Illinois Passes Bill Prohibiting Lenders From Charging More Than 36% APR on Consumer Loans
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On January 13, the Illinois legislature 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 would apply to any non-commercial loan made to a consumer in Illinois, including closed-end and open-end credit, retail installment sales contracts, and motor vehicle retail installment sales contracts.
Under the PLPA, any loan made in excess of 36% APR would be considered null and void and no entity would have the “right to collect, attempt to collect, receive, or retain any principal, fee, interest, or charges related to the loan.” Additionally, each violation would be subject to a fine of up to $10,000.
We suggest that banks, lenders, loan purchasers and other participants in bank partnership programs involving loans to consumers in Illinois immediately review their lending criteria and contracts to determine what, if any, changes are required to comply with the PLPA. If signed into law, the PLPA will likely require many participants in the Illinois consumer lending market to modify their current practices.
The PLPA contains 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”):
Notably, banks and credit unions are exempt from the restrictions of the PLPA. However, bank lending partners and service providers such as fintechs may be subject to the PLPA restrictions if:
Many of these features are common in bank partnership programs, which means that loans to Illinois consumers originated through such programs could be subject to the 36% APR limit even if such loans were made by a bank that is itself exempt from the PLPA.
The PLPA’s attempt to eliminate, or seriously challenge, the bank partnership lending model is likely to cause significant upheaval since it is broadly drafted to cover persons that make, arrange, act as a service provider with respect to, or purchase whole or partial interests in, loans to consumers in Illinois, whether or not such persons are themselves located in Illinois. In recent years the prudential regulators and Attorney General’s office in Illinois have not been hesitant to pursue out-of-state online lenders that violated usury and other state licensing and lending laws and the PLPA’s broad scope would substantially expand the potential enforcement opportunities for these regulators.
The PLPA comes less than a month after the effective date of the Office of the Comptroller of the Currency’s (“OCC”) final rule with respect to the “true lender” doctrine, which attempts to resolve some of the legal uncertainty created by theMadden v. Midland Funding, LLCdecision in 2015. The OCC’s new rule confirms that a national bank lending partner will benefit from federal preemption of state usury laws and is the “true lender” if the national bank is named as the lender in the loan agreement or funds the loan. The PLPA, in contrast, contains a less forgiving framework for structuring bank lending partnerships.
Governor Pritzker has 60 days to sign or veto SB 1792. The PLPA will become effective upon the Governor’s signature.
If you have questions, please feel free to contact Scott Fryzel (312-627-2105 or [email protected]), Lindsay Henry (312-627-2287 or [email protected]), Lauren Quigley (312-627-2567 or [email protected]), or your Dykema relationship attorney.
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