A court settlement involving Illinois lenders suggests that Illinois Attorney General Lisa Madigan is making good on her promise to crack down on lenders’ attempts to charge excessive fees to debtors. The settlement in Illinois v. CMK Investors, Inc., which the Attorney General’s office announced this week, requires CMK Investors, Inc. to both cease efforts to collect on accounts with excessive fees and reimburse customers who overpaid. The settlement also permanently and immediately prohibits CMK from making loans with an interest rate above the state’s 36 percent limit.
The heart of the case addressed whether “account protection fees” charged by the lender constitute an end-run around the 36 percent interest cap mandated by Illinois’s Consumer Installment Loan Act and Payday Loan Reform Act. The result suggests that lenders must be conscientious about selling products with appropriate interest rates, lest they find themselves the target of Attorney General Madigan’s campaign to eliminate excessive interest on loans.
The case raises interesting questions about potential liability for lenders employing percentage fees in addition to standard loan interest rates. Lenders who cannot justify their percentage fees in clear and practical terms may be hit with fines and prohibitions on making future loans. Because CMK accepted its punishment via settlement agreement (rather than a verdict from the Court), these questions remain unanswered, at least for now.
Larger questions loom regarding whether and to what extent the Truth in Lending Act (TILA) permits lenders to make “open-ended credit” loans like those at issue in CMK Investors, and how lenders can charge fees without running afoul of the 36 percent limit. For example, a question raised but not answered during the case regards whether the 36 percent cap is a limit on annual percentage fees or whether the cap relates to fees collected at any one time. Whether the account protection fees constitute interest or percentage fees, the latter of which has no statutory cap under TILA, is also undecided. In short, CMK asked several important questions facing lenders, and then settled without answering them.
The settlement comes on the heels of the Consumer Finance Protection Bureau’s proposal that lenders be required to run credit checks for potential customers before making a loan that a consumer cannot realistically pay back. Attorney General Madigan has supported the proposal, and has made clear her intent to wipe out usurious fees. Lenders who apply fees without the proper safeguards in place may be subject to the same costly litigation that led CMK to settle rather than try to further defend its conduct. The result in CMK should serve as wake-up call to Illinois lenders: in the face of increasing scrutiny from the Attorney General’s office, it is important for lenders to understand and clearly apply interest and percentage fees, or potentially face dire consequences.