Payday Lending Legal Summit

1
Payday Lending Legal Summit

• Installment Lending Panel
• APR Misconceptions and Problems

2
TILA Misconceptions

• Loan Origination SystemsOK To Buy An
  Off-The-Shelf Product
• Buy OursWeve done installment loans for
  years! Like New!
• Problems
• Not Designed For Payments Tied To Paydays
• Built for Long-Term Loans
• Lower Rates
• More Tolerance For Error

3
TILA Misconceptions

• If You Only Charge InterestThen The APR Is
  Always The Interest Rate!
• It has to be
• There are no Finance Charges
• e.g., 250 Interest Rate Equals 250 APR
• Fact Or Fiction?
• Answer

4
Fact or Fiction?

• AnswerThat Depends
• Depends On Your Tolerance To Risk
• Depends On How Gutsy You Are

5
Fact or Fiction?

• Issue US Rule versus Actuarial Methods
• US Rule
• APR Will Always Be The Interest Rate If There
  Are No Other TILA Finance Charges
• Actuarial Method
• APR Is Almost Never The Same As The Interest
  RateEven If No Other Finance Charges Are
  Imposed

6
Gutsy?

• Which Would You Rather Defend?
• US Rule Method
• One Paragraph Authorization In Appendix J
• (3)  In contrast, under the United States Rule
  method, at the end of each payment period, the
  unpaid balance of the amount financed is
  increased by the finance charge earned during
  that payment period and is decreased by the
  payment made at the end of that payment period.
  If the payment is less than the finance charge
  earned, the adjustment of the unpaid balance of
  the amount 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 total
  earned finance charge for the two payment
  periods, the adjustment of the unpaid balance of
  the amount financed is postponed still another
  payment period, and so forth.
• No Formulas or Other Support in Reg. Z

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Which Would You Rather Defend?

• US Rule Method
• Not Used In APRWIN Software (Actuarial)
• US Rule Produces Different Results
• APRWIN Is Accepted Standard For Verification
• Regulators Litigators
• No Supporting Case Law

8
Which Would You Rather Defend?

• Actuarial Method
• Clearly Spelled-Out In Appendix J
• 15 Pages of Formulas and Examples
• Too Many To Show Here
• Support in Official Staff Commentary
• Exact Match With APRWIN
• Provided There Is No Garbage In

9
Whats The Difference?

• Both Take Into Account Time Value of Money
• Based On Timing And Amounts Of Payments
  Advances
• US Rule
• No Compounding Of Interest
• No Negative Amortization
• Actuarial Method
• Allows For Compounding of Interest
• May Have Negative Amortization
• Both Are After The Fact And Ignore Interest
  Accrual Method

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Monthly Payment Example

• Interest Rate 300.00
• Amount Financed 750.00
• Finance Charge 1657.76
• Pmt Schedule 12 Monthly Pmts
• 11 _at_ 200.66
• 1 _at_ 200.50
• Actuarial APR 298.77 (APRWIN)
• US Rule APR 300.00
• Which One Is Correct?

11
Which One Is Correct?

• They Both Are!
• Actuarial APR 298.77 (APRWIN)
• US Rule APR 300.00

12
TILA Misconceptions

• Payments Due Semi-monthly Means
  Twice-Per-Month
• Or Does It?
• Problems
• Only Example In Appendix J is 1st 16th
• Only Example In APRWIN is 1st 16th
• Webster Definition Occurring Twice A Month

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So Whats the Problem?

• Are The Following Payment Frequencies
  Semi-monthly?
• Due On the 1st And the 15th?
• Due On the 5th and the 25th?
• Due on the 15th and the 30th?
• Problem
• APR For Each Loan Must Be Based On The Unit
  Period (i.e., the Time-Base) For That Loan

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Whats The Unit Period?

• The Interval Of Time (Time-Base) That Best Fits
  The Pmt. Schedule Frequency
• Unique To Each Loan
• Identified By
• (1) Measure All Periods In The Loan,
• (2) Determine The Common Period In The Loan
• Need To Know Before Proceeding With The APR
  Calculation Process

15
Twice-Monthly Examples

• Whats the Unit Period When Pmts. Are Scheduled
• 1st and the 16th ?
• Answer15 days (Semi-monthly)
• Thats EasySupported by Appendix J APRWIN
• 1st and the 15th?
• Answer14 days (Bi-WeeklyNot Semi-monthly)
• Look At All The Periods
• Common Period

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Twice-Monthly Examples

• Whats the Unit Period When Pmts. Are Scheduled
• 5th and the 25th?
• Answer20 Days (Not Semi-monthly)
• Look At All The Periods
• Common Period is 20
• 15th 30th (or Last Day of the Month)?
• Answer15 days (Not Semi-Monthly)
• Look At All The Periods
• Then The Common Period Is 15

17
Twice-Monthly Examples

• Assumptions
• No Odd Days
• 8 Payments Due Twice-Per-Month
• Four Loans With Pmts. Due Twice-Per-MonthThree
  Different APRs
• 2 APRs Matched By Coincidence Caused By Dates
  And Number Of Payments

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Best GuessSemi-Monthly

• If All Of The Following 3 Conditions Are Met,
  Then
• Always Use 15 Days For the Unit Period
• 1. Must Be 2 Scheduled Due Dates Within Each Full
  Month,
• 2. Due Dates Have The Same Two Anniversary Dates
  Within Each Full Month (e.g., 5th And 20th Of
  Each Month), AND
• 3. There Are Exactly 15 Days Between The Two
  Payment Dates Within Each Month

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Best GuessSemi-Monthly

• All Other Twice-Monthly Payments, then
• Look For Common Period
• If no Common PeriodThen Use Standard Interval
  of Time As Defined By Appendix J
• Another Topic For Another Conference

20
RONALD D. GORSLINECHAMBLISS, BAHNER STOPHEL,
P.C.1000 TALLAN BUILDINGCHATTNOOGA, TN
37402423-756-3000www.cbslawfirm.com
21
CLIFF E. COOK COMPLIANCE SERVICES, INC.TACOMA,
WASHINGTON(253) 756-5767 ccook_at_aol.com