Illinois has joined the growing number of states that have restricted high-cost payday loans, but it’s taken a different path to get there: state house.
Illinois Governor JB Pritzker (D) signed a law on 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 the Democratic-controlled New Mexico legislature, have proven to be less successful against industry opposition.
The last three states to impose interest rate caps at 36% – South Dakota, Colorado and Nebraska – have done so through public referendums, not through state houses .
One of the keys to Illinois lawmakers pushing through interest rate cap legislation was speed. Although consumer advocates and church groups have pushed for a rate cap in previous years, it quickly moved through the legislature without meaningful debate.
“This was probably one of the main reasons the bill was able to get through without getting bogged down. We will see what the consequences ultimately will be, ”said Sarah Reise, lawyer at Ballard Spahr LLP.
Illinois’ new rate caps make it the fourth state in the past five years to curb high-cost lending, and other states are undertaking similar efforts.
Some lenders have said that strict rate caps will reduce access to credit for borrowers. But consumer advocates countered that swift legislative action allowed the bill to pass without the industry having a chance to spoil the work.
“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 vivid example of how legislation can get bogged down.
New Mexico already bans payday loans, which typically mature over 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 state of New Mexico, also led by Democrats, passed a bill in March to this effect.
But legislation is stuck in the state’s Democratic-led House of Representatives after the chamber passed a 36% cap just 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 chambers were unable to reach 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 these measures are still in their infancy.
The types of consumer loan reforms that typically go through public institutions allow high-interest loans with additional protections for consumers, such as 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 measure.
“We don’t want to ban payday loans. We think people want this service. We just want to make sure it’s not that 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 the left-right lines like many problems do. People on the right see this as exploitation of the poor, ”said Rieber.
Voters in South Dakota passed a popular referendum in 2016, capping interest rates, the same year Donald Trump won the state by nearly 30% in that year’s presidential election. Deep Red Nebraska approved its own 36% interest rate cap in the 2020 election, with about 85% of Nebraskans 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 of up to 120%.
For states seeking tougher measures, the voter referendum seems like the best bet, Stifler said.
“When it is put to a vote, it is never lost,” she said.
But the referendum option is not available in all states, including Kansas and New Mexico. Activists from both states say their coalitions will continue to pressure their state legislatures to take action.
The Illinois bill includes tough measures that will make it easier for state regulators to limit online lenders who partner with foreign banks to evade the interest rate cap. But the legislation leaves open questions about the fees to lenders that would be factored into the 36% cap.
These issues could have been more clearly spelled out in the legislative debate, said Brett Ashton, chairman of Krieg Devault’s financial institutions practice. Ashton is a member of several industry groups that opposed the bill, including the Illinois Financial Services Association.
“Time will judge the negative impact of passing legislation like this on those most in need of access to credit,” Ashton said, adding he was not speaking on behalf of the associations. professional.
Some industry groups, like the brand new American Fintech Council, have backed the Illinois bill. Democratic lawmakers have said the measure will not cut credit for borrowers, but allow more secure access to loans.
“The 36% rate cap strikes the right balance between access to secure 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.