New rules target high-interest loan firms
The state aims to have amended rules in place later this year to further protect consumers seeking high-interest, short-term loans that use their vehicles as collateral.
The Illinois Department of Financial and Professional Regulation on Wednesday filed the proposed changes to regulations on so-called title loans that went into effect in 2001. The proposals are available for public comment for two 45-day periods and could become permanent if no one files a protest. Companies that violate the new rules could face fines and revocation of their business licenses.
"We'd like to see these new rules stay as is, or with more protections in place, to help begin protecting consumers before the holidays, which is the peak time for these types of loans," said Dean Martinez, director of the Department Financial and Professional Regulation.
Illinois has about 3,000 firms that are licensed to offer title loans, as well as other short-term loans, which carry annual interest rates with double- or triple-digit percentages.
Title loans use cars or trucks for collateral and have terms for around 60 days with interest rates of 300 percent or more annually. If left unpaid, the vehicle could be repossessed without notice, leaving the borrower without a way to get to work or losing any personal belongings inside the vehicle.
Sometimes, these short-term loans carry balloon payments toward the end of the term, which could financially cripple the borrower and lead to repossession, Martinez said.
For example, a $3,000 loan that requires the borrower to pay $400 monthly for seven months might then have a $3,000 balloon payment in the eighth month.
The state agency receives roughly 100 complaints a year regarding title loan companies.
Under the proposed rules filed Wednesday, a title loan would be defined as any loan with an interest rate of more than 36 percent per year that is secured by the title to a vehicle owned by the borrower. The rules are designed to rein in the escalating cost of a title loan by restricting the amount of money that can be lent, limiting the number of times a loan can be refinanced and establishing consumer protections for borrowers, Martinez said.
Also, the rules require the lender to make sure that the borrower has not had a title or other short-term loan in at least 15 days.
In 2001, the state had similar rules that defined the short-term loan as 60 days or less. But such companies quickly changed the terms of their loans to 61 days or more to avoid the regulation. It also included loan caps of $2,000.
The proposed rules redefine the loan terms over 60 days and increased the cap to $4,000 to reflect the higher value of cars today, Martinez said.
In addition, the proposed rules allow the borrower to park the car in an accessible place and retrieve their personal belongings before any potential repossession.
While more consumer protection is good, the Better Business Bureau encourages consumers to explore alternative loans rather than short-term, high-interest loans.
"It's important to compare offers with the lowest APR (annual percentage rate) and finance charges and consider credit unions, small loan companies, advance pay from an employer or local community-based organizations that make small business loans to individuals," a bureau spokesman said.