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#2243175 - 09/28/20 02:29 AM Small dollar loan APR
M&M Offline
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Joined: Nov 2003
Posts: 527
Midwest
We have a small dollar loan product with a processing fee. It’s disclosed that the fee is a prepaid finance charge, and it will be reflected in the APR. However, when you factor in the fee, for some loan amounts and terms, it puts the APR over our state usury limit. I believe the business line tried to call it a prepaid FC so that it wouldn’t impact the APR, but I don’t believe this is an option. Is there any way this fee wouldn’t impact the APR? Am i missing something that I should be considering? Thanks!

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#2243176 - 09/28/20 11:01 AM Re: Small dollar loan APR M&M
rlcarey Offline
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rlcarey
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Posts: 77,275
Galveston, TX
"I believe the business line tried to call it a prepaid FC so that it wouldn’t impact the APR,"

It is a prepaid finance charge and a prepaid finance charge always impacts the APR, so I am a little confused. As far as your State usury limits, those can be complex and it is best to visit with you legal counsel on those concerns.
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#2243177 - 09/28/20 12:08 PM Re: Small dollar loan APR M&M
M&M Offline
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Posts: 527
Midwest
Hi Randy.
I wasn't here when the product was created, but from what I can tell, they wanted to charge the fee but classify it in a way that it would not cause the APR to increase. I think they called it a prepaid FC instead of a finance charge, thinking it then wouldn't impact the APR. But, I don't see any way around the fee impacting the APR. Is there any way around this that I'm missing?

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#2243178 - 09/28/20 12:31 PM Re: Small dollar loan APR M&M
rlcarey Offline
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rlcarey
Joined: Jul 2001
Posts: 77,275
Galveston, TX
No - there is no way to classify a fee to get a loan in a way to not treat it as a finance charge. There is no specific exemption in 1026.4 and it is not a fee that would be imposed in a comparison cash transaction.
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#2243179 - 09/28/20 12:39 PM Re: Small dollar loan APR M&M
M&M Offline
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Joined: Nov 2003
Posts: 527
Midwest
Thanks Randy. That's what I thought as well. Appreciate your help.

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#2243180 - 09/28/20 01:33 PM Re: Small dollar loan APR M&M
Richard Insley Offline
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Richard Insley
Joined: Oct 2000
Posts: 9,999
Toano, VA
Originally Posted by M&M
charge the fee but classify it in a way that...
"I am not a duck." Fail.
The first step in resolving this concern is to read your state law carefully. Does it set absolute limits? Are those limits denominated in terms of (a) APR (based on the federal definition?) or (b) interest rate?
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#2243181 - 09/28/20 02:36 PM Re: Small dollar loan APR M&M
Rocky P Offline
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Joined: Jun 2003
Posts: 7,239
Florida
The problem with APR's is that either a short term or low dollar amount have a huge effect on the APR. With small dollar loans you usually have both. The processing fee is a cost to get the loan, therefore a finance charge. Since it is charged at the beginning of the loan, it is a prepaid finance charge.

Like the "R's" have mentioned, either you or your attorney should check state law for nuances.
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#2243183 - 09/28/20 02:48 PM Re: Small dollar loan APR M&M
M&M Offline
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Joined: Nov 2003
Posts: 527
Midwest
Thanks everyone! I appreciate your input on this one.

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