United States: Illinois Regulator Issues Proposed Predatory Loan Prevention Act Regulations; Lawsuits Filed To Block Implementation Of Act's Database Reporting Requirement And For Declaration Act Does Not Apply To Pawn Transactions

In March 2021, Illinois Governor Pritzker signed into law SB 1792, which contains the Predatory Loan Prevention Act (the "Act").  The new law became effective immediately upon signing notwithstanding the authority it gives the Illinois Department  of Financial and Professional Regulation ("IDFPR") to adopt rules "consistent with [the] Act."

The Act extends the 36% "all-in" Military Annual Percentage Rate (MAPR) finance charge cap of the federal Military Lending Act (MLA) to "any person or entity that offers or makes a loan to a consumer in Illinois" unless made by a statutorily exempt entity.  The Act provides that any loan made in excess of a 36% MAPR is considered null and void, and no entity has the "right to collect, attempt to collect, receive, or retain any principal, fee, interest, or charges related to the loan."  Each violation of the Act is subject to a fine of up to $10,000.

Proposed Regulations.  The IDFPR  has proposed regulations to implement the Act.  In addition to section containing definitions (Section 215.10), the proposal contains a section regarding loan terms (Section 215.20).  The loan terms addressed by Section 215.20 include:

• Calculation of the APR for purposes of the Act (i.e. what charges must be include in the APR)
• Bona fide fees charged on credit card accounts that may be excluded from the APR, including standards for assessing whether a bona fide fee is reasonable, a reasonable bona fide fee safe harbor, and indicia of reasonableness for participation fees
• The effect of finance charges on bona fide fees

In addition to these proposed regulations implementing the Act, the IDFPR has simultaneous proposed amendments to the implementing regulations of the Illinois Consumer Installment Loan Act and the Payday Loan Reform Act.  These amendments propose extending substantive and disclosure limitations previously aimed at high-APR payday and auto title lending programs to loans with an MAPR of 36% or less without modification.   For example, a prime loan secured by a consumer's vehicle with an MAPR of 1% would be subject to, among other things, a principal amount ceiling of $4,000, refinance limitations, "ability to repay" limitations in the form of a gross monthly income check and various pamphlets and disclosure requirements that make little sense in the context of a loan with an MAPR of 36% or less.

Lawsuit to block the Act's data base reporting requirement.  Prior to the Act's enactment, only lenders making certain higher-cost loans with annualized rates above 36% were required to report loan information to a state database administered by Veritec.  The Act amended the Illinois Consumer Installment Loan Act ("CILA") to require all licensed lenders, regardless of the rate charged, to pay Veritec fees for each loan and report information about the loan to the database.  Because the Act became effective immediately and Veritec onboarding typically takes several months, Illinois lenders initially faced the Catch-22 of either violating the amended law or ceasing all lending operations.  To address this dilemma, the IDFPR issued a Notice in April 2021 stating that it did "not intend to take adverse supervisory or enforcement action for violations of reporting requirements" under applicable Illinois law until further notice.

The American Financial Services Association and the Illinois Financial Services Association  have filed a lawsuit against the IDFPR seeking to enjoin implementation of the Act's reporting requirement retroactive to March 23, 2021 and asking for a declaration that the requirement is unconstitutionally vague and impossible to comply with.  In its complaint, the IFSA alleges that despite the impossibility of complying, licensed lenders may be subject to civil actions under the CILA, and that the Act's implementation will expose consumer finance lenders to substantial risk of loss.

Lawsuit to declare the Act does not cover pawn transactions.  Two trade groups and two companies engaged in the pawn industry have filed a lawsuit against the IDFPR seeking a declaration that the Act cannot apply to pawn transactions unless and until the IDFPR amends or rescinds its regulations implementing the Illinois Pawnbroker Regulation Act ("PRA") that are inconsistent with the Act.   The PRA requires pawnbrokers to be licensed by the IDFPR to lawfully operate in Illinois and sets forth the permissible terms and finance charges for pawn transactions.

In April 2021, the IDFPR issued a series of FAQs on the Act that listed "pawn loans" as an example of loans covered by the Act.  In their complaint [link], the plaintiffs allege that that the Act does not amend the PRA, and makes no reference to pawn transactions.  They also allege that the Act's legislative history indicates that the Act was never intended to impact the pawn industry.  According to the plaintiffs, the IDFPR has not given any guidance to the pawn industry about key issues such as how the Act and the PRA interact and what, if anything, should change from a compliance standpoint in terms of how pawn transactions are conducted.

The plaintiffs claim that as a result of its FAQs, "the IDFPR has not only created a myriad of questions in terms of how the pawn industry in Illinois is supposed to operate, but it has done so while placing a target on the industry's back and opening it up to consumer-facing litigation."  The plaintiffs also claim that if the Act's 36% APR cap were to apply to pawn transactions, "it would have a devastating effect on the industry and likely lead to the closure of most if not all pawn shops in Illinois because the pawn segment is the main revenue source of the business."