March 24, 2021

Illinois Imposes 36% MAPR Rate Cap On Consumer Loans; Takes Aim At Fintech-Bank Partnerships And Secondary Market Transactions

On March 23, 2021, the Predatory Loan Prevention Act (the “PLPA”) was signed into law by Illinois Governor J.B. Pritzker. The PLPA imposes a 36% military annual percentage rate (“MAPR”) cap on all loans made to Illinois consumers. It applies to all consumer loans made or renewed on or after the effective date of the PLPA, and is effective immediately. Failure to comply with the interest rate cap may result in the consumer loan becoming null and void. The PLPA was part of a legislative package intended to address economic inequities, which also created the Illinois Community Reinvestment Act, and expanded civil rights.

Which Loan Types are Covered?

The PLPA applies to all consumer loans. This includes closed-end loans, open-end lines of credit, payday loans, and retail installment sales contracts. It does not apply to commercial loans. While banks and credit unions are generally exempt, there are circumstances under which the consumer loans originated by banks or credit unions may not be protected by this exemption, as described below.

How is the APR Calculated?

A lender may not contract for or receive charges exceeding a 36% MAPR on the unpaid balance on the amount financed. The MAPR is calculated according to the method prescribed by the federal Military Lending Act, 32 CFR §232.4. The Military Lending Act takes an “all in” approach to calculating the APR, requiring that the calculation include periodic interest, finance charges, credit insurance premiums, fees for participation in any credit plan, fees for ancillary products sold in connection with the loan, fees for debt cancellation or debt suspension, and in some circumstances, application fees. These charges are included in the calculation of the MAPR under the PLPA even if they would be excluded from the finance charge calculation under the Truth in Lending Act and Regulation Z.

Who is a Covered Lender?

The PLPA applies to any person or entity that offers or makes a loan to a consumer in Illinois. There is an exemption for banks, credit unions and insurance companies that are chartered by the United States or any state. However, exempt parties may be indirectly impacted by the applicability of the PLPA to its non-exempt partners and service providers. A person who does not make a loan, but purchases, brokers or acts as an agent for the party that originates the loan may also be a covered “lender.” Additionally, the PLPA has a sweeping anti-evasion provision which provides that a person may be a covered lender by purporting to act as an agent of a bank or other exempt party, and engages in marketing, arranging or brokering loans made by the exempt party, or holds or acquires the predominant economic interest in the loans generated by the exempt party.

Impact on Bank Partnerships and the Secondary Market

The anti-evasion provision of the PLPA appears to have been designed, in part, to limit the use of partnerships and service provider relationships commonly seen between banks and non-banks, such as fintech companies, marketplace lenders and loan servicers to operate loan programs with interest rates in excess 36% MAPR. It is common for banks to use these third parties to help design, market and manage a loan program. It is also common for banks to sell loans or interests in loans it originates on the secondary market for a variety of reasons, such as reducing its credit risk and obtaining liquidity.

If applied strictly, the PLPA may effectively prohibit exempt parties, such as banks, from originating lawful loans, if the loan program is operated in partnership with non-exempt parties. Although banks are exempt and may originate loans with MAPR in excess of 36%, these restrictions significantly hamper the operation of symbiotic loan programs operated, marketed, designed or serviced by fintech companies, loan servicers, marketplace lenders and other non-exempt bank service providers. The PLPA may also effectively prevent banks from originating and selling loans or interests in those loans to non-exempt entities on the secondary market because a loan will be of little value to a non-exempt party who cannot enforce it on its terms.

Although many of these programs were designed to increase credit access and provide better terms than payday loans, these restrictions are likely to render banks unable to continue offering these programs to consumers in Illinois. It remains unclear how the PLPA will be enforced with respect to these arrangements while honoring the PLPA’s exemption of banks.

Potential Conflict with “Valid When Made” Rules

The apparent applicability of the PLPA to loans originated by banks and sold to a non-exempt party may conflict with the “Valid When Made” rules issued by the FDIC and OCC in 2020.[1] In response to the Madden v. Midland Funding, LLC decision[2] by the U.S. Court of Appeals for the Second Circuit, the FDIC and OCC issued parallel Valid When Made rules which provide that a the interest rate on a loan that was valid when made by a bank is not affected by the subsequent sale or transfer of the loan.

In contrast, the PLPA appears to prohibit a non-exempt purchaser from honoring and receiving the interest rate lawfully contracted for by a bank in its loan agreement if it exceeds 36% MAPR. As a result, the loans originated by the bank may be deemed null and void under the PLPA if they are subsequently sold and enforced by a non-exempt party. This may result even though the loans and the interest rate was valid when made by the bank under both the PLPA and the federal Valid When Made rules. The PLPA’s exemption for banks does not fully resolve this issue.

Due to this apparent conflict, clearer guidance is necessary to understand how Illinois intends to enforce the PLPA in light of the Valid When Made rules. The result may ultimately rest on the fate of the Valid When Made rules, which have been subject to challenge by several states including Illinois.

What’s to Come?

The PLPA is effective immediately, and is enforceable by the Secretary of the Illinois Department of Financial & Professional Regulation (“Secretary”). The PLPA further provides authority for the Secretary to issue rules to implement the law. The Secretary is also expected to issue FAQs to clarify some of the issues raised by the PLPA before a formal rule can be issued. These rules, interpretations, guidance and enforcement policies issued by the Secretary will significantly shape how the PLPA impacts non-bank lending, bank-fintech partnerships and secondary market transactions involving consumer loans in Illinois. Until greater clarity is provided, non-banks, fintech companies and banks alike who make consumer loans in Illinois should act promptly to understand the scope of their regulatory requirements under the PLPA and evaluate its impact on their consumer lending programs.

[1] 12 CFR §§7.4001, 160.110, 331.4(e). 
[2] Madden v. Midland Funding, LLC, 786 F.3d 246 (2nd Cir. 2015).