rate (APR) of a loan that is found in the Truth in Loans Act (TILA), the law requires the method used to calculate the rate in the Military Loan Act, known as the “Annual Percentage Rate” (MAPR). This is important because the MAPR includes the costs associated with the loan that would normally be excluded from the calculation of the APR. For example, TILA excludes charges for optional ancillary products, such as GAP insurance or debt protection. Using the MAPR calculation, the law includes charges for optional ancillary products sold with the loan for rate cap purposes. In practice, the likely net effect is that lenders will not be able to offer consumers the option of purchasing ancillary products if these products cause the loan’s MAPR to exceed the 36% cap. It also means that lenders must now calculate two rates: the APR for TILA disclosures and the MAPR to comply with the rate cap.
So what is the net impact of this bill? This will harm consumers in their ability to access credit and ancillary products; this will potentially lead to more litigation for the true lender lending model; and it appears tens of thousands of consumers across Illinois are at risk of losing their ability to access credit during the current pandemic. Whether credit takes the form of small loans, auto loans, or other products, it has been widely shown that the cost of credit for consumers who are close to prime or subprime is much higher due to the high default rate and underwriting costs. Therefore, capping the rate at 36% (especially using the MAPR calculation) will cut off access to this type of consumer credit because lenders will stop offering the products if they are not profitable, leading consumers between the hands of unregulated lenders.
In other words, if the intent of this law is to protect consumers from ‘bad lending’ products, industry participants have speculated that consumers with the most credit-demanding consumers will end up falling behind. excluded from the legal credit market due to the inability to price products. compared to the risk. A significant risk of legislation of this nature is the creation of “credit deserts” and the need for the most credit-demanding borrowers to resort to dangerous or illegal credit alternatives, while more creditworthy borrowers do not. are unlikely to feel much of an impact.
We plan to continue to monitor the impact of this law and the application of its provisions over the coming months.