The MAPR is an “all in” APR, and includes in the interest calculation, with limited exceptions: (i) finance charges; (ii) application fees; (iii) any credit insurance premium or fee, any fee for a debt cancellation contract, or any fee for a debt suspension agreement; and (iv) any fee for a credit-related ancillary product sold in connection with the credit transaction, The Department of Defense (“DOD”), which interprets the MLA, has not provided much guidance on what constitutes a “credit-related ancillary product.”
In 2020, the DOD withdrew a prior interpretation of the MLA that effectively said when a lender extends credit in excess of an item’s purchase price, the exemption from the MLA for motor vehicle acquisition loans would not apply. This change was understood to allow dealers to sell GAP without running afoul of the MLA. Repealing this interpretation, however, only meant a vehicle financing transaction was exempt from the MLA. It did not address whether GAP is covered in the MAPR calculation. A prudent approach for Illinois dealers is to treat GAP premiums as interest for purposes of calculating the MAPR rate under Illinois law.
It may be possible to act as an agent for a federally chartered lender in the origination of two-party (direct loan) financing. However, the law does not recognize such an agency approach if “the totality of circumstances indicates that the person or entity [the dealer] is the lender and the transaction is structured to evade the requirements of this Act.” The question essentially comes down to the dealer’s economic interest in the transaction. Dealers are advised to consult with their federally chartered lenders to attempt to structure an agency relationship for the dealer to have no economic interest in the financing (such as a non-recourse loan compensated by a flat fee) to not run afoul of this prohibition against evading the requirements of the law.
Penalties under the new law are harsh. They include making the credit arrangement null and void from inception. No interest, principal, fees, or charges can be collected from the consumer. The Illinois Secretary of Financial and Professional Regulation (“Secretary”) can impose a fine of $10,000 per violation and a violation of the Act is also a violation of Illinois’ UDAP law, the Illinois Consumer Fraud and Deceptive Business Practices Act. That law allows consumers to sue for actual damages, punitive damages, and attorneys’ fees.
The Secretary is authorized to write rules under the Act, but it is not known when he or she will do so.
Reportedly, efforts are underway in the Illinois legislature to amend the new law to exempt purchase money auto financing. It is unknown what the timing or likelihood of success will be of such legislation.
For now, compliance is a must given the draconian penalties of the new law. It is recommended that you speak with your DMS provider to determine if it can calculate an MAPR and speak with your federally chartered lenders about an agency arrangement for direct two-party financing.