Potential Threats to Consumer Protections in Illinois

As these numbers demonstrate, predatory APRs on small dollar loans have taken an incredible financial toll on Black and Latino/a communities in Chicago. The passage of the PLPA made it illegal to charge exorbitant interest and fees on personal loans in Illinois. However, while the PLPA is an essential piece of protective legislation for Illinois’s Black and Latino/a communities, the effectiveness of the law is threatened by two main issues.

• Opposition to the PLPA is strong in the high-interest lending industry. The pawnbrokers and high-cost installment lenders have been especially vigorous. The strong industry lobby is continually introducing loophole legislation.
• The new law is part of the solution, but consumers still need financial support. For it to be truly effective at increasing wealth-building in Black and Latino/a households, more affordable alternatives and other resources are essential to address the demand for cash.

“The first loans I ever took out, I was 21 or 22. My interest rate went up to like 400 percent… I owed $1,000 on the $500 loan and $900 on the $498 loan. I took them out because I was trying to catch up on my bills.” – Chris, former payday loan borrower

To some degree, high-interest lending can be like a hydra-headed dragon. Laws may cut off one head only to have another source of high-interest credit take its place. Policymakers who are intent on ensuring that people have access to credit at reasonable interest rates must consider all of the ways that lenders might work to circumvent the law.

Research indicates that after state legislation that limits payday lending, companies find policy loopholes and create other products that can be used in place of payday loans. For example, in Ohio, with the passage of the Short-Term Loan Law, the state of Ohio effectively banned the payday lending industry with binding fee restrictions. However, small loan products and second mortgages increased dramatically, despite the fact that in the wake of the housing financial crisis, credit was severely restricted. Payday lenders in Ohio effectively relicensed under other types of small loan lenders, which allowed them to keep operating.¹ Creating clear and thorough policy ensures that the small lenders are not pushed to other areas where they can operate the same sorts of business under differing licensure.

The Illinois Predatory Loan Protection Act includes several provisions to protect consumers from some of the most common loopholes exploited by lenders to erode consumer protections. Namely, lenders in other states have sought to circumvent interest rate caps through (1) online lending, (2) partnerships with Native American tribes who hold sovereign immunity (similar to ‘Rent-a-bank’ schemes²), and (3) operating under open-end credit statutes.³ Due to limited enforcement power on the internet, online lenders have a history of attempting to evade state laws and licensing requirements.⁴ This has been seen in California and Virginia, where reforms have now been made to strengthen provisions against online predatory lending.⁵ Small dollar lenders in states that have restrictions and bans frequently form partnerships with Native American tribes, who are immune to consumer protection laws, to skirt regulations. This practice has been seen in states such as Illinois, Arizona, Oklahoma, and Colorado, where lenders fraudulently operate as tribal businesses, despite only a small percentage of profits going towards said tribes.

The Act includes a sweeping anti-evasion provision that accounts for lenders using this bank-partnership model, and applies to open end-credit as well as online lending. However, it should be noted that borrowers can still travel to or obtain loans online from states that do not enforce restrictions. Lawmakers must ensure these anti-evasion provisions are enforced, and be wary of bills that seek to circumvent them. In the spring of 2021, SB 2306/HB 3192 was introduced in Illinois to overturn the “all-in” annual percentage rate (APR) similar to the Military Lending Act (MLA) in favor of the Truth in Lending Act (TILA) definition of APR.⁶ Under TILA, the APR calculation excludes “add-on” products and fees, allowing predatory lenders to disguise the true cost of loans to borrowers.

“It depressed me. It really did… It’s a vicious cycle. You find yourself just spinning and spinning” – Carla, former payday loan borrower

During the Illinois General Assembly’s fall veto session in 2021, lawmakers also explored the introduction of regulatory sandbox legislation that could have opened the door to exclusions to caps on interest. Regulatory sandboxes were introduced in 2015 in the U.K. as a place for financial technology (fintech) firms, in particular, to test new products without immediately running into regulatory issues.⁷ In the United States, states have enacted sandboxes to enable companies to operate without a license. While regulatory sandboxes can be used to incentivize innovations to improve financial inclusion, according to the World Bank, there is little evidence that they actually improve inclusion. In addition, well-designed sandboxes can cost regulatory agencies as much as one million dollars to run, and they require thoughtful design to ensure they are not simply used as a loophole for lenders to escape interest rate caps.⁸ Perhaps most importantly, most sandboxes are not designed for consumers who have traditionally been excluded from mainstream credit.⁹ While a well-designed regulatory sandbox could theoretically improve financial inclusion, the process needs to be explicitly and carefully designed to ensure it has the intended impact without weakening consumer protections. To protect the integrity of the PLPA and prevent consumers from being exploited through hidden fees, lawmakers should be wary of similar bills in future years.

Across the country, a number of different states have implemented different regulations on payday and other high-interest loans. While the results have been mostly positive, consumers continue to need access to cash. Caps on interest rates such as Illinois’s PLPA and the national MLA, help put guardrails on the lending industry to keep rates reasonable for consumers, but they do not eliminate the need for gap funding or emergency funds. Predatory loans are most often taken to cover basic needs for a population that has less generational wealth and continues to be paid less income for similar work. As long as low-wage jobs and racism exist, there will always be people who simply don’t have enough income for monthly costs, major purchases, or one-time emergencies. Policy incentives to improve access to lower-cost lending alternatives, improve wealth creation, and credit are essential to ensure Black and Latino/a communities receive the full benefits intended by the legislation.