April 22, 2021

Illinois Joins States Capping Consumer Loan Interest Rates at 36%

4 min

Through the recent Predatory Loan Prevention Act (PLPA), which imposes a 36% APR cap on interest rates for consumer loans under $40,000, Illinois joins 18 other states and the District of Columbia in capping interest rates on consumer loans at 36% or less. The PLPA covers payday loans, auto title loans, and installment loans, and encompasses open-end lines of credit and closed-end loans. The PLPA is modeled on the federal Military Lending Act (MLA) and relies upon definitions established by the MLA. Like the MLA, the PLPA takes an "all in" approach to calculating APR. Thus, the calculation includes periodic interest, finance charges, credit insurance premiums, fees for participating in any credit plan, fees for ancillary products sold in connection with the loan, fees for debt cancellation or suspension, and, under some circumstances, application fees.

The PLPA contains an exemption for financial institutions such as banks and credit unions. However, it also includes an anti-evasion provision likely designed to curb partnerships and service provider relationships between banks and non-exempt entities such as fintech companies, marketplace lenders, and loan servicers, in which the latter operate loan programs using loans generated by banks with interest rates in excess of the 36% cap. Under the anti-evasion provision, a person or entity that "purports to act as an agent, service provider, or in another capacity" for a bank or other exempt entity is subject to the PLPA if, among other things, the person or entity "holds, acquires, or maintains . . . the predominant economic interest" in the loan generated by the exempt entity. However, it remains to be seen how the anti-evasion provision—which appears to cover loans originated by a bank and sold to a non-exempt third party—will be applied in light of its potential conflict with "Valid When Made" rules issued in 2020 by the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC). Under those rules, the permissibility of a loan's interest rate is determined at the time the loan is made by a bank and is not affected by the bank's subsequent transfer of the loan to a third party. Illinois is one of several states that have filed suit against the FDIC and the OCC to challenge the Valid When Made rules.

The ultimate impact of the PLPA will depend in part upon how it is applied by the Illinois Department of Financial and Professional Regulation, the agency that is authorized to enforce—and to issue further rules to implement—the law.

Other states have passed similar rate caps, including California, which in 2019 enacted a 36% interest rate cap on consumer loans between $2,500 and $10,000. However, Illinois is an outlier among the most recent states to cap interest rates, in that advocates of the measure accomplished their goal by successfully shepherding legislation through the statehouse. By contrast, in the previous three states in which such measures have been enacted—South Dakota, Colorado, and Nebraska—action came via public referenda rather than from the state legislature.

Indeed, efforts to move interest rate caps through state legislatures have stalled in some other states. New Mexico is a prime example. Democrats control both houses of the state legislature, and Gov. Michelle Lujan Grisham (D) made passage of a 36% interest rate cap for installment loans a top priority for the 2021 legislative session. Nevertheless, although the state senate passed such a bill in March, the legislation failed to pass the state house of representatives, which instead passed a bill that adopted the 36% cap only for loans over $1,000, while allowing rates up to 99% on smaller loans. The state house and senate were unable to reach agreement in a conference committee before the legislative session expired.

For the most part, consumer lending reforms that have succeeded in state legislatures have permitted some high-rate lending, while imposing new consumer protections, such as extended repayment periods. This is true, for instance, of measures recently approved in Ohio and Virginia, as well as legislation under consideration in Kansas.