Illinois has joined the growing number of states that have restricted expensive payday loans, but it went another route: the statehouse.
Illinois Governor JB Pritzker (D) signed law on March 23 that limits the interest rates on payday loans, auto title loans, and installment loans to 36%. Similar efforts in other states, most recently in the Democrat-controlled legislature in New Mexico, have proven less successful against industry opposition.
The last three states to have 36% interest rate caps – South Dakota, Colorado, and Nebraska – did so through public referendums, not state houses.
One of the keys to Illinois lawmakers enforcing interest rate cap laws was speed. Although consumer advocates and religious communities had pushed for an interest rate cap in previous years, it went quickly through the legislative period without any significant debate.
“It was probably a big reason the bill could be passed on without getting bogged down. We’ll see what the consequences will be, ”said Sarah Reise, Of Counsel at Ballard Spahr LLP.
Illinois’ new interest rate cap makes it the fourth state in the past five years to restrict high-priced lending, and other states are making similar efforts.
Some lenders have said that hard interest rate caps will limit borrowers’ access to credit. Consumer advocates countered, however, that swift legislative action made it possible to get the bill through without giving the industry a chance to glue the factories together.
“Unfortunately, money plays a role in state legislatures,” said Lisa Stifler, state director of the Center for Responsible Lending.
Faltered in New Mexico
The New Mexico experience provides a vivid example of how legislation can stall.
New Mexico already bans payday loans that typically mature over two weeks. But the state currently allows installment loans – which are repaid over longer periods of time – with interest rates of up to 175%.
New Mexico Governor Michelle Lujan Grisham (D) has made the adoption of a 36% interest rate cap on installment loans a top priority for the 2021 legislature. The New Mexico State Senate, also led by Democrats, passed a bill in March.
But legislation stalled in the state’s Democrat-run House of Representatives after the chamber accepted a 36 percent cap only on loans above $ 1,100. The House Bill would allow interest rates of up to 99% on smaller loans that consumer groups say accounted for 62% of New Mexico installment loans.
The legislators of both chambers could not come to an agreement in a conference committee before the end of the legislative period.
Maine, Minnesota, and Rhode Island state legislatures are considering all interest rate cap bills, but these measures are still in the early stages.
The types of consumer lending reforms that typically run through state houses allow for some high-yield lending with added consumer protection such as extended repayment periods. These laws, as recently passed in Ohio and Virginia, also open the door to competition from fintechs and other lenders offering lower interest rates.
The Kansas legislature is considering such a move.
“We don’t want to ban payday loans. We believe that people want this service. We just want to make it so that it is not so burdensome for the borrowers, ”said Rabbi Moti Rieber, the executive director of Kansas Interfaith Action and member of the activist group Topeka JUMP.
Kansas law has powerful backers like the Catholic Church, which underscores the bipartisan appeal of payday lending reforms.
“It doesn’t collapse on left-right lines, as it does with many problems. The right see this as the exploitation of poor people, ”said Rieber.
South Dakota voters passed a referendum on the interest rate ceiling in 2016, and that same year Donald Trump won the state by nearly 30% in this year’s presidential election. Deep red Nebraska approved its own interest rate cap of 36% in the 2020 elections, with around 85% of Nebraskans voting in favor.
Colorado passed a 36% interest rate cap in a referendum in 2018, just eight years after state lawmakers narrowly approved less restrictive limits on small dollar loans that allowed interest rates of up to 120%.
For states looking for tougher measures, the referendum appears to be a better choice, Stifler said.
“When it comes to the vote, it is never lost,” she said.
But the referendum option isn’t available in all states, including Kansas and New Mexico. Activists in both states say their coalitions will continue to urge their legislatures to take action.
The Illinois bill contains tough measures that will make it easier for state regulators to limit online lenders who work with banks outside of the state to bypass the interest rate cap. However, the legislation leaves unanswered questions about what fees the lender would count towards the 36% cap.
These issues could have been made clearer in the legislative debate, said Brett Ashton, chairman of Krieg Devault’s financial institution practice. Ashton is a member of several opposing industry groups, including the Illinois Financial Services Association.
“Time will judge how negative the passage of such laws will be for those most in need of access to credit,” Ashton said, adding that he was not speaking on behalf of trade associations.
Some industry groups, like the newly formed American Fintech Council, supported Illinois law. Democratic lawmakers said the measure will not cut off borrowers’ credit cone but will allow safer access to credit.
“The interest rate cap of 36% offers the right balance between access to secure and affordable credit on the one hand and protection against predatory credit on the other,” State Senator Jacqueline Collins (D) said in a statement.