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South 51 Development Corporation v. Vega

November 26, 2002


Appeal from the Circuit Court of Cook County. Honorable Sophia H. Hall, Judge Presiding.

The opinion of the court was delivered by: Justice Cerda


This case involves a challenge by plaintiffs, South 51 Development Corporation, d/b/a Cash Express of Southern Illinois, Midwest Title Loans, Inc., Cottonwood Financial, Ltd., Advanced America, Cash Advance Centers of Illinois, L.L.C., d/b/a National Cash Advance, Check Into Cash of Illinois, LLC, and Check 'n Go of Illinois, Inc. *fn1 , to the validity of legislation amending the Consumer Installment Loan Act (the Loan Act) (205 ILCS 670/1 et seq. (West 2000)), and certain short-term lending rules promulgated pursuant to the amendatory legislation by defendant, Sarah Vega, as Director of the Illinois Department of Financial Institutions (Department). Upon the Director's motion, the circuit court dismissed plaintiffs' lawsuit. Plaintiffs now appeal and, upon leave from this court, several amici briefs were filed in support of each party's respective positions. For the reasons that follow, we affirm.

The Department is the Illinois agency responsible for regulating the practices of certain financial lending institutions conducting business in this state. Lenders specifically engaged in the business of extending loans in principal amounts not exceeding $25,000, and charging a rate of interest greater than that permitted by State usury laws, are regulated by the Department under the Loan Act and departmental regulations promulgated in accordance with the Loan Act's statutory scheme. One type of lender falling within the Department's oversight includes so-called "short-term lenders," which are generally characterized by the small dollar amount and short duration of their loans.

In mid-1990, the Department was commissioned by our General Assembly to conduct a study of the short-term lending industry in Illinois. The Department's findings and analysis were published in a formal report, entitled Illinois Department of Financial Institutions Short Term Lending Final Report (hereinafter, the Report), issued in September 1999.

According to the Report, the number of short-term lenders operating in Illinois has increased dramatically over the past two decades. The State's industry is generally comprised of two types of lenders: payday lenders and title-loan companies. Payday lenders are individually licensed offices that lend relatively small amounts of money to the consuming public for terms not usually exceeding two weeks, to coincide with the borrower's pay cycle. A general lack of preloan procedures allows borrowers to obtain cash quickly and easily. The borrower secures her loan by providing the lender a postdated check, covering the amount financed plus a finance charge, which is held until either the loan is satisfied or the check is cashed. On average, payday lenders charge $20 per $100 borrowed for the typical two-week period. Computed over a one-year period, the lender's fee translates to an annual percentage rate (APR) of 521.43%.

Title-loan companies are also individually licensed offices offering single-payment loans, usually for a term of 30 days, that are secured by the customer's automobile title. Like payday lenders, title lenders provide consumers ready access to cash and charge annual interest rates well in excess of 100%.

While acknowledging that short-term lenders fill a credit void for a segment of the borrowing public, much of the report highlights the pitfalls encountered by borrowers in using short-term loans. Citing the ease and expediency in which cash can be obtained, the Report found consumers are willing to incur higher borrowing costs in exchange for the convenience offered by short-term loans. Contrary to industry claims that the market is primarily comprised of individuals who, due to some unforeseen circumstances, need immediate access to cash until their next payday, the Department found that the typical customer, who according to a Department survey earns just over $24,000 a year, is not a one-time borrower occasioned by some unexpected financial obligation. According to the Report, customers "rarely" borrow a single time and, in many cases, are repeat borrowers. The Department's survey found that the typical borrower remains a customer for at least six months following consummation of the original loan and has an average of nearly 11 loan contracts with a single short-term lender. The explosive growth and financial success within the industry, the Report explains, are largely attributed to the repeat business of borrowers.

Most customers, the Department found, do not, or cannot, repay their loans when they become due. As a result, many customers are required to refinance their original loan by either (1) extending the initial period of the loan (referred to as "rolling over"), or (2) securing a new loan to cover the amount of the original sum. In both instances, the cost of the original loan increase to the borrower.

The Report identifies two types of borrowers who are particularly susceptible to experience problems with short-term loans. The Report deems these individuals "captive borrowers" and describes the first type of borrower as one who, due to limited financial resources and availability to other credit options, has no choice but to borrow from short-term lenders. Due to their financial circumstances, these borrowers are considered a high risk to lenders which, in turn, charge higher fees than those usually charged in other loan transactions. Not being constrained by any sort of rate cap, lenders typically seize the opportunity to maximize revenues by setting rates greater than the actual risk assumed.

The other type of borrower identified is one who gets entrapped in a cycle of debt caused by an inability to pay off the original loan due to excessive costs. These borrowers, according to the Report, "consider the use of *** [short-term] loans to be a cash-flow decision rather than a loan or credit decision." Unable to timely satisfy their original obligations, these individuals frequently renew their loans, incurring added costs. Further unable to pay each renewal when they become due, these individuals become stuck in a cycle of unmanageable debt.

The Report recognizes short-term borrowing may prove more economical for consumers than accessing cash or credit from traditional financial institutions like banks and credit card issuers. The Report, however, feared most consumers are not financially astute and, consequently, are unable to truly understand the costs associated with their borrowing activities. Given the short maturation periods of the loans, borrowers principally concern themselves with the periodic fee charged by the lender and pay scant, if any, attention to the loan's APR. The Report posits that since most consumers fail to satisfy their initial obligations when they become due, borrowers would be better served if they concentrated more on the APR and its effect over the life of the loan.

When utilized properly and responsibly, short-term lenders, the Report recognizes, provide a needed and beneficial service to certain segments of the borrowing population, especially to those "people with questionable credit or those that have incurred unexpected expenses." Only when borrowers use short-term loans for extended periods of time or for reasons other than financial hardship do problems arise.

While cognizant of borrower misuse and imprudence, the Report does not exculpate short-term lenders for the ills associated with the industry. Suggesting short-term lenders hold the upper hand in many of their loan transactions, the Report indicates lenders foster borrower irresponsibility in order to maximize revenues, most notably by allowing financially strapped consumers to roll over their existing obligations. The Report expressly notes that departmental regulations have proved ineffective "in stopping people from converting a short term loan into a long term headache" and suggests actions aimed at curbing lender profits generated from rollovers so as to ensure the financial stability of consumers. Stating previous legislative changes to the Loan Act have been inadequate to address the ever-changing nature of the short-term lending industry, the Report specifically recommended enactment of a short-term lending statute to confront the issues and concerns raised by short-term lending practices and, in particular, the customer's ability to rollover their loan obligations.

In response to the Department's study, Senator Patrick O'Malley introduced Senate Bill 1275 (SB 1275) (91st Ill. Gen. Assem., Senate Bill 1275, 1999-2000 Sess), which proposed the enactment of a short-term lending statute. The proposed bill represented new legislation, separate and apart from the Loan Act, and sought, among other things: to impose a maximum $500 cap on the principal amount on a loan secured by a postdated check and a $2,000 cap on the principal amount of any other short-term loan; to restrict a customer's ability to refinance a loan to a total of two times and only when the loan's previous outstanding balance has been reduced by 25%; and to set forth a 30-day waiting period between the time a customer satisfied one loan and applied for a new loan. SB 1275 ultimately failed to pass muster in the Senate.

A subsequent bill, Senate Bill 355 (SB 355) (91st Ill. Gen. Assem., Senate Bill 355, 2000 Sess), was sponsored by Senator O'Malley that proposed amending section 22 of the Loan Act to broaden the Department's rulemaking powers in protecting consumers. SB 355 was overwhelmingly approved by the General Assembly and was enacted in Public Act 91-698 (the Amendment) (Pub. Act 91-698, eff. May 6, 2000). With the Amendment, section 22 of statute now provides:

"The Department may make and enforce such reasonable rules, regulations, directions, orders, decisions, and findings as the execution and enforcement of the provisions of this Act require, and as are not inconsistent therewith. In addition, the Department may promulgate rules in connection with the activities of licensees that are necessary and appropriate for the protection of consumers in this State. All rules, regulations and directions of a general character shall be printed and copies thereof mailed to all licensees." (Emphasis added to highlight amendatory language.) 205 ILCS 670/22 (West 2000).

The Department, pursuant to the authority granted by the Amendment, issued "Short-Term Lending Rules" (the Rules) (38 Ill. Adm. Code 110.300 through 110.410 (2002)), which, after some contestation that will be discussed later in this opinion, became effective August 1, 2001.

By their lawsuit, plaintiffs, each an owner and operator of licensed short-term lending businesses in Illinois, seek to declare the Amendment unconstitutional and the Rules void or, alternatively, invalid. Plaintiffs assert the Amendment, authorizing the Department to promulgate rules that are "necessary and appropriate for the protection of consumers," is so broad and devoid of any meaningful standards to guide the Department's rulemaking authority that the Amendment constitutes an unlawful delegation of legislative power. This improper delegation, plaintiffs further contend, renders the Amendment unconstitutionally vague. Plaintiffs additionally argue that the Department, in promulgating the Rules, assumed a legislative function, impermissibly usurping the role of our General Assembly and thereby rendering the Rules void. Alternatively, plaintiffs claim the Rules are invalid since they (1) conflict with and exceed the scope of the Loan Act and (2) were adopted in violation of the Illinois Administrative Procedure Act (the Procedure Act) (5 ILCS 100/1-1 et seq. (West 2000)).

In moving to dismiss plaintiffs' complaints pursuant to section 2-619(a)(9) of the Code of Civil Procedure (735 ILCS 5/2-619(a)(9) (West 2000)), the Director argues the Amendment clearly bridles the Department's discretion in promulgating rules for consumer protection and, thus, constitutes a proper delegation of legislative authority. For the same reason, the Director asserts, the Amendment is not impermissibly vague. The Director additionally asserts the Rules were promulgated within the Department's statutory grant of authority and are further consistent with the purpose and substantive ...

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