GAP Financing Being Limited by New Illinois Law

By Danielle Fish - August 11, 2021

A new Illinois law, the Predatory Loan Prevention Act, which took effect on March 23, 2021, could have a significant impact on dealers in the state.  The new law is based on the federal government’s Military Lending Act (MLA), which instituted a cap APR of 36% for active duty, guard, or reserve service members or their dependents.  The Predatory Loan Prevention Act places a maximum annual percentage rate of 36% on nearly all non-bank consumer loans.  Consumer loans are defined in the law to include traditional loans along with motor vehicle installation sales contracts.  Banks, credit unions, savings associations, and insurance companies are exempt from this law.

This new act adopts an “all in” method for calculating a loan’s APR. This requires that the method used to calculate the APR be the calculation for the Military Lending Act, known as the Military Annual Percentage Rate (MAPR), rather than the more widely used method for calculating APR found in the Truth in Lending Act (TILA).  The MAPR calculation includes the following: finance charges, application fees, credit insurance premiums or fees, and any fee for credit-related ancillary products such as GAP insurance.  The cost of credit to consumers is significantly higher in the subprime industry. Adding GAP into the calculation drives the MAPR up, effectively preventing auto dealers from offering that product.  Capping the rate at 36% cuts off lenders offering credit for these types of products, pushing customers to go with unregulated lenders or to pursue a more dangerous and illegal credit alternatives.

With the implementation of this law dealerships need to be aware of the penalties that can occur if the rules are not followed.  These penalties include making the credit arrangement null and void from the inception.  Principal, interest, fees, or charges related to the loan cannot be collected from any entity.  Each violation of this law can result in a fine of up to $10,000.  There are efforts underway in Illinois legislation to amend the law and allow auto purchases to be exempt.  Deal Pack allows customers to set default amounts or percentages for their APR and GAP insurance making it easier for them to comply with the new state law.

If you are a dealer in Illinois and are interested in more information about setting up custom deals that follow the guidelines of this new law, feel free to reach out to a Customer Support Specialist at (800) 526-5832 or by email at support@abcoa.com.

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