Illinois has joined the growing number of states that have reined in high-cost payday loans, but it took a different path getting there: the statehouse.
Illinois Gov. J.B. 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 statehouses.
One of the keys to Illinois lawmakers getting the interest rate cap legislation through was speed. Although consumer advocates and faith groups pushed for a rate cap in previous years, it moved swiftly through the legislature without significant debate.
“It likely was probably a key reason the bill was able to be passed on not get bogged down. We’ll see what the consequences of that ultimately will be,” said Sarah Reise, of counsel at Ballard Spahr LLP.
The new rate cap in Illinois makes it the fourth state in the last five years to rein in high-cost lending, and other states are undertaking similar efforts.
Some lenders have said that hard rate caps will reduce access to credit for borrowers. But consumer advocates countered that quick legislative action allowed the bill to make it through without the industry getting the chance to gum up the works.
“Money plays a role in state legislatures, unfortunately,” said Lisa Stifler, the Center for Responsible Lending’s state policy director.
Stalled in New Mexico
New Mexico’s experience provides a vivid example of how legislation can bog down.
New Mexico already bans payday loans, which typically mature over two weeks. But the state currently allows installment loans—which are paid back over longer periods—with interest rates as high as 175%.
New Mexico’s Gov. Michelle Lujan Grisham (D) made passage of a 36% interest rate cap for installment loans a top priority for the 2021 legislative session. New Mexico’s state Senate, also led 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 adopted a 36 percent cap only for loans exceeding $1,100. The House bill would allow rates up to 99% on smaller loans, which consumer groups say accounted for 62% of installment lending in New Mexico.
Lawmakers from the two chambers were unable to come to an agreement in a conference committee before the legislative session expired.
The state legislatures in Maine, Minnesota and Rhode Island are all considering interest rate cap bills, but those measures are in the early stages.
The types of consumer lending reforms that typically make it through statehouses allow for some high-rate lending with additional consumer protections, like extended repayment periods. Those laws, like ones 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 outlaw payday loans. We think people want this service. We just want to make it so that it’s not so onerous for the borrowers,” said Rabbi Moti Rieber, the executive director of Kansas Interfaith Action and a member of Topeka JUMP, an activist group.
The Kansas bill has powerful backers like the Catholic Church, highlighting the bipartisan appeal of payday lending reforms.
“It doesn’t break down on left-right lines the way many issues do. People on the right see this as an exploitation of poor people,” 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 that year’s presidential election. Deep red Nebraska approved its own 36% interest rate cap in the 2020 elections, with around 85% of Nebraskans voting in favor.
Colorado passed a 36% interest rate cap in a 2018 referendum, only eight years after the state’s legislature narrowly approved less restrictive limits on small-dollar lending that allowed interest rates as high as 120%.
For states looking for tougher measures, the voter referendum appears to be the better bet, Stifler said.
“When it’s put to the vote, it’s 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 keep pressing their state legislatures to take action.
The Illinois bill includes strict 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 lender fees would be counted toward the 36% cap.
Those issues could’ve been more clearly laid out in the legislative debate, said Brett Ashton, the chair 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 be the judge of exactly how negative the impact of enacting legislation like this is to those who need access to credit the most,” Ashton said, adding that he wasn’t speaking on behalf of the trade associations.
Some industry groups, like the newly-formed American Fintech Council, supported the Illinois bill. Democratic lawmakers said the measure won’t cut off the credit spigot 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 from predatory lending on the other,” State Sen. Jacqueline Collins (D) said in a statement.