While the Act exempts banks and credit unions generally, it includes expansive exceptions to counter the bank-partnership model, among other evasive tactics. That is, the Act not only prohibits the use of any device, subterfuge, or pretense to evade the requirements of the Act, but the Act also eliminates an exemption for an entity with a loan exceeding the Act’s interest rate limitations where: (1) the entity directly or indirectly holds the predominant economic interest in the loan; (2) the entity markets, brokers, arranges, or facilitates the loan and holds the right, requirement, or first right of refusal to purchase loans, receivables, or interests in the loans; or (3) the totality of the circumstances indicate that the person or entity is the lender and the transaction is structured to evade the requirements of this Act.
The Act defines a “title-secured loan” to include all loans as opposed to the prior definition under Illinois law, which only applied to a loan with an annual percentage rate exceeding 36 percent as defined by the federal Truth in Lending Act. The Proposed Regulation further muddies this definition by defining a title-secured loan to mean any loan in which, at commencement, an obligor provides to the licensee, as security for the loan, physical possession of the obligor’s title when at any time prior to that date, the obligor has held the title free and clear of any lien interest. When any lender extends credit requiring a security interest in a vehicle as collateral, Illinois law requires the lender send the vehicle title to the Office of the Illinois Secretary of State to record the lender’s lien. Once complete, the title is then returned to the lender for safekeeping, unlike the process in some other states where the owner holds the title. The Proposed Rule excludes purchase money and refinanced purchase money auto loans, but includes any refinance of a title-secured loan effectively forcing traditional installment lenders to consider any loan secured by an auto to be a title-secured loan. The scope of the definition of a title-secured loan is significant given the long list of added requirements for licensees who engage in this activity. Among other things, the Act requires that no scheduled loan payment exceed 22.5% of the obligor’s gross monthly income, and restricts permissible methods of repossession. The Act also eliminates the previously permitted $25 document preparation fee for CILA loans, prohibits refunding using the Rule of 78s, and mandates extensive loan level data reporting to an Illinois based data repository that is still unable to accept data.
Penalties for violating the PLPA are significant. Violations may result in voiding of the loan and the loss of all principal and interest. The IDFPR and the Office of the Illinois Attorney General may also pursue regulatory enforcement, which may result in injunctive relief and penalties of up to $10,000 per violation, not to mention the risk of civil litigation. The Proposed Rule must be approved by the Illinois Joint Committee on Administrative Rules before becoming final. If adopted in its current form, lenders likely must make significant operational changes to ensure compliance.
While the Act is of particular interest to lenders in Illinois, similar laws have been proposed or enacted in other states. Notably, a similar rate cap law in New Mexico includes an anti-invasion provision similar to the PLPA. Lenders in all states should familiarize themselves with the Act and similar state laws,