New Illinois Law Imposes Rate Cap Restrictions and True Lender Requirements on Small-Dollar and Payday Consumer Loans

On March 23, 2021, Illinois’ new Predatory Loan Prevention Act (“PLPA”), Senate Bill No. 1792, was signed into law, Public Act 101-0658, causing it to become effective immediately. The PLPA is a consumer protection law, and it will significantly impact lenders making certain consumer loans in Illinois. This note covers key provisions of the PLPA and focuses on its impact on small-dollar lenders and payday lenders.

Key Definitions

The PLPA has a broad reach. Its definition of “lender” broadly covers parties that offer, make or buy whole or partial interest in loans, as well as those who arrange or act as agent in making a loan, including affiliates, subsidiaries or agents, or any such persons. However, notwithstanding this broad definition, the PLPA does not apply to depository financial institutions (such as banks and credit unions) or insurance companies that are exempt from application of the PLPA.

The PLPA also employs a broad definition to the term “loan”, which covers any money or credit provided in exchange for a consumer’s agreement to a certain set of terms, including, to pay finance charges, interest or “other conditions”. The term “loan” includes closed-end and open-end credit, retail installment sales contracts, motor vehicle retail installment sales contracts, and any transaction conducted via any medium whatsoever, including, paper, facsimile, internet, or telephone. The PLPA’s only exception from the definition of “loan” is that it does not include “commercial loan”. However, the PLPA does not define the term “commercial loan” and it will be up to the Illinois Secretary of Financial and Professional Regulation or the courts to determine its meaning.

Applicability

The PLPA applicability section is “interestingly” worded in that it states that the PLPA only applies to any person or entity that offers or makes loans in Illinois. Thus, arguably, not to every person or entity meeting the definition of “lender”, discussed above. So, for example, it is questionable whether it applies to a person or entity that “buy” covered loans, so the PLPA’s application to assignees is in question. It also denotes territorial limitation on the applicability of the PLPA, namely that the loan must be made in Illinois, which is consistent with other consumer lending laws in Illinois. However, the applicability section also states that the PLPA applies to “any person or entity that seeks to evade [the PLPA’s] applicability by any device, subterfuge, or pretense whatsoever.” The scope of this general evasion provision is an open question, but it may be limited to the meaning of the PLPA’s specific “no evasion” section, which is discussed further below.

Rate Cap Requirement

 Substantively, the PLPA imposes a usury limit, a rate cap, on consumer loans (“Rate Cap”). It prohibits lenders from entering into loans with an annual percentage rate on the unpaid balance of the amount financed of the loan that exceeds 36%. Importantly, the PLPA requires that the annual percentage rate be calculated using the method for calculating military annual percentage rate (“MAPR”), 32 CFR 232.4 under the federal Military Lending Act (“MLA”) regulations, as opposed to the annual percentage rate (“APR”) calculation method under the federal Truth In Lending Act (“TILA”), which is normally used for consumer loans for non-military borrowers. The MAPR generally parallels the APR, but the MAPR includes more types of charges in its calculation that are excluded from the calculation of APR. For example, an application fee is excluded from the finance charge under TILA and thus not included in the calculation of the APR, yet it is a charge included in the calculation of MAPR. Moreover, the PLPA appears to set the method of calculation of MAPR on the method “as in effect on the effective date of the [PLPA]”, i.e., it does not incorporate future amendments to the method of calculating MAPR under the MLA regulations.

Anti-Evasion

As mentioned, the PLPA contains a specific anti-evasion provision, addressing various circumstances. First, it prohibits any person or entity from engaging in any device, subterfuge, or pretense to evade its Rate Cap requirement. The PLPA provides that such polys include making loans disguised as a personal property sale and leaseback transaction, disguising loan proceeds as a cash rebate for the pretextual installment sale of goods or services, or making, offering, assisting, or arranging a debtor to obtain a loan with a greater rate of interest, consideration, or charge than is permitted through any method including mail, telephone, internet, or any electronic means regardless of whether the person or entity has a physical location in the State. So, for example, a non-Illinois based lender making loans by phone, through the internet, mobile application or by mail to Illinois borrowers cannot escape the Rate Cap prohibition of the PLPA.

True Lender Evaluation

Second, if a loan exceeds the Rate Cap it triggers the PLPA evaluation requirement to determine the “true lender”. This “true lender” evaluation is intended to prevent lenders’ evasion of the Rate Cap requirement by making loans through entities exempt from the PLPA, such as depositories. Under this requirement, a person or entity is a lender subject to the PLPA notwithstanding the fact that the person or entity purports to act as an agent, service provider, or in another capacity for another exempt entity, if, among other things:

• the person or entity holds, acquires, or maintains, directly or indirectly, the predominant economic interest in the loan; or
• 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
• the totality of the circumstances indicate that the person or entity is the lender, and the transaction is structured to evade the Rate Cap requirement.
  • Circumstances that weigh in favor of a person or entity being a lender include, where the person or entity:
    • indemnifies, insures, or protects an exempt person or entity for any costs or risks related to the loan;
    • predominantly designs, controls, or operates the loan program; or
    • 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.

Amendments to CILA and PLRA

The legislation also makes conforming amendments to the Illinois Consumer Installment Loan Act (“CILA”) and to the Payday Loan Reform Act (“PLRA”), prohibiting loans made by licensees under these acts from exceeding the Rate Cap.

Enforcement and Remedies

The PLPA authorizes the Illinois Secretary of Financial and Professional Regulation to take administrative enforcement actions against violators and issue cease and desist orders and fines of up to $10,000, per violation.

As for a loan made in violation of the Rate Cap requirement, the PLPA renders such loan null and void and prohibits any person or entity from collecting or attempting to collect on it. Moreover, a violation of the PLPA constitutes a violation of the Consumer Fraud and Deceptive Business Practices Act, which could expose lenders to liability for actual damages, punitive damages and attorney fees and costs.

Takeaways

The PLPA is in effect which means that small-dollar consumer lenders and payday lenders making loans in Illinois, including through mail, phone or by electronic means, must immediately conform their lending practices in Illinois to the PLPA Rate Cap requirements. Such lenders should treat all loans as if made for military personal and subject to the MLA for the purpose of calculating MAPR in their loan systems. Lenders should also update their Illinois loan policies consistent with PLPA requirements.

Exempt entities (banks and credit unions) that make consumer loans in Illinois through companies providing origination services should evaluate their relationships with such service providers to determine whether their relationship could result in a determination that the service provider is the “true lender”, and the implication of finding such loans originated with rates that exceed the Rate Cap.

Finally, secondary market purchasers of consumer loans subject to the PLPA should ensure that Illinois loans they purchase do not violate the PLPA Rate Cap requirement if the loan is made by a non-exempt lender.

If you have any questions concerning the PLPA or need assistance with its implementation, please contact Solomon Maman.