The Illinois 36% “all-in” rate cap, or Predatory Loan Prevention Act, enacted March 23 is poised to present significant challenges to the auto finance industry in the next year if other states and the federal government implement similar statutes, Ken Rojc, managing partner at Nisen & Elliott, said during the Auto Finance Risk Summit on Wednesday.
“Other states, as we speak, are looking at this and saying, ‘why aren’t we adopting this?’ So, this is going to be a potential challenge for the upcoming year and potentially beyond. In addition, at the federal level, there has been some serious talk at initiating a federal law that would bring in the [military annual percentage rate cap],” Rojc said.
“It’s important for creditors to revisit their policies as to what cases ancillary products are going to be allowed to be financed and at what price, because they there could be limitations on the ability to finance those products,” Rojc said.
The Predatory Loan Prevention Act places an all-in 36% rate cap on consumer loans, in line with the U.S. military APR calculation required under federal law, which includes any ancillary products financed on the note. The statute applies to all consumer loans less than $40,000 made to borrowers living in the state, including retail installment contracts, but does not apply to leases, have a retroactive effect, or to borrowers that move out of the state, Rojc said.
Subprime lenders are likely to be most affected by the statute, as banks and credit unions are exempt, Rojc said. Lenders that are determined to be in violation of the statute will have the loan considered void and be subject to a $10,000 fine.
“There are clear policy arguments on both sides that this the net effect is going to cut out a certain chunk of people that we know will not be able to get credit otherwise,” Rojc said.