Author: Alan Alop, LAF
Last updated: November 2009

Payday Loans: 815 ILCS 122/1-1 et seq.
Title Loans
Legal Claim That May Be Asserted Against Payday and Title Loan Companies:
     Illinois Consumer Fraud and Deceptive Trade Practices Act, 815 ILCS §505/2
     Common Law Unconscionability Doctrine
     Truth-in-Lending Act, 15 U.S.C. §1601 et seq.
     Electronic Funds Transfer (“EFT”) Act 15 U.S.C. § 1693
     Illinois Commercial Code Violations After Repossession (Title Loans).
Possible Pitfall:  Arbitration Clause

Payday Loans

Payday lending is a form of short-term lending at extraordinary high rates of interest. A law governing payday loans (not title loans) in Illinois, 815 ILCS 122/1-1 et seq, became effective on December 6, 2005.

Definition of Payday Loan

A payday loan is defined as a loan with three attributes:  

1. An annual percentage rate of interest exceeding 36%; 
2. A term that is not less than 13 days and does not exceed 120 days; and 
3. The borrower either provides a post-dated check to the lender, authorizes the lender to debit his bank account, or executes a wage assignment.  815 ILCS 122/1-10.

Note:  Lenders can attempt to circumvent this law by providing loans with terms of 121 days or longer.

Rollovers Outlawed

Payday loans used to be extended when they came due; payday loan companies called this a “rollover.”  Now renewals or rollovers are not permitted under Illinois law.  815 ILCS 122/2-30.

New Payday Loans

Payday lenders are permitted to make a new loan to the borrower if the new loan will not result in the borrower being indebted for more than 45 consecutive days.  Example:  Joe Smith takes out a 13-day payday loan from Company Z, gets a second loan from Company Z on the thirteenth day, and a third loan from Company Z on the 26th day.  Joe cannot get a fourth loan on the 39th day because that would mean he would have a payday loan for more than 45 days.  Under this scenario, Illinois law now says that Joe must wait at least seven days after he pays off the prior payday loan before he can get another payday loan.  815 ILCS 122/2-5 (b).

Maximum Amount of the Loan

The maximum amount of a payday loan is $1,000 or 25% of the borrower’s gross monthly income, whichever is less.  So if a borrower is grossing $2,000 monthly, the most he/she could borrow from a payday lender is $500 (25% of gross monthly earnings).  815 ILCS 122/2-5 (c).

Maximum Two Outstanding Payday Loans

No payday loan may be made to a borrower who has an outstanding balance on two payday loans.  815 ILCS 122/2-5 (d).

Maximum Interest Rate

The maximum interest charge is $15.50 per $100 loaned, which translates to an annual percentage rate of interest of about 429% on a thirteen-day loan.  815 ILCS 122/2-5 (e).

Restriction on Security Interest

No payday lender may retain a security interest in the personal property of the borrower.  815 ILCS 122/2-5 (f).

Verification

Before entering into a payday loan, the payday lender must verify that the loan is permissible through a consumer reporting service database.  815 ILCS 122/2-15.  For example, borrowers may not take out a third payday loan when two payday loans are outstanding. See, 815 ILCS 122/2-5 (d).  Payday lenders must therefore confirm, prior to extending the loan, that the borrower does not currently have two or more outstanding payday loans.

Disclosures

Before a payday loan is made, the lender must deliver to the borrower a pamphlet prepared by the Department of Financial Institutions (DFI) that: 

1. Explains in English and Spanish the rights of the borrower; 
2. Includes a toll free telephone number of DFI; and 
3. Provides information regarding the availability of debt management services. 815 ILCS 122/2-20 (a).

Lenders must provide the borrower a copy of the agreement and that agreement must include in English and in the language in which the loan was negotiated, the following: 

1. name and address of lender and name and title of lender’s employee signing the agreement; 
2. Truth in Lending Act disclosures; 
3. clear description of the borrower’s payment obligations;
4. statement that the borrower may not be prosecuted in criminal court to collect the loan; 
5. a statement that payday loans should be used only to meet short-term cash needs. 815 ILCS 122/2-20 (b).

Posted Notices

Notices in English and Spanish must be posted in the payday loan office stating: 

1. the lender cannot use criminal process to collect a loan; 
2. the schedule of finance charges on a $100 loan, including the interest rate; 
3. the loan should not be used for long-term financial needs;
4. a description of an interest free repayment plan that is available to borrowers who still owe on a payday loan after more than 35 days.  815 ILCS 122/2-20 (c).

Right to Cancel

Borrowers may cancel the payday loan by paying the entire proceeds of the loan no later than the end of the second business day following the day on which the loan was executed.  815 ILCS 122/2-25.

Assignment

The holder or assignee of any payday loan takes the loan subject to all claims and defenses of the consumer against the maker.  815 ILCS 122/2-35 (d).

Repayment Plan

All payday loans now have a procedure called the “repayment plan” that allows a borrower to stop the interest from accumulating on the debt after 35 days.  If a borrower has not paid off a payday loan after 35 days, he can ask the payday lender for a repayment plan.  The repayment plan gives the borrower 55 days to repay the loan in installments with no additional finance charges or other charges of any kind.  If the borrower and the payday lender agree, the repayment plan can be extended to 90 days.  The borrower must request the repayment plan no later than 28 days after the loan is in default.  The lender than has 48 hours to prepare a written repayment plan which must be executed by the lender and the borrower.  The repayment plan shall allow the borrower to repay in at least four payments with at least 13 days between each payment.   815 ILCS 122/2-40.

Default

Lenders may not initiate any proceedings until 28 days after the default date of the loan, or 28 days after the default date under the terms of a repayment plan.  Upon default the lender may not charge the borrower any finance charges, interest, or fees of any kind other than a $25 bad check fee.  815 ILCS 122/2-45.

Members of the Military

No lender may garnish the wages of a member of the military.  Lenders must also suspend any collection activity of a member of the military who has been deployed to combat or combat support.  Lenders may not contact the military chain of command to collect a loan.   815 ILCS 122/2-50.

Loans to military personnel must follow the requirements of the Talent Amendment, a federal consumer protection law for service members and their dependants, including a 36% interest rate cap. To learn more about the Talent Amendment, visit 10 USC 49 § 987.

Advertising

If payday loan advertising states a rate, a monthly payment, amount of the loan, the number of installments or amount of charge for a loan, the annual percentage rate of interest must be stated as well.  815 ILCS 122/2-60.

Licensure

Payday lenders must seek and obtain a license through the DFI.  815 ILCS 122/3-3.

Prohibited Acts

Lenders may not:

1. threaten to use the criminal process to collect a loan;
2. use and device to collect more charges than the Act authorizes; 
3. engage in unfair or deceptive practices;
4. use the post-dated check of the borrower as collateral for another transaction;
5. knowingly accept proceeds of another payday loan;
6. threaten to take any action against a borrower which is prohibited by the Act; 
7. require a waiver of jury unless that waiver is part of an arbitration clause; 
8. sell any insurance;
9. take any power of attorney;
10. take a security interest in real estate;
11. collect a late charge; 
12. collect treble damages on an amount owing from a payday loan; 
13. refuse or inhibit the borrower from entering into a repayment plan; 
14. charge attorney fees, court costs or other fees in connection with the collection of the loan;
15. include an arbitration clause that is unfair or oppressive.  815 ILCS 122/4-5.

Provisions of the Act May Not Be Waived

No provision of the PLRA may be waived.  815 ILCS 122/4-40.

Attempts to Evade the Act

The Act is applicable to any person or entity that seeks to evade its applicability by any device, subterfuge or pretense.  815 ILCS 122/1-15(b).

Enforcement

Any material violation of this Act constitutes a violation of the Illinois Consumer Fraud Act.  815 ILCS 122/4-10 (b).

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Title Loans

Until April 1, 2009, title loans were only regulated if they were less than 60 days in term. Therefore, all title loans were made for terms longer than 60 days. In April, 2009, new rules were enacted that cover all title loans. The rules can be found at 38 Ill. Adm. Code 110.300 – 110.430.

Definition

A “Title secured loan” is any loan that has an interest rate greater than 36%, and where the borrower provides title to a motor vehicle as security for the loan when the loan is made. 38 Ill. Adm. Code 110.300

Requirements

Title lenders must compute interest on all title-secured loans as simple interest. The loans must be fully amortized and repayable in substantially equal payments. The old practice was for lenders to require a large balloon payment, which borrowers could rarely make. The failure to make the balloon payment would allow the lender to either repossess the vehicle or to extend the loan and collect more interest payments. The new rules require that each payment count toward paying off the principal of the loan, and disallows balloon payments. 38 Ill. Adm. Code 110.340

The loan must indicate on its face the make, model, year, and VIN of the vehicle being used as security. The lender must also take title at the time the loan is made. When the loan is paid, the lender must release the lien, provide evidence of the release to the borrower, and return the title. 38 Ill. Adm. Code 110.350

As in payday loans, the lender must provide a pamphlet to the borrower describing the availability of debt management services and explaining the rights and responsibilities of the borrower. There must be an initialed statement by the obligor that reads: “I have received from (name of lender) a toll-free number from the Department of Financial and Professional Regulation-Division Financial Institutions that I can call for information regarding debt management services.” This number must also be provided with any written notice of arrears or default. 38 Ill. Adm. Code 110.360, 110.380

Lending Limits

Title loans cannot exceed $4,000. The monthly payments may not exceed 50% of the borrower’s gross monthly income (although the borrower may prepay the loan down in any amount they wish). 38 Ill Adm Code 110.370(a)

Title loans may be refinanced, but only if at least 20% of the principal has been repaid. The principal of the refinanced loan may not exceed the principal amount of the original loan. 38 Ill Adm Code 110.370(b)

No loans may be made without consulting the database. No loans may be made within 15 days of a borrower being indebted on another title loan, having paid off a title loan, closing a loan due to sale of collateral, writing off a loan, or return of security. Refinancing is allowed during the 15 day waiting period. Lenders must check the database to make sure the borrower is eligible. The lender must also advise the borrower of the Division’s existence and number and that the borrower can report the lender to the division. 38 Ill Adm Code 110.370(c)

The lender must obtain documentation of the borrower’s gross monthly income prior to making a loan. Documentation includes: payroll stubs or receipts, or the most recent receipt documenting payment of government benefits. 38 Ill Adm Code 110.430

Security

Lenders may not take keys or copies of keys as security. 38 Ill Adm Code 110.390(a)

Lenders, prior to repossessing a vehicle, must give notice and give the borrower the opportunity to return the car at a reasonably convenient time and place, and allowing the borrower to remove personal items. No charges or costs may be applied. 38 Ill Adm Code 110.390(b)

Lenders may not repossess the vehicle and then lease it back to the borrower. 38 Ill Adm Code 110.390(d)

Lenders may not take an interest in any of the borrower’s property other than the motor title listed on the loan as security. 38 Ill Adm. Code 110.410
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Legal Claim That May Be Asserted Against Payday and Title Loan Companies

Illinois Consumer Fraud and Deceptive Trade Practices Act, 815 ILCS §505/2

The Consumer Fraud Act (“CFA”) prohibits “unfair” or “deceptive” practices in trade or commerce.  815 ILCS 505/2.

The Payday Loan Reform Act of 2005 (“PLRA”) specifically states that any material violation of that Act constitutes a violation of the CFA.   815 ILCS 122/4-10 (b).  The CFA provides a private right of action for damages and attorney fees.  815 ILCS 505/10a.  Case law has established that punitive damages may also be recovered under the CFA.  Ekl v. Knecht, 223 Ill. App. 3d 234 (2d Dist. 1991). Thus, if a payday lender fails to comply with a material provision of the PLRA, such as failing to make requisite disclosures or to provide a repayment plan when timely requested, the borrower may initiate an action under the CFA for the non-compliance with the PLRA.

If a payday lender or title lender commits an unfair practice—even one not specifically enumerated in the PLRA, it may be actionable under the CFA.  Robinson v. Toyota Motor Credit Corporation, 201 Ill. 2d 403 (2002) held that unfair acts alone--without deception--are actionable.

The Court will examine three factors to make a determination whether conduct is “unfair” within the meaning of the CFA: 

1. whether the practice offends public policy;
2. whether it is immoral, unethical, oppressive, or unscrupulous; or
3. whether it causes substantial injury to consumers. Robinson at 417-418.

It is not necessary to satisfy all three criteria to establish an unfair practice.  Id.

Excessive Interest Rate as an Unfair Act

The imposition of an excessive interest rate may constitute an unfair practice under the CFA. Mitchem v. American Loan Company, Inc., 2000 U.S. Dist. LEXIS 5785, 8-9  (N.D.Ill. 2000).  But the enactment of the Payday Loan Reform Act of 2005 undercuts this argument (as for loans within its purview), as that statute authorizes interest rates up to 429% in payday loan transactions. 

Deceptive Acts

Payday loan companies may not engage in conduct that is deceptive under the CFA.

Deceptive advertising

Garcia v. Overland Bond & Investment Company, 282 Ill.App.3d 486, 668 N.E.2d 199 (1st Dist 1996). Use of advertisement that stated “Easy Credit” was deceptive.

Misrepresentations

Hartke v. Illinois Payday Loans, Inc., 1999 U.S. Dist. LEXIS 14937 (C.D. Ill.1999). Contractual statement that a bounced check obligates the borrower to pay “statutory fees” a misrepresentation.

Common Law Unconscionability Doctrine

The doctrine of unconscionabilty in Illinois, as in most other states, operates to protect people in need from the overreachings of others. Reuben H. Donnelley v. Krasny Supply Co., 227 Ill.App.3d 414, 592 N.E.2d 8, 12 (1st Dist. 1991). Unconscionability is most frequently noted in regard to the sale of goods.  Section 2-302 of Article 2 of the Illinois Commercial Code (810 ILCS 5/2-302) prohibits unconscionable contractual provisions. Loans of money do not come within the scope of the Illinois Commercial Code, but the common law doctrine of unconscionability pre-existed the Commercial Code and is not limited to the sale of goods. See, Tinsman v. Moline Beneficial Finance Co., 531 F2d 815, n.5 at 818 (7th Cir.1976).

While there is no ceiling on interest rates in most Illinois loan transactions, excessive interest rates that are typical in payday and title loans may be unconscionable in violation of Illinois common law principles. A series of cases have denied motions to dismiss unconscionability claims against short-term loan outfits. In Brown v. C.I. L., Inc., 1996 U.S. Dist LEXIS 4917 (N.D. Ill.  1996); adopted at 1996 U.S. Dist LEXIS 4053 (N.D. Ill. 1996), plaintiff challenged as unconscionable, under Illinois common law, interest rates that began at 179%. Noting that “these contract terms appear unreasonably unfavorable to CIL,” the Court refused to dismiss a claim for unconscionability. Many other courts have also refused to dismiss a claim that a loan with an excessive interest rate was unconscionable. In Cobb v. Monarch Finance Corp., 913 F. Supp.1164 (N.D. Ill. 1995) the Court stated:

"At this stage of the litigation we cannot hold, as a matter of law that Cobb has failed to state a claim of unconscionability. The annual percentage rates charged by the Lender Defendants, ranging from 57% to 101%, appear unreasonably favorable to the lenders..."

Cobb, 913 F. Supp. at 1179.  See also,  Pinkett v. Moolah Loan Company, 1999 U.S. Dist. LEXIS 17276 (N.D. Ill. 1999); Carboni v. Arrospide, 2 Cal. Rep. 2d 845, 16 UCC Rep. 2d 584 (Cal. 1991); Hartke v. Illinois Payday Loans, Inc., 1999 U.S. Dist. LEXIS 14937 (C.D. Ill. 1999); Johnson v. Tele-Cash, Inc., 82 F.Supp2d. 264 (D.Del. 1999), revs’d on other grounds, sub nom. Johnson v. West Suburban Bank, 225 F.3d  366 (3d Cir 2000); Sharp v. Chartwell Financial Services, Ltd., 2000 U.S. Dist. LEXIS 3143 (N.D. Ill. 2000); Contra:  Gardner Payday Loan Corp., 1999 U.S. Dist. LEXIS 18040 (N.D. Ill. 1999).

However, the 2005 enactment of a statutory authorization of 429% in the case of payday loans makes the assertion of unconscionability more difficult for loans within the statutory parameters.  The argument would still be viable for title loans and loans with terms greater than 120 days. 

Truth-in-Lending Act, 15 U.S.C. §1601 et seq.

Introduction

The Truth in Lending Act ("TILA"), 15 U.S.C. §1640 et seq. (and its regulations found at 12 CFR §226 et seq. ) was enacted to protect consumers by requiring creditors to provide a series of credit disclosures prior to the consummation of the credit transaction. Disclosures such as the annual percentage rate of interest, the finance charge and a description of the security interest must be given to the consumer prior to the consummation of the transaction. If the consumer is not given the disclosures in a timely fashion, TILA provides the consumer statutory damages in the amount of do