Illinois Caps Consumer Loans at 36% Rate, Limiting Consumers’ Access to CreditLast week, Illinois enacted the “Predatory Loan Prevention Act” (SB 1792), which would place a 36% rate cap on nearly all non-bank consumer loans. This act will essentially outlaw small-dollar loans in Illinois and may make ancillary products on auto loans, such as GAP insurance, unavailable for a large number of consumers. The act authorizes fines of up to $10,000 per violation and voids any loans that exceed the rate cap. The act became effective after it was signed by Gov. JB Pritzker on March 23, 2021.

The act’s reach is extremely broad and will severely limit consumer access to credit. First, it covers virtually all types of consumer loans — including closed-end and open-end credit, retail installment sales contracts, and auto retail installment sales contracts — made to an Illinois consumer. It does not cover commercial loans or loans made by banks, savings banks, savings and loan associations, credit unions, or insurance companies, which are exempt from the act.

Second, the act covers not only lenders making the loan, but also those that originate or purchase the loan. The act states that it applies to “any person or entity, including any affiliate or subsidiary of a lender, that offers or makes a loan, buys a whole or partial interest in a loan, arranges a loan for a third party, or acts as an agent for a third party in making a loan.” The act also permits the Illinois Department of Financial and Professional Regulation to extend coverage to any person it determines is engaging in a “disguised loan” or “a subterfuge” to avoid the act. It will be interesting to see how the act’s broad inclusion of any agent of a lender or anyone who purchases all or part of a loan will play out against the Office of the Comptroller of the Currency’s definition of true lender.

Additionally, the act directly attacks the bank partnership model. It covers “a person or entity [that]. . . purports to act as an agent [or] service provider . . . for another entity that is exempt from this Act, if . . . : (1) the person or entity holds . . . the predominate 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 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.” Because of this legislation, would-be bank partners are prohibited from taking part in making loans that are otherwise legally made by a bank.

The act also adopts an “all in” method for calculating a loan’s rate. Instead of employing the more widely used method for calculating a loan’s annual percentage rate (APR) found in the Truth In Lending Act (TILA), the act requires the method used to calculate the rate in the Military Lending Act, known as the “Military Annual Percentage Rate” (MAPR). This is significant because MAPR includes charges associated with the loan that would normally be excluded from the APR calculation. For example, TILA excludes charges for optional ancillary products, such as GAP insurance or debt protection. By using the MAPR calculation, the act includes charges for optional ancillary products sold with the loan for purposes of the rate cap. Practically speaking, the likely net effect is that lenders will be unable to provide consumers the option to purchase ancillary products if those products would cause the loan’s MAPR to exceed the 36% cap. It also means that lenders must now calculate two rates: the APR for the TILA disclosures and the MAPR to comply with the rate cap.

So, what is the net impact of this legislation? It will adversely affect consumers in their ability to access credit and ancillary products; it will potentially cause more litigation for the true lender lending model; and it appears that tens of thousands of consumers throughout Illinois may lose their ability to access credit during the current pandemic. Whether credit takes the form of small-dollar loans, auto loans, or other products, it has been widely shown that the cost of credit to consumers that are near prime or subprime is much larger due to the high rate of default 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 unprofitable, driving consumers into the hands of unregulated lenders.

In other words, while the intent of this act is to protect consumers from “predatory loan” products, industry participants have speculated that the most credit-needy of consumers will find themselves frozen out of the legal credit marketplace because of the inability to price products in relation to risk. A significant risk of legislation of this nature is the creation of “credit deserts” and the need for the most credit-needy borrowers to resort to dangerous or illegal credit alternatives, while more creditworthy borrowers are unlikely to feel much of an impact.

We expect to continue to monitor the impact of this act and the enforcement of its provisions over the coming months. For more details on this and other consumer finance updates, visit and subscribe to the Bradley’s Financial Services Perspective blog and read more about the Bradley Small Dollar and Unsecured Consumer Lending team.

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Photo of Michael M. Aphibal Michael M. Aphibal

Michael Aphibal advises on regulatory issues affecting financial institutions, including banks, non-bank lenders, and insurance agencies. His work primarily focuses on issues surrounding the offering of consumer financial products and services, including licensing, employee compensation, loan origination and servicing, customer information sharing and…

Michael Aphibal advises on regulatory issues affecting financial institutions, including banks, non-bank lenders, and insurance agencies. His work primarily focuses on issues surrounding the offering of consumer financial products and services, including licensing, employee compensation, loan origination and servicing, customer information sharing and privacy, consumer disclosures, telemarketing, and the sale of add-on products, particularly debt protection products.

Photo of Andrew J. Narod Andrew J. Narod

Andrew Narod is an experienced litigator who represents bank and non-bank financial services institutions and other types of businesses in class-action litigation, complex commercial litigation, and other high-profile litigation disputes nationwide. His clients entrust him to navigate some of their most sensitive litigation…

Andrew Narod is an experienced litigator who represents bank and non-bank financial services institutions and other types of businesses in class-action litigation, complex commercial litigation, and other high-profile litigation disputes nationwide. His clients entrust him to navigate some of their most sensitive litigation matters in some of the most difficult venues in the country.

Photo of Jennifer L. Galloway Jennifer L. Galloway

Jennifer Galloway’s practice is dedicated to helping financial services clients successfully navigate increasingly complex regulatory and business environments. She is co-chair of Bradley’s Small Dollar and Unsecured Consumer Lending team and focuses on consumer financial services laws and regulations affecting banks, non-depository banks…

Jennifer Galloway’s practice is dedicated to helping financial services clients successfully navigate increasingly complex regulatory and business environments. She is co-chair of Bradley’s Small Dollar and Unsecured Consumer Lending team and focuses on consumer financial services laws and regulations affecting banks, non-depository banks and other financial institutions. Jennifer provides skilled regulatory guidance and detailed knowledge of the laws impacting both traditional and innovative lenders in the consumer financial services market, with considerable experience in online consumer lending. Her compliance work includes assisting clients with developing, implementing and maintaining compliance management systems, performing internal compliance audits for clients, preparing clients for outside audits, as well as preparing related lending documents and disclosures. She also counsels financial services companies regarding CFPB preparedness, implementation and operational strategies for complying with the CFPB’s regulations, and assists in defending regulatory enforcement actions.

Photo of Preston H. Neel Preston H. Neel

Preston Neel is a member of the firm’s Litigation and Banking and Financial Services practice groups. His practice concentrates on representing financial institutions and mortgage companies in civil litigation. Preston defends causes of action including alleged violations of TILA, RESPA, FDCPA, and FCRA.

Preston Neel is a member of the firm’s Litigation and Banking and Financial Services practice groups. His practice concentrates on representing financial institutions and mortgage companies in civil litigation. Preston defends causes of action including alleged violations of TILA, RESPA, FDCPA, and FCRA. He also litigates cases throughout the Southeast involving allegations of predatory lending, wrongful foreclosure, breach of contract, and deceptive trade practices. View articles by Preston