Illinois Imposes Strict 36% Usury Cap for a Range of Consumer Finance Products and Providers

On March 23, 2021, Illinois Governor JB Pritzker signed into law Senate Bill 1792, enacting the Predatory Loan Prevention Act (PLPA) and capping interest at an “all-in” 36% APR (similar to the Military Lending Act’s MAPR) for a variety of consumer financing, effective immediately. The PLPA uses an expansive definition of interest for the usury cap’s purposes, applies to a wide array of businesses, and voids any contract that exceeds the rate cap. Companies providing consumer financing in Illinois and secondary market purchasers should review their business practices and ensure that their financing arrangements do not violate the PLPA. This Legal Update describes the requirements of the PLPA, discusses the transactions and entities subject to (and exempt from) the legislation, considers “true lender” and Madden implications, identifies particular products affected, and sets out penalties for violations.

The Predatory Loan Prevention Act

SB 1792 enacted the PLPA as a new standalone statute, in addition to amending Illinois’s general usury statute, which imposes a 9% usury ceiling for written contracts.¹ The state’s general usury rate remains 9%, but SB 1792 changes the interest calculation methodology from simple interest to an “annual percentage rate” (the “IL-APR”). The PLPA borrows its definition of the IL-APR from the Military Lending Act (MLA), which defines the term broadly as discussed below. Thus, the new IL-APR interest computation methodology applicable to the state’s 9% usury cap means that certain agreements nominally charging interest of 9% or less under a simple interest computation could be usurious if the IL-APR exceeds 9%, including in certain circumstances in which the APR is calculated under different methodologies—such as that included on disclosures provided to consumers under the Truth in Lending Act (“TILA”).

The PLPA’s 36% cap is significant despite the existence of the 9% general cap because Illinois law provides a number of exemptions from the 9% general cap—under product-specific licensing laws or otherwise—and certain of these exempt entities and transactions are now subject to the PLPA’s 36% cap when they may not have been limited previously. The contracts exempt from the general usury law include agreements authorized under the Consumer Installment Loan Act, Payday Loan Reform Act, Retail Installment Sales Act, Motor Vehicle Retail Installment Sales Act, and Illinois Financial Services Development Act. The general usury statute exempts additional transactions not separately regulated under separate licensing laws, such as certain securities transactions, mortgage loans, and employer-employee loans.² These transactions are now subject to the PLPA’s 36% cap if they qualify as “loans” as defined in the legislation and discussed below, unless there is a separate basis on which the PLPA rate cap may not apply to the transaction, such as an express exemption or an effective preemption defense under federal law.

Exemptions

The PLPA exempts state and federally chartered banks, savings banks, savings and loan associations, credit unions and insurance companies.

The Predatory Loan Prevention Act’s 36% APR Cap

The PLPA provides that for all “loans” made or renewed after March 23, 2021, a “lender” may not contract for or receive charges exceeding a 36% IL-APR on the unpaid balance of the amount financed. For the purposes of the 36% limit, the IL-APR is calculated pursuant to MLA methodology, and thus includes insurance premiums, fees for ancillary products, certain finance charges, application fees, and certain open-end credit plan participation fees, among others.³ Notably, the PLPA expressly does not supplant the general Illinois usury law.

No Retroactive Effect

As noted in the prior section, the PLPA applies to loans made or renewed after March 23, 2021, meaning that lawful contracts entered into before that date are not subject to the PLPA’s new restrictions. In early April, the Illinois Department of Financial and Professional Regulation (IDFPR) posted a “Notice Regarding the Consumer Reporting Database and the [PLPA]” and FAQs addressing some of the main points of the PLPA and confirming that the IDFPR will not apply the PLPA retroactively to pre-existing contracts. According to the FAQs, “The law does not impact existing contracts. Any lawful contract entered before March 23, 2021 remains effective and the lender may continue to service it.”

Transactions Subject to the PLPA

The PLPA applies to “loans,” which the PLPA defines expansively to include essentially any consumer-purpose financing provided to an individual or individuals. Specifically, “loan” means “money or credit provided to a consumer in exchange for the consumer's agreement to a certain set of terms,” including “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, but not limited to, paper, facsimile, Internet, or telephone.” The term expressly excludes commercial loans. A “consumer” is a natural person or persons. The PLPA’s sweeping loan definition thus includes transactions that are not technically loans, such as retail instalment contracts, and even “any transaction conducted via any medium whatsoever,” which could presumably reach consumer-purpose financing of any kind.

Entities Subject to the PLPA

Loans are limited to the PLPA’s 36% IL-APR limit when transacted by “lenders.” The PLPA defines a lender as expansively as it defines a loan. A “lender” means “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, regardless of whether approval, acceptance, or ratification by the third party is necessary to create a legal obligation for the third party.” This broad definition could capture lead generators, brokers, purchasers of participation interests and secondary market purchasers of whole loans in addition to originators of loans. Lender also includes a catch-all provision covering any other person that the IDFPR deems to be transacting in disguised loans, which could conceivably capture alternative forms of consumer financing such as early wage access programs, guarantees, and other arrangements traditionally not construed as loans.

The definition of a lender would cover passive holders of loans that purchase loans, receivables, or participation interests in loans. It is not clear whether servicers of loans should be deemed subject to the PLPA. The PLPA prohibits the receiving of interest exceeding a 36% IL-APR, which language could be applied to an entity that services a loan. However, the PLPA’s definition of a lender would appear not to reach a servicer. Moreover, the PLPA “applies to any person that offers or makes a loan to a consumer in Illinois” (emphasis added). This ambiguity ultimately may be addressed in rulemaking or case law developed on the basis of the PLPA. 

True Lender Implications

As defined, a lender subject to the PLPA includes not only the person entering into the “loan” agreement with the consumer, but also any person that arranges or brokers the loan, or that purchases the loan or any loan receivables, and any affiliate or subsidiary thereof. In addition to the breadth of its definitions, the PLPA further reinforces the wide-ranging scope of the legislation through a separate anti-evasion section, which expressly applies the PLPA to an agent or service provider for an exempt entity that (i) has the predominant economic interest in the loan; (ii) markets, brokers, arranges, or facilitates the loan and holds the right to purchase the loan, receivables, or interests therein; or (iii) is the lender under the totality of the circumstances under an arrangement structured to evade the PLPA.⁴

This language clearly targets bank partnership arrangements commonly used in the marketplace lending space, where a loan that is solicited through a nonbank’s online platform is originated and funded by a bank or tribe and subsequently purchased by the nonbank—and tribal lending arrangements using a Native American tribe for federal preemption authority instead of a bank. The statutory language in the PLPA refers to a number of common approaches used by courts to determine who is the true lender in a bank partner program. The true lender issue continues to be hotly debated. On March 25th, Congressional Democrats introduced a resolution of disapproval to invalidate, through the Congressional Review Act (CRA), the Office of the Comptroller of the Currency’s (OCC) recent rule applicable to national banks and thrifts addressing the identity of the true lender for purposes of “interest exportation” under the National Bank Act. While the PLPA should not affect the interpretation of federal banking law, it may set the stage for a more nuanced set of true lender challenges in which the issue at play is whether a party is a lender under a particular state regime even if it is not the lender for interest exportation purposes and, if so, whether the state regime can be applied in any manner that is not preempted by federal law.

Madden Implications

The PLPA’s regulation of secondary market purchasers of bank- and tribe-originated loans also potentially implicates the Second Circuit’s 2015 decision in Madden v. Midland Funding,⁵ which held that the National Bank Act does not preempt state usury laws for assignees of loans made by national banks in all cases. Madden was out of step with the other judicial circuits and created some turmoil in the secondary market in the Second Circuit states (Connecticut, New York and Vermont). As a result, during the Trump administration the OCC and Federal Deposit Insurance Corporation (FDIC) stepped in to ease some of the uncertainty by adopting “Madden Fix” regulations providing that interest on a loan that is permissible under provisions of federal banking laws establishing the interest exportation authority of national and state banks and savings associations is not affected by a sale, assignment, or transfer of the loan, effectively overturning Madden.

Here, the tension arises where the PLPA purports to restrict the interest that purchasers of loans may charge, even if the loans are originated by a bank that is, itself, exempt from the PLPA. The validity of that application of the PLPA is unclear and may be subject to challenge, given preemption defenses under federal law and, in particular, the OCC/FDIC “Madden Fix” rules expressly permitting a purchaser to charge interest at the rate contracted for by the assigning bank—which bank, pursuant to its federal interest exportation authority and the PLPA’s express bank exemption, may contract for a rate exceeding the PLPA’s 36% cap.

Specific Types of Financing Made Expressly Subject to the 36% APR Cap

Beyond applying to “loans” and “lenders,” SB 1792 also amends a number of Illinois consumer finance laws so that the PLPA’s 36% IL-APR maximum now expressly applies to:

• Payday loans
• Retail installment contracts generally
• Motor vehicle retail installment contracts
• Retail charge agreements

Changes to the Consumer Installment Loan Act

Licensees under the Illinois Consumer Installment Loan Act (CILA) were already limited to charging 36% interest on loans of $40,000 or less, but as amended by SB 1792, the 36% limit is now computed using the PLPA’s IL-APR methodology. In addition, a license under the CILA is now required to make loans charging interest at a 9% IL-APR or greater, rather than the previous effective threshold of 9% numerical interest. Given the broader IL-APR definition now in effect for the CILA, a number of loans that did not previously trigger licensing under the CILA may now trigger licensing, depending on the fees and other amounts charged to the borrower. In addition, licensing under the CILA no longer expressly applies only to loans of $40,000 or less, though CILA licensees are prohibited from making loans transacted pursuant to the CILA that exceed $40,000.⁶ The practical effect of these changes is that (i) a license will only be necessary for loans of $40,000 or less; and (ii) licensees continue to be able to make loans over $40,000, provided that they are not made pursuant to the CILA (meaning, among other things, that they are not relying on the CILA for rate/fee/term authority). The PLPA also repealed the CILA’s authorization for a lender to charge a $25 document preparation fee.

Pursuant to the PLPA, CILA licensees are now required to report each loan made under the CILA to a state database, including title-secured loans. The IDFPR’s FAQs state that the agency will promulgate rules addressing the database reporting requirement, and that the agency “does not intend” to take adverse action for reporting violations until further notice.

SB 1792 also repeals provisions relating to “small consumer loans,” repeals the statutory authorization to make “installment payday loans,” and amends consumer fraud and deceptive business practices provisions, among other changes.

Penalties—Noncompliant Loans Void

Consequences for violating the PLPA’s 36% IL-APR cap are severe, as the PLPA renders any noncompliant loan void and uncollectible. “Any loan made in violation of this Act is null and void and no person or entity shall have any right to collect, attempt to collect, receive, or retain any principal, fee, interest, or charges related to the loan.” Further, the IDFPR can issue fines of up to $10,000 per violation and order a person to cease and desist. The PLPA also expressly makes a violation of the PLPA a violation of any specific state licensing law under which a company is regulated, potentially subjecting a violator to stacking penalties—which are expressly cumulative under the PLPA.⁷

Conclusion

SB 1792 authorizes the IDFPR to promulgate rules to implement the PLPA, so additional clarification of the law’s application may be forthcoming. As noted above, the IDFPR has issued FAQs and intends to promulgate rules to address the PLPA’s loan reporting requirements, as well as rules relating to title-secured loans. The IDFPR may issue further guidance or adopt rules interpreting other aspects of the PLPA as well. Until such time, companies extending consumer credit of any type in Illinois should review their policies and ensure that their credit products and terms are in compliance with the PLPA. This may mean introducing new 36% IL-APR caps on certain financing offerings, and recalculating the interest on others as IL-APRs. In addition, marketplace lending programs operating in Illinois and secondary market purchasers of these loans should evaluate their true lender risk and, consequently, their usury risk in the state, as Illinois is broadcasting its intention to scrutinize such arrangements under the PLPA.

¹ 815 Ill. Comp. Stat. Ann. 205/4(1).

² See id.

³ See 10 U.S.C. § 987; 32 C.F.R. § 232.4.

⁴ The PLPA provides that under the totality of the circumstances approach, circumstances that weigh in favor of a person being the lender include where the person (i) indemnifies, insures, or protects an exempt person or entity for any costs or risks related to the loan; (ii) predominantly designs, controls, or operates the loan program; or (iii) 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.

⁵ 786 F.3d 246 (2d Cir. 2015).

⁶ 205 Ill. Comp. Stat. Ann. 670/15(a); 670/17.

⁷ “A violation of this Act by a person or entity licensed under another Act including, but not limited to, the Consumer Installment Loan Act, the Payday Loan Reform Act, and the Sales Finance Agency Act shall subject the person or entity to discipline in accordance with the Act or Acts under which the person or entity is licensed.”