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The 45 Day "Rule"
by Andy Zavoina and Richard Insley, BOL Gurus

Question: Our bank feels that the first payment date on monthly installment loans cannot be more than 45 days from the date of the note. I've called the FDIC and they know of no requirement like this. A prior bank had a rule that if the installment loan was 12 months or more, the first payment had to be between 19 and 51 days out. If it was under 12 payments, there was a narrower window for the first payment. Does anyone have a clue if these are old wives tales or is there some legal basis to this?

Answer by Andy Zavoina:

This is a state issue. Check your loan regulations for the state, call your state association or check in the new State forums in the BOL threads.

In Texas, as an example, a consumer installment loan may have its first payment as early as 15 days, up to a month and 15 days, from the loan date. (FYI, a "month" is defined as from that day this month to the same day of the next month. If that date does not exist, the last day of the month. So it isn't a good rule to use 45 days as a max, it may be less.)

Answer by Richard Insley:

Andy's right about state law being the controlling factor, but the genesis of your practice is Reg Z's "odd days" exception found in Section 226.17(c)(4). If the length of your first payment falls within the allowed range, then you need not take the longer/shorter period into account in your APR calculation (you are required to disclose the effect of the odd period in your Finance Charge.) This part of Reg Z was needed when APRs were computed by hand with table books and a #2 pencil. Today, automation has rendered this exception unnecessary--but it's still there!

First published on 7/1/02

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