On January 13, Illinois lawmakers unanimously passed the Predatory Loan Prevention Act (SB 1792) (“PLPA”), which would prohibit lenders from charging more than 36% APR on consumer loans. Specifically, the PLPA applies to all non-commercial loans granted to an Illinois consumer, including line and credit, consumer hire purchase agreements, and automobile hire purchase agreements.
Any loan in excess of 36% APR would be considered null and void and no company would have the right to collect, attempt to collect, receive, or withhold any principal, fee, interest or fee related to the loan. In addition, any violation will result in a fine of up to $ 10,000.
We suggest that banks, lenders, loan buyers, and other participants in banking partnership programs with credit to consumers in Illinois immediately review their lending criteria and agreements to determine what changes, if any, may be required to comply with the PLPA. If the bill is signed, the PLPA will likely require many participants in the Illinois consumer credit market to change their current practices.
The PLPA includes the following significant changes to the Illinois Consumer Installment Loan Act (“CILA”), the Illinois Sales Finance Agency Act (“SFAA”), and the Illinois Payday Loan Reform Act (“PLRA”):
- Sets a ceiling of 36% APR on all loans, including those granted under the CILA, SFAA and PLPRA;
- Eliminates $ 25 Document Preparation Fee For CILA Loans; and
- Cancels CILA’s small loan exemption, which previously allowed effective annual interest rates of more than 36% on small consumer installment loans of less than or equal to US $ 4,000.
In particular, banks and credit unions are exempt from the restrictions of the PLPA. However, credit partners of banks and service providers such as fintechs may be subject to the PLPA restrictions if:
- The partner holds, acquires or retains, directly or indirectly, the predominant economic share in the loan;
- the partner markets, brokers, brokers, or brokers the loan and has the right, requirement, or right of first refusal to purchase any loan, receivables or interest in the loan; or
- the entirety of the circumstances suggests that the partner is the lender and the transaction is structured to circumvent the requirements of the PLPA. Circumstances that suggest that a partner is considered a lender within the meaning of the PLPA include, among other things, if the partner:
- compensates, 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
- purporting to act as an agent, service provider, or other capacity for an exempt entity while acting directly as a lender in other states.
Many of these features are common in banking partnership programs, meaning that loans to Illinois consumers made through such programs could be subject to the 36% APR limit, even if such loans were made by a bank that is itself covered by the PLPA is excluded. The PLPA’s attempt to eliminate or seriously question the banking partnership credit model is likely to result in significant upheaval, as it is broadly designed to cover individuals who, as service providers, have wholly or partially stakes in make, Loans to Illinois consumers whether or not they are Illinois residents themselves. Regulators and the Attorney General’s Office in Illinois have not hesitated to prosecute foreign online lenders who violate usury and other state licensing and credit laws, and the PLPA’s broad scope would greatly expand the potential enforcement options for these regulators.
All of this is also happening in the context of the Office of the Comptroller of the Currency’s (“OCC”) final final ruling on the “true lender” doctrine which seeks to remove some of the legal uncertainty caused by the Madden v. Midland Funding, LLC Decision in 2015. The new regulation of the OCC confirms that a national bank lending partner benefits from the federal reservation of the state usury laws and is the “real lender” if the national partner bank is named as the lender in the loan agreement or finances the loan. In contrast, the PLPA contains a less lenient framework for structuring bank loan partnerships.
Governor Pritzker has 60 days to sign or veto SB 1792. The PLPA takes effect with the signature of the governor.