regulated aspects of installment lending installment lending panel payday loan bar association...
TRANSCRIPT
Regulated Aspects of Installment Lending
Installment Lending PanelPayday Loan Bar Association Summit
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Presented byMichael A. Raskasky
Harlowe & Falk LLPNovember 14, 2006
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Why are we talking about installment lending?
Changing laws, negative climate for PDLs
Stay in business if the legislative axe falls
Diversify product offerings
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Why are we talking about installment lending?
Offer installment product that combines features of payday loans…:
Small dollar amounts not offered by banks Limited underwriting/credit check Fast cash for borrower “Above prime” interest rates “Secured” by check or ACH authorization Payments tied to paydays
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Why are we talking about installment lending?
…and additional features of traditional installment loans:
Multiple payments over time v. single repayment
Simple interest (generally) on unpaid balance v. fee-based finance charge
Secured lending option
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Why are we talking about installment lending?
What legal and operational issues arise with this new product?
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Caveats
Focus -- issue spotting Rules can vary dramatically by state
Consumer loan laws Uniform Consumer Credit Code (7
states) Usury laws UCC Rev. Article 9 (secured lending) Motor vehicle codes (vehicle secured
lending)
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The Contract
Loan amount Large amounts (e.g., >$25,000) or
real estate loans frequently outside scope of consumer loan statutes
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The Contract (cont’d)
Finance charges Origination fees
Typical limit - 2% of principal Prepaid finance charge - special
treatment under TILA Contract interest rate (not just the
APR)
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The Contract (cont’d)
--Finance charges Interest calculation methodology
Simple interest/365 day year Precomputed interest Compounding of interest Describe in the contract
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The Contract (cont’d)
Loan term May be tied to loan amount
Ex: loans up to $300 - up to 25 months Loans $301 to $1,000 - up to 37 months
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The Contract (cont’d)
Payment schedule Small loan amounts (e.g., <$1,000)
– substantially equal amounts, intervals
Big TILA issues, particularly with payments tied to pay periods (irregular, semi-monthly, etc.)
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The Contract (cont’d)
Method of payment ACH
Preauthorized ACH – Reg. E limitations, NACHA rules
Check NSF fee limits Broader bad-check remedies may be
available
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The Contract (cont’d)
Secured lending – collateral considerations
Grant language Collateral description (UCC 9-108
and TILA 226.18(m))
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The Contract (cont’d) --Secured lending - collateral considerations
Motor vehicles Certificate of title May implicate title loan statutes
Household goods FTC Unfair or Deceptive Credit Practices Rule Limits non-possessory security interests in household
goods Exceptions for PMSI, art works, antiques, jewelry (not
wedding rings), one television and one radio Insurance on collateral – Special disclosure
required to exclude from finance charge (Reg. Z 226.18(n), 4(d))
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Servicing and Payments
Late payments Late payment charges
Ex: 10 days late, charge lesser of 5% of installment amount or $20
No “pyramiding” of interest on late fees
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Servicing and Payments (cont’d)
--Late payments Deferral
By agreement after-the-fact, or Unilateral – in loan agreement Deferral charges authorized
Generally cannot charge deferral AND late charges
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Servicing and Payments (cont’d)
Partial payments Application of payments
Specify in contract, but check state law
Event of default Triggers a late charge to extent of
unpaid installment
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Servicing and Payments (cont’d)
Prepayments Nearly always allowed Rebate for precomputed loans
“Earned” may be complicated
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Servicing and Payments (cont’d)
--Prepayments Prepayment penalty
Frequently prohibited or limited Certain real estate loans, refinancings by
same lender, etc. Disclosures required (TILA, contract)
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Servicing and Payments (cont’d)
Extra payments Application of payments – generally
applied to principal, but check statute
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Servicing and Payments (cont’d)
Last payment Balloon payments (ex: 2x average
of other payments) May have a statutory right to refinance
at same terms
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Servicing and Payments (cont’d)
Receipts and statements Amount paid to date, amount
applied to principal and interest, pay-off amount
Requires additional programming
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Default
Statutory definition? May be limited to actual
nonpayment Acceleration generally permitted
Precomputed loans – if a judgment is obtained, some statutes require rebate as if full payment was made on judgment date
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Default (cont’d)
Secured lending issues Repossession – how?
Post-repossession interest What if customer brings collateral to store?
UCC 9A-620 (acceptance in satisfaction of debt) Limits on taking motor vehicles, other collateral in
satisfaction of debt (TRUE predatory lending!) Pawn statutes?
Disposition of collateral - Art. 9
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Regulatory challenges for “converting” payday lenders
Regulatory climate (not exactly “global warming”)
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Regulatory challenges for “converting” payday lenders
“Nightmare on Winter Street” – the Oregon example
Politics and competition – the two fronts meet
Gubernatorial election Resistance by existing consumer finance lenders
New proposed consumer finance rules “In consultation with” (read: written by) existing
consumer finance licensees Press release
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Regulatory challenges for “converting” payday lenders
Initially – 36% rate cap
Now – regulate aspects of PDL business model
Make it very difficult to operate on PDL platform
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Regulatory challenges for “converting” payday lenders
Sampling of proposed rules Regulation of portfolio mix (90%
“consumer loans”) 6 month minimum term “Documented” underwriting (but no
substantive “ability to pay” requirements)
Equal periodic payments
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Regulatory challenges for “converting” payday lenders
--Sampling of proposed rules “Are you experienced?”
Store level “District” level
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Regulatory challenges for “converting” payday lenders
--Sampling of proposed rules Indirect attempts to regulate
interest rate Include interest rate in business plan Notice if rate changes more than 25%
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Regulatory challenges for “converting” payday lenders
--Sampling of proposed rules Limits on holding checks/ACH
authorizations for payments
“DISCLOSURE!!!” required
Challenges are in the works, but who knows?
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Regulatory challenges for “converting” payday lenders
Last, but not least….
Washington payment plans
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Contact InformationMichael A. RaskaskyHarlowe & Falk LLPOne Tacoma Avenue North, Suite 300Tacoma, WA [email protected]
Payday Lending Legal Payday Lending Legal SummitSummit
Installment Lending PanelInstallment Lending Panel
APR Misconceptions and APR Misconceptions and ProblemsProblems
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TILA Misconceptions TILA Misconceptions Loan Origination Systems—OK To Loan Origination Systems—OK To
Buy An Off-The-Shelf ProductBuy An Off-The-Shelf Product ““Buy Ours—We’ve done installment Buy Ours—We’ve done installment
loans for years!” loans for years!” Like New!Like New!
ProblemsProblems:: Not Designed For Payments Tied To Not Designed For Payments Tied To
PaydaysPaydays Built for Long-Term LoansBuilt for Long-Term Loans
Lower RatesLower Rates More Tolerance For ErrorMore Tolerance For Error
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Off-The-Shelf Software Off-The-Shelf Software PDL ExamplePDL Example
Lender’s Target Yield: Approximately 260%Lender’s Target Yield: Approximately 260% Loan Amount: $500Loan Amount: $500 Simple Interest Rate: 200% Simple Interest Rate: 200% Loan Fee: $50 (10 % of Loan Amount)Loan Fee: $50 (10 % of Loan Amount) Repayment Schedule: 3 “Monthly” Pmts @ Repayment Schedule: 3 “Monthly” Pmts @
$245.03$245.03
Problem:Problem: Disclosed APR: 264.66%Disclosed APR: 264.66% Actual APR: 388.12%Actual APR: 388.12%
Restitution Violation: Understated by Restitution Violation: Understated by 123.46%123.46%
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TILA MisconceptionsTILA Misconceptions
If You Only Charge Interest—Then The If You Only Charge Interest—Then The APR Is APR Is AlwaysAlways The “Interest Rate!” The “Interest Rate!” It has to beIt has to be::
There are no There are no otherother “Finance Charges” “Finance Charges”e.g., 250% Interest Rate e.g., 250% Interest Rate EqualsEquals 250% 250% APRAPR
Fact Or Fiction?Fact Or Fiction? Answer…Answer…
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Fact or Fiction?Fact or Fiction?
Answer…That DependsAnswer…That Depends Depends On Your Tolerance To RiskDepends On Your Tolerance To Risk Depends On How Gutsy You AreDepends On How Gutsy You Are
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Fact or Fiction?Fact or Fiction?
Issue: Issue: US RuleUS Rule versus versus ActuarialActuarial Methods:Methods: US RuleUS Rule::
APR Will APR Will Always Always Be The Interest Rate Be The Interest Rate IfIf There Are No Other TILA “Finance There Are No Other TILA “Finance Charges” Charges”
Actuarial MethodActuarial Method:: APR Is Almost APR Is Almost NeverNever The Same As The The Same As The
Interest Rate—Even If No Other “Finance Interest Rate—Even If No Other “Finance Charges” Are ImposedCharges” Are Imposed
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Gutsy? Gutsy? Which Would You Rather Defend?Which Would You Rather Defend?
US Rule MethodUS Rule Method One Paragraph Authorization In One Paragraph Authorization In
Appendix JAppendix J(3) In contrast, under the United States Rule method, at the end of (3) In contrast, under the United States Rule method, at the end of
each payment period, the unpaid balance of the amount financed each payment period, the unpaid balance of the amount financed is increased by the finance charge earned during that payment is increased by the finance charge earned during that payment period and is decreased by the payment made at the end of that period and is decreased by the payment made at the end of that payment period. If the payment is less than the finance charge payment period. If the payment is less than the finance charge earned, the adjustment of the unpaid balance of the amount earned, the adjustment of the unpaid balance of the amount financed is postponed until the end of the next payment period. If financed is postponed until the end of the next payment period. If at that time the sum of the two payments is still less than the at that time the sum of the two payments is still less than the total earned finance charge for the two payment periods, the total earned finance charge for the two payment periods, the adjustment of the unpaid balance of the amount financed is adjustment of the unpaid balance of the amount financed is postponed still another payment period, and so forth.postponed still another payment period, and so forth.
No Formulas or Other Support in Reg. ZNo Formulas or Other Support in Reg. Z
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Which Would You Rather Defend?Which Would You Rather Defend?
US Rule MethodUS Rule Method Not Used InNot Used In APRWIN APRWIN Software Software
(Actuarial)(Actuarial)US Rule Produces Different US Rule Produces Different
ResultsResultsAPRWINAPRWIN Is Accepted Standard For Is Accepted Standard For
VerificationVerificationRegulators & LitigatorsRegulators & Litigators
No Supporting Case LawNo Supporting Case Law
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Which Would You Rather Defend?Which Would You Rather Defend?
Actuarial MethodActuarial Method Clearly Spelled-Out In Appendix JClearly Spelled-Out In Appendix J 15 Pages of Formulas and Examples15 Pages of Formulas and Examples
Too Many To Show HereToo Many To Show HereSupport in Official Staff Support in Official Staff
CommentaryCommentary Exact Match With Exact Match With APRWINAPRWIN
Provided There Is No “Garbage In”Provided There Is No “Garbage In”
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What’s The Difference?What’s The Difference? Both Take Into Account “Time Value of Money”Both Take Into Account “Time Value of Money”
Based On Timing And Amounts Of Payments & Based On Timing And Amounts Of Payments & Advances Advances
US Rule:US Rule: No Compounding Of InterestNo Compounding Of Interest No Negative AmortizationNo Negative Amortization
Actuarial Method:Actuarial Method: Allows For Compounding of InterestAllows For Compounding of Interest May Have Negative AmortizationMay Have Negative Amortization
Both Are “After The Fact” To Test APRs, And Both Both Are “After The Fact” To Test APRs, And Both Ignore Interest Accrual MethodIgnore Interest Accrual Method
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Monthly Payment ExampleMonthly Payment ExampleInterest Rate: 300.00%Interest Rate: 300.00%Amount Financed: $750.00Amount Financed: $750.00Finance Charge: $1657.76Finance Charge: $1657.76Pmt Schedule: 12 Monthly PmtsPmt Schedule: 12 Monthly Pmts
11 @ $200.6611 @ $200.66 1 @ $200.501 @ $200.50
Actuarial APR: 298.77% (Actuarial APR: 298.77% (APRWINAPRWIN))US Rule APR: 300.00%US Rule APR: 300.00%
Which One Is Correct?Which One Is Correct?
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Which One Is Correct?Which One Is Correct?
They Both Are!They Both Are!
Actuarial APR: 298.77% (Actuarial APR: 298.77% (APRWINAPRWIN))
US Rule APR: 300.00%US Rule APR: 300.00%
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TILA MisconceptionsTILA Misconceptions Payments Due “Semi-monthly” Payments Due “Semi-monthly”
Means “Twice-Per-Month”Means “Twice-Per-Month” Or Does It?Or Does It?
Problems:Problems: Only Example In Appendix J is 1Only Example In Appendix J is 1stst & &
1616thth
Only Example In Only Example In APRWIN APRWIN is 1is 1stst & 16 & 16thth
Webster Webster DefinitionDefinition: “: “Occurring Twice Occurring Twice A Month”A Month”
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So What’s the Problem?So What’s the Problem? Are The Following Payment Are The Following Payment
Frequencies Semi-monthly?Frequencies Semi-monthly? Due On the 1Due On the 1stst And the 15 And the 15thth?? Due On the 5Due On the 5thth and the 25 and the 25thth?? Due on the 15Due on the 15thth and the 30 and the 30thth??
Problem:Problem: APR For Each Loan Must Be APR For Each Loan Must Be
Based On The “Unit Period” (i.e., Based On The “Unit Period” (i.e., the Time-Base) For That Loanthe Time-Base) For That Loan
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What’s The Unit Period?What’s The Unit Period?
Unique To Each Loan Unique To Each Loan The Interval Of Time (Time-Base) That The Interval Of Time (Time-Base) That
Best Fits The Contracted Payment Best Fits The Contracted Payment ScheduleSchedule
Identified By:Identified By: (1) Measure All “Periods” In The Loan, (1) Measure All “Periods” In The Loan, && (2) Determine The “Common Period”(2) Determine The “Common Period”
Need To Know Before Proceeding Need To Know Before Proceeding With The APR Calculation ProcessWith The APR Calculation Process
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Twice-Monthly ExamplesTwice-Monthly Examples What’s the Unit Period When Pmts. Are What’s the Unit Period When Pmts. Are
Scheduled:Scheduled: 11stst and the 16 and the 16thth ? ?
Answer—15 days (“Semi-monthly”)Answer—15 days (“Semi-monthly”)That’s Easy—Supported by Appendix That’s Easy—Supported by Appendix
J & J & APRWINAPRWIN 11stst and the 15 and the 15thth??
Answer—14 days (“Bi-Weekly”—Not Answer—14 days (“Bi-Weekly”—Not “Semi-monthly”)“Semi-monthly”)
Look At All The PeriodsLook At All The PeriodsCommon PeriodCommon Period
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Twice-Monthly ExamplesTwice-Monthly Examples What’s the Unit Period When Pmts. Are What’s the Unit Period When Pmts. Are
Scheduled:Scheduled: 55thth and the 25 and the 25thth??
Answer—20 Days (Not “Semi-monthly”)Answer—20 Days (Not “Semi-monthly”)Look At All The PeriodsLook At All The PeriodsCommon Period is 20Common Period is 20
1515thth & 30 & 30thth (or Last Day of the Month)? (or Last Day of the Month)?Answer—15 days (Not “Semi-Monthly”)Answer—15 days (Not “Semi-Monthly”)
Look At All The PeriodsLook At All The PeriodsThen The Common Period Is 15Then The Common Period Is 15
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Twice-Monthly ExamplesTwice-Monthly Examples Four Loans With Pmts. Due Four Loans With Pmts. Due
Twice-Per-Month—Twice-Per-Month—Three Three Different APRsDifferent APRs 2 APRs Matched By Coincidence 2 APRs Matched By Coincidence
Caused By Dates And Number Of Caused By Dates And Number Of PaymentsPayments
Assumptions:Assumptions: No “Odd Days”No “Odd Days” 8 Payments Due Twice-Per-Month8 Payments Due Twice-Per-Month
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Best Guess—When to Use Best Guess—When to Use “Semi-Monthly”“Semi-Monthly”
If If AllAll Of The Following 3 Conditions Are Of The Following 3 Conditions Are Met, ThenMet, Then
AlwaysAlways Use 15 Days For the “Unit Period”: Use 15 Days For the “Unit Period”:1. Must Be 2 Scheduled Due Dates Within 1. Must Be 2 Scheduled Due Dates Within
Each Full Month,Each Full Month,
2. Due Dates Must Have The Same Two 2. Due Dates Must Have The Same Two Anniversary Dates In Each Full Month Anniversary Dates In Each Full Month (e.g., 5(e.g., 5thth And 20 And 20thth Of Each Month), Of Each Month), ANDAND
3. There Are Exactly 15 Days Between The 3. There Are Exactly 15 Days Between The Two Payment Dates In Each Month Two Payment Dates In Each Month
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Best Guess—“Semi-Best Guess—“Semi-Monthly”Monthly”
All Other “Twice-Monthly” All Other “Twice-Monthly” Payments, then:Payments, then:
Look For Common PeriodLook For Common Period If no Common Period—Then Use If no Common Period—Then Use
“Standard Interval of Time” As “Standard Interval of Time” As Defined By Appendix JDefined By Appendix J
Another Topic For Another Another Topic For Another ConferenceConference
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RONALD D. GORSLINECHAMBLISS, BAHNER & STOPHEL, P.C.
1000 TALLAN BUILDINGCHATTNOOGA, TN 37402
423-756-3000www.cbslawfirm.com