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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 [email protected]