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Interest by Any Other Name Would Cost Just as Much

posted by Bob Lawless

Some odd news has reached my desk about Illinois's Predatory Loan Prevention Act (PLPA) and efforts to clarify its application to pawnbrokers. As many Credit Slips readers will know Illinois passed a 36% APR cap on consumer lending in 2021. The cap applies "notwithstanding any other provision of law" and specifically excepts banks but no other other lenders.

Despite this language, the pawnbroker industry filed suit claiming it was not covered by the law. Every state has a specialized law regulating pawnbrokers. It was not frivolous to claim the PLPA did not apply, but it did not seem like a winner given the PLPA's clear statutory directive. Nonetheless, a state trial judge granted a preliminary injunction preventing the Illinois Department of Professional and Financial Regulation from enforcing the PLPA against pawnbrokers. It was perhaps a lucky break they drew the same state trial judge that had issued a temporary restraining against the vaccine and testing mandates by the Chicago Public Schools only to be reversed twelve days later. Two years has passed since the preliminary injunction was issued, and that litigation still languishes (which is another story for another day).

There have been efforts for legislative action to clarify the application of the PLPA to pawnbrokers. This is where the odd news comes in because the story is that there is squabbling over whether pawnbrokers are already subject to a 3% per month/36% per year cap. To understand that, we need to dig a bit into the Illinois Pawnbroker Regulation Act.

That law first says pawnbrokers can charge 3% interest per month. OK, I can multiple by twelve. That is 36% per year. Two paragraphs later the same law then says "Each pawnbroker may contract for and receive a monthly finance charge including interest and fees not to exceed one-fifth of the loan amount." That is 20% per month, and my handy calculator says that is 240% per month. 

I cannot believe that any serious person involved in these discussion is squabbling over labels. Pawnbrokers can charge customers 20% per month in Illinois, and that is exactly what they do. The labels matters not to the customer. You can call it 3% "interest" and 17% "fees." You can say the fee is a "money retention fee" until the loan is repaid. Call it what you will--whatever the name, it all costs the same to the consumer. Call it what you will--the lender needs to recover its costs from the revenue it receives. 

Fixing these labeling issues is the genius of the federal Truth in Lending Act. By providing a uniform calculation we all know as the annual percentage rate or "APR," TILA has been a statutory success story for both lenders and customers. One of my favorite things to test in my Consumer Finance course is to appreciate that any charge incident to an extension of credit is a finance charge that increases the APR. My old exams are riddled with all sorts of creative labels for "interest." Pro tip for my current students--if the issue comes up on the exam this semester, don't tell me that a charge a pawnbroker requires its customer to pay is not a "finance charge."

The drafters of the Illinois PLPA knew all about how easy it is to play with labels and used APR for the 36% cap. Pawnbroker interest or fees are all finance charges. The pawnbroker industry conceded the point in their lawsuit as they must. It would have been disingenuous in a courtroom to argue you need relief from a 36% APR cap that otherwise would not apply to you. Apparently, the tolerance for sophistry is higher in legislative discussions.

Serious people can make other serious arguments about the best legislative solution. Perhaps a 36% APR cap would prevent pawnbrokers from recovering their costs for low-dollar loans. Perhaps it would be entirely unfeasible to operate a pawn business at those rates, and Illinois would cut off a way for desperate person to access needed cash. The difficulty for those arguments is they are the same ones that the legislature rejected for other fringe lending when it passed the PLPA. But, at least those are serious arguments. Word games about what "interest" means are not.

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