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Understanding Consumer Credit: Costs, Loans, and Regulations

This guide provides essential insights into consumer credit transactions, including credit sales and consumer loans. It covers maximum allowable service charges, finance charges for different loan amounts, and additional fees such as origination and documentation fees. It explains the Federal Truth-in-Lending Act’s requirements for APR disclosure and itemization of amounts financed. Furthermore, it clarifies the costs associated with payday loans under the Deferred Presentment and Small Loan Act, including allowed fees and the obligations of payday lenders.

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Understanding Consumer Credit: Costs, Loans, and Regulations

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Presentation Transcript

  1. Facts About Lending The Cost of Credit

  2. Consumer Credit Transactions • Consumer Credit Sales – Finance the purchase of goods or services (autos, furniture, dental work, etc.) • Consumer Loans – Loan of Money ($$$)

  3. Consumer Credit Sales • Maximum Credit Service Charge (interest) the greater of: • 24% on unpaid balance up to $1,750, and • 18% on balance from $1,750 - $5,000, and • 12% on unpaid balance over $5,000; or • 18% on unpaid balance of amount deferred

  4. Consumer Loans (over $350) • Maximum Loan Finance Charges for Consumer Loans (R.S. 9:3519) • 36% on loan amounts up to $1,400 • 27% on loan amounts from $1,400 to $4,000 • 24% on loan amounts from $4,000 to $7,000 • 21% on loan amounts over $7,000

  5. Additional Fees and Charges • Consumer Loans may include fees in addition to the interest (R.S. 9:3530) • $50 Origination Fee • $20 Documentation Fee These fees are included in the amount financed and not considered finance charges when calculating interest. However, these fees are finance charges according to the federal Truth-In-Lending Act (Reg Z) and are included in the APR calculation.

  6. Consumer Credit Sales andConsumer Loans • What is the common element in both types of loan agreements?

  7. Federal Truth-In-Lending Disclosures ITEMIZATION OF AMOUNT FINANCED • AMOUNT GIVEN TO BORROWER $ _______ • FEES AND CHARGES (PREPAID) $ _______ • INSURANCE (Credit Life, Property) $ _______ • AMOUNTS PAID TO OTHERS $ _______ Number, Amount and Due Dates of Monthly Payments

  8. What is the Annual Percentage Rate (APR)? • The federal Truth-In-Lending Act through Regulation Z requires disclosure of the finance charge in the form of an annualized rate that includes interest and other fees imposed by the creditor as a condition of the extension of credit.

  9. Interest Rate vs. APR (present value or actuarial method of calculating interest) ITEMIZATION OF AMOUNT FINANCED • AMOUNT GIVEN TO BORROWER ……………$1,000 • ORIGINATION FEE……………………................$ 50 • DOCUMENTATION FEE………………………… $ 20 • TOTAL AMOUNT BORROWED ………………...$1,070 • 36% interest on $1,070 for 12 months = $219.93 • 12 Monthly Payments: 11 at $107.49 and 1 at $107.54

  10. Other Fees on Consumer Loans NOT Finance Charges Fees must be included in the Itemization • Prepayment Penalties ($25) • NSF Check Charges (the greater of 5% or $25) • Delinquency Charges (the greater of 5% or $10) • Notary Fees ($15 for non-real estate loans) • Convenience Fees ($18 for tag agent on auto secured loans) • Insurance (credit life, AD&D, property)

  11. Deferred Presentment and Small Loan Act, R.S. 9:3578.1 et seq. (Payday Loans) Definition of Deferred Presentment – A consumer loan made pursuant to a written agreement whereby a licensee: • Accepts a check from the issuer (borrower), • Agrees to hold the check for a period of time not to exceed 30 days prior to presentment, and • Pays the issuer the amount of the check less the permissible fees. The amount paid to the issuer of the check may not exceed $350.

  12. Deferred Presentment and Small Loan Act, R.S. 9:3578.1 et seq. (Payday Loans) • Definition of Small Loan – A consumer loan of three hundred and fifty dollars or less, made for a term of sixty days or less.

  13. Finance Charge and Fees on Payday Loans • A licensee may charge a fee not to exceed 16.75% of the face amount of the check issued, not to exceed $45 plus a documentation fee up to $10 on each loan transaction. • Other fees allowed: • R.S. 9:3529 ($25 NSF check charge); and • R.S. 9:3527, a delinquency charge of 5% of the unpaid amount after 10 days of the maturity date, or • Interest after default at the rate of 36% per annum for the first year and 18% per annum thereafter. • Reasonable attorney fees and costs awarded by a court.

  14. The Cost of a 14-Day Payday Loan Amount Borrowed $350 • Interest $ 45 • Documentation Fee $ 10 • Total Payoff $405

  15. Payday Loan Prohibitions A payday lender shall not refuse a partial payment of $50 or more; A payday lender shall not renew or roll over a deferred presentment transaction or small loan. However, a licensee may accept a partial payment of 25% of the amount advanced plus fees charged and enter into a new deferred presentment transaction or renew the small loan for the remaining balance owed.

  16. Other Issues • Internet Lenders from out-of-state are not required to apply for a license and are not under the jurisdiction of OFI. However, to enforce a contract in LA, the creditor shall reduce the charges to those permitted in LA pursuant to R.S. 9:3511(B).

  17. Other Issues Debt Relief Companies offer to help consumers with multiple payday loans or other financial difficulties. Usually these companies collect up-front fees and do little to resolve financial problems. Most of these companies are scams.

  18. Louisiana Pawnshop Act • The pawnbroker takes possession of the pledged item for 3 months as required by R.S. 37:1781 et seq.

  19. Where to go for Assistance • See handout for important agencies, names, addresses, phone numbers and web sites.

  20. QUESTIONS? John J. Braud, CPA Compliance Examiner Deputy Chief Louisiana Office of Financial Institutions • (225) 925-7762 (Direct) • jbraud@ofi.la.gov • (225) 925-4660 (Main Office) • (888) 525-9414 (Toll Free)

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