Illinois adopts strict payday loan limits as other states stagnate
Illinois has joined the growing number of states that have clamped down on high-cost payday loans, but it has taken a different route to get there: the state house.
Illinois Governor JB Pritzker (D) signed legislation March 23 that caps interest rates on payday loans, auto title loans and installment loans at 36%. Similar efforts in other states, most recently in New Mexico’s Democratic-controlled legislature, have proven less successful against industry opposition.
The last three states to impose 36% interest rate caps — South Dakota, Colorado and Nebraska — did so through public referendums, not through state houses.
One of the keys to getting Illinois lawmakers to pass the interest rate cap legislation was speed. Although consumer advocates and faith groups had called for a price cap in previous years, it quickly passed through the legislature without meaningful debate.
“That was probably one of the main reasons the bill was able to get through without getting bogged down. We will see what the consequences are,” said Sarah Reise, attorney at Ballard Spahr LLP.
The new rate cap in Illinois makes it the fourth state in the past five years to curb high-cost lending, and other states are undertaking similar efforts.
Some lenders said hard rate caps would reduce borrowers’ access to credit. But consumer advocates countered that swift legislative action allowed the bill to pass without industry having a chance to scrub the works.
“Money unfortunately plays a role in state legislatures,” said Lisa Stifler, director of state policy for the Center for Responsible Lending.
Stranded in New Mexico
The New Mexico experience provides a stark example of how legislation can get bogged down.
New Mexico already bans payday loans, which typically mature in two weeks. But the state currently allows installment loans, which are repaid over longer periods, with interest rates of up to 175%.
New Mexico Governor Michelle Lujan Grisham (D) has made passing a 36% interest rate cap on installment loans a top priority for the 2021 legislative session. The Senate of the state of New Mexico, also run by Democrats, passed a bill in March doing just that.
But the legislation stalled in the state’s Democratic-led House of Representatives after the chamber passed a 36% cap only on loans over $1,100. The House bill would allow rates of up to 99% on small loans, which consumer groups said accounted for 62% of installment loans in New Mexico.
Lawmakers in both houses were unable to reach an agreement in a conference committee before the legislative session expired.
The state legislatures of Maine, Minnesota and Rhode Island are all considering interest rate cap bills, but those measures are still in their infancy.
The kinds of consumer loan reforms that typically go through state houses allow for certain high-rate loans with added protections for consumers, like extended repayment periods. These laws, like those recently passed in Ohio and Virginia, also open the door to competition from fintechs and other lenders offering lower rates.
The Kansas legislature is considering such a move.
“We don’t want to ban payday loans. We think people want this service. We just want to make sure it’s not so onerous for borrowers,” said Rabbi Moti Rieber, executive director of Kansas Interfaith Action and a member of Topeka JUMP, an activist group.
The Kansas bill has strong supporters like the Catholic Church, underscoring the bipartisan appeal of payday loan reforms.
“It doesn’t break down on left-right lines like many issues do. Right-wingers see this as exploitation of the poor,” Rieber said.
South Dakota voters passed a popular referendum in 2016 capping interest rates, the same year Donald Trump won the state by nearly 30% in the presidential election that year. Deep red Nebraska approved its own 36% interest rate cap in the 2020 election, with about 85% of Nebraskas voting in favor.
Colorado passed a 36% interest rate cap in a 2018 referendum, just eight years after the state legislature narrowly approved less restrictive limits on small-dollar loans that allowed interest rates as high as 120%.
For states seeking tougher measures, a voter referendum appears to be the best bet, Stifler said.
“When it comes to a vote, it’s never lost,” she said.
But the referendum option is not available in all states, including Kansas and New Mexico. Activists in both states say their coalitions will continue to pressure their state legislatures for action.
The Illinois bill includes tough measures that will make it easier for state regulators to limit online lenders that partner with out-of-state banks to evade the interest rate cap. But the legislation leaves open questions about which lenders’ fees would factor into the 36% cap.
These issues could have been more clearly articulated in the legislative debate, said Brett Ashton, chairman of Krieg Devault’s financial institutions practice. Ashton is a member of several industry groups that have opposed the bill, including the Illinois Financial Services Association.
“Time will be the judge of the negative impact of passing legislation like this on those most in need of access to credit,” Ashton said, adding that he was not speaking on behalf. professional associations.
Some industry groups, like the fledgling American Fintech Council, have backed the Illinois bill. Democratic lawmakers said the measure will not cut off the credit tap for borrowers, but will allow safer access to loans.
“The 36% rate cap strikes the right balance between access to safe and affordable credit on the one hand and protection against predatory lending on the other,” said State Senator Jacqueline Collins (D ) in a press release.