Payday Lending Legal Summit
Installment Lending Panel
APR Misconceptions and Problems
TILA Misconceptions

Loan Origination Systems—OK To Buy An
Off-The-Shelf Product
 “Buy
Ours—We’ve 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
TILA Misconceptions

If You Only Charge Interest—Then 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…
Fact or Fiction?

Answer…That Depends
 Depends
On Your Tolerance To Risk
 Depends On How Gutsy You Are
Fact or Fiction?

Issue: US Rule versus Actuarial Methods:
 US Rule:
Will Always Be The Interest Rate If There Are
No Other TILA “Finance Charges”
 APR
 Actuarial

Method:
APR Is Almost Never The Same As The Interest
Rate—Even If No Other “Finance Charges” Are
Imposed
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
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
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”

What’s 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
Monthly Payment Example
Interest Rate: 300.00%
Amount Financed: $750.00
Finance Charge: $1657.76
Pmt Schedule: 12 Monthly Pmts
11 @ $200.66
1 @ $200.50
Actuarial APR: 298.77% (APRWIN)
US Rule APR: 300.00%
Which One Is Correct?
Which One Is Correct?
They Both Are!
Actuarial APR: 298.77% (APRWIN)
US Rule APR: 300.00%
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”

So What’s 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
What’s 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
Twice-Monthly Examples

What’s the Unit Period When Pmts. Are Scheduled:
 1st
and the 16th ?
 Answer—15 days (“Semi-monthly”)
 That’s Easy—Supported by Appendix J &
APRWIN
 1st and the 15th?
 Answer—14 days (“Bi-Weekly”—Not “Semimonthly”)
 Look At All The Periods
 Common Period
Twice-Monthly Examples

What’s the Unit Period When Pmts. Are Scheduled:
 5th
and the 25th?
 Answer—20 Days (Not “Semi-monthly”)
 Look At All The Periods
 Common Period is 20
 15th & 30th (or Last Day of the Month)?
 Answer—15 days (Not “Semi-Monthly”)
 Look
At All The Periods
 Then The Common Period Is 15
Twice-Monthly Examples
 Assumptions:



No “Odd Days”
8 Payments Due Twice-Per-Month
Four Loans With Pmts. Due Twice-PerMonth—Three Different APRs

2 APRs Matched By Coincidence Caused
By Dates And Number Of Payments
Best Guess—“Semi-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
Best Guess—“Semi-Monthly”

All Other “Twice-Monthly” Payments, then:


Look For Common Period
If no Common Period—Then Use “Standard
Interval of Time” As Defined By Appendix J
 Another Topic For Another Conference
RONALD D. GORSLINE
CHAMBLISS, BAHNER & STOPHEL, P.C.
1000 TALLAN BUILDING
CHATTNOOGA, TN 37402
423-756-3000
www.cbslawfirm.com
CLIFF E. COOK
COMPLIANCE SERVICES, INC.
TACOMA, WASHINGTON
(253) 756-5767
ccook@aol.com