Proposal designed to protect borrowers from predatory lending practices

[October 25, 2008]  CHICAGO -- To solidify the consumer protections for customers who need to borrow money against the value of their car, the Illinois Department of Financial and Professional Regulation has forwarded revised rules on title loans to the Joint Committee on Administrative Rules. Title loans are short-term loans with interest rates that often exceed 300 percent per year and can, if unpaid, allow the lender to repossess the vehicle and leave the borrower without the means to get to and from work. Families across the state have turned to these nontraditional types of loans as credit card and other lending options have become more restricted.

"Our goal is to make sure that people who use title loans are able to repay the loan successfully. We think these rules make important changes that protect consumers so that they can keep their vehicles," said Dean Martinez, secretary of the Department of Financial and Professional Regulation. "We received comments from community groups and lenders and made changes based on the information we received."

After the first 45-day comment period, the department strengthened the proposed rule to better protect Illinois families who borrow against the value of their car or truck. The changes that were made reflect comments from both consumer groups and industry representatives. The rules, if they take effect, would (1) cover all title loans regardless of the length of term of the loan; (2) require the loan to be cleared through a statewide database before it could be made; and (3) structure loan payments so that the borrower makes progress on reducing the principal with each payment instead of only paying interest costs.

In 2001, Gov. Ryan filed a similar rule but had included a provision that defined title loans as being for 60 days or less. At that time the average length of title loans was 30-60 days. Much as members of the payday loan industry changed the terms of their loans to avoid consumer protections encompassed in the Payday Loan Reform Act, the title lending industry responded by extending the length of loans to 61 days or longer to circumvent a rule that had tried to protect consumers. Additionally, industry representatives sued the state to overturn the rule, arguing that it was an unconstitutional encroachment by the governor on the powers of the legislature. In 2004, the Illinois Supreme Court affirmed a lower court's ruling that upheld the rule.

Once a rule has been filed with the secretary of state, there is a 45-day initial notice period, during which industry groups, advocates and other concerned members of the public may file comments or request a public hearing. During the second notice period, also 45 days long, the rule, and any modifications or amendments, will be reviewed by the Joint Committee on Administrative Rules. The committee can request additional clarification or information from the Department of Financial and Professional Regulation, and this must be supplied during the committee's review. At the end of that time, if the committee takes no action, the rule becomes permanent, and any further changes must be filed through a new rulemaking process. In order to stop a rule from becoming permanent, three-fifths of the panel must vote to block the rule.

[Text from Illinois Department of Financial and Professional Regulation file received from the Illinois Office of Communication and Information]