Payday Lending Legal Payday Lending Legal SummitSummit

Installment Lending PanelInstallment Lending Panel

APR Misconceptions and APR Misconceptions and ProblemsProblems

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

TILA Misconceptions

If You Only Charge Interest—Then If You Only Charge Interest—Then The APR Is The APR Is AlwaysAlways The “Interest The “Interest Rate!”Rate!” It has to beIt has to be::

There are no “Finance Charges”There are no “Finance Charges”e.g., 250% Interest Rate e.g., 250% Interest Rate EqualsEquals 250% APR250% APR

Fact Or Fiction?Fact Or Fiction? Answer…Answer…

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

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

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

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

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”

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” And Ignore Interest Both Are “After The Fact” And Ignore Interest Accrual MethodAccrual Method

Monthly 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?

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%

TILA 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”

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

What’s The Unit Period?What’s The Unit Period?

The Interval Of Time (Time-Base) That The Interval Of Time (Time-Base) That Best Fits The Pmt. Schedule Frequency Best Fits The Pmt. Schedule Frequency

Unique To Each Loan Unique To Each Loan Identified By:Identified By:

(1) Measure All “Periods” In The Loan, (1) Measure All “Periods” In The Loan, && (2) Determine The “Common Period” In (2) Determine The “Common Period” In

The LoanThe Loan Need To Know Before Proceeding Need To Know Before Proceeding

With The APR Calculation ProcessWith The APR Calculation Process

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

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

Twice-Monthly ExamplesTwice-Monthly Examples Assumptions:Assumptions:

No “Odd Days”No “Odd Days” 8 Payments Due Twice-Per-Month8 Payments Due Twice-Per-Month

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

Best Guess—“Semi-Best Guess—“Semi-Monthly”Monthly”

If If AllAll Of The Following 3 Conditions Are Met, Of The Following 3 Conditions Are Met, ThenThen

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 Have The Same Two 2. Due Dates Have The Same Two Anniversary Dates Within Each Full Month Anniversary Dates Within 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 Within Each Month Two Payment Dates Within Each Month

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

RONALD D. GORSLINECHAMBLISS, BAHNER & STOPHEL, P.C.

1000 TALLAN BUILDINGCHATTNOOGA, TN 37402

423-756-3000www.cbslawfirm.com

CLIFF E. COOKCOMPLIANCE SERVICES, INC.

TACOMA, WASHINGTON(253) 756-5767ccook@aol.com