SPRINGFIELD – Beginning April 1, consumers who borrow money against the value of their car or truck will be better protected from predatory lenders, according to new title loan regulations established by the Illinois Department of Financial and Professional Regulation (IDFPR).
Working with the Joint Committee on Administrative Rules (JCAR), consumer groups, and the industry, IDFPR revised the rules to strengthen the repayment and lending provisions of title loans under the Consumer Installment Loan Act. Title loans permit vehicle owners to obtain short-term loans against the value of their car or truck.
Many working families rely on these non-traditional loans, especially as credit card and other lending options have become more restricted during the current economic recession. But title loan borrowers often found themselves trapped in a cycle of debt, forced to either continually refinance the loan or to default and have their vehicles repossessed.
Particularly problematic, some title lenders arranged the payment schedules on their loans so that the consumer would make small payments at the beginning of the loan term but then be required to make a huge balloon payment at the end of the loan term. A consumer who could not make the balloon payment would then be forced to take out a new loan to pay off the old one.
“Title loans have their purpose, but many lenders took advantage of consumers by manipulating payment schedules to trap consumers in an endless cycle of debt,” said Brent E. Adams, IDFPR deputy secretary. “Our goal is to protect consumers by requiring lenders to engage in sane and sound business practices. The days of balloon payments on title loans are over.”
The revised rules include:
- The principal amount of a title loan may be no more than $4,000. However, no title loan may be in an amount such that the monthly payment is greater than 50 percent of the consumer’s gross monthly income.
- No balloon payments. Title loans must be repayable in substantially equal installments.
- All title loans must be approved by a statewide database, which will be established October 1, 2009. Until the database becomes available, each loan agreement must include a signed statement by the customer attesting that they have not had an outstanding title-secured loan within the preceding 15 days.
- A title lender may not make any loan to a borrower who has had a title loan outstanding within the preceding 15 days.
- Before entering into a title loan, the title lender must provide the consumer with an IDFPR-created pamphlet describing the availability of debt management services and the consumer’s rights and responsibilities, including an IDFPR-sponsored consumer hotline telephone number to handle questions and complaints.
- Any notice of delinquency or default sent or given to the consumer must contain the IDFPR hotline telephone number.
- A title loan may be refinanced only when the principal has been reduced (by the borrower or lender or both) by at least 20 percent. The principal amount of the new loan may not exceed the total outstanding balance of the refinanced loan.
- In the event of repossession, the lender must give notice to the consumer and afford them the opportunity to make the car available at a reasonably convenient place, date, and time, and permit the consumer to remove any personal belongings from the car without charge or additional cost to the consumer.
- No title lender may repossess a car and lease it back to the consumer.
- When making a title loan, a title lender may not take a security interest in any property other than the consumer’s vehicle.