(267) 481-5636
    Randy Henrick & Associates, L.L.C.
    • Home
    • Services
    • Special Offers
    • About Us/Contact
    • Blog

    ​

    Blogs

    New Illinois Law Effectively Restricts GAP and Products Sales

    3/30/2021

    0 Comments

     
    Illinois Governor Jay Pritzker signed the Predatory Loan Prevention Act which applies to all consumer financing in the state and took effect upon his signature on March 23.  The law adopts a maximum Military Lending Act calculated APR (“MAPR”) of 36% for consumer loans in Illinois.  Consumer loans are defined to include motor vehicle retail installment sales contracts as well as traditional loans.  Only banks, savings associations, credit unions and other federally chartered lenders are exempt from the law.

    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.  

    0 Comments



    Leave a Reply.

      Author

      Randy Henrick is a leading auto industry compliance consultant. This article is not intended as legal or compliance advice due to the unique nature of a dealer's situation in each state. Randy's articles do provide issues and best practices that you may want to discuss with your attorney or compliance advisor for possible adoption in your dealership. Email Randy at AutoDealerCompliance@gmail.com
      Follow us on Twitter @randyh44

      Archives

      January 2021
      August 2020
      July 2020
      May 2020
      March 2020
      January 2020
      December 2019
      October 2019
      August 2019
      June 2019
      April 2019
      March 2019
      February 2019
      January 2019
      November 2018
      October 2018
      August 2018
      June 2018
      May 2018
      February 2018
      December 2017
      October 2017
      September 2017
      July 2017
      May 2017
      March 2017
      January 2017
      December 2016
      November 2016
      October 2016
      September 2016
      August 2016
      June 2016
      May 2016
      April 2016

      RSS Feed

    © 2018 Randy Henrick & Associates, L.L.C.
    Back to top