Would be interested to hear thoughts on the following situation and if there is any fair lending risk.

A loan product has an interest rate that is exactly at the state usury limit. There are no fees, but when credit insurance/cancellation type products are added, it bumps the APR over the legal limit. This is due to the product's premium being based on the monthly outstanding balance (MOB). In order to stay within the usury limit, we'd like to back the interest rate down until the APR is at the limit. This usually would result in a decrease of just a few basis points decrease in the rate.


I have seen this done before in regards to military lending and MAPR where if MAPR is breached, fees would be backed out of the transaction until the MAPR is under the limit. I can't say I've seen it previously on just the standard APR, but wondering if anyone has experience with something similar and the potential regulatory/fair lending risks.

You are adding non-voluntary credit insurance/cancellation type products?

No, it is voluntary. The premium does not go into the finance charge or is not calculated into the APR. However, because the premium is based on the outstanding balance of the loan, the premium is higher at the beginning of the loan then at the end, and therefore more interest accrues because the principal pays down slower. This leads to a slight bump in the APR over the standard interest rate.

I am not familiar with an application of payments like that, but I assume you have it under control. Having a product that is up against the State usury limits and includes these sorts of ancillary products that are usually extremely expensive for the benefits provided, is likely to draw regulators like flies on you know what as it is. The calculation of usury limits is very State specific, but if it is causing you to violate usury - what other choice do you have beside re-pricing your entire product, so this does not happen?

I think the two options we have are:
1. update our rate sheet so that our max rate is low enough that adding the insurance never triggers the APR over usury, or
2. When a loan is at the max rate with the added ancillary product, back the rate down on that specific loan.

Do you think there are fair lending concerns if we went with option 2?

It is easier to defend a product that does not need an interest rate adjustment.

This must be a high-risk product with the average cost of funds being around .75% and then be lending up at a State usury rate, unless you have some weird usury laws in your State. Sounds almost like predatory lending material, especially with these add-on products..

Isn't usury typically based on the interest rate and not the APR? I wouldn't think that the customer electing a credit life product would impact usury. This would be the same as adding an administrative fee. On a smaller loan, it would have a much greater impact on the APR but not change the interest rate. I'm in Texas but I believed most states to calculate similarly. If I'm totally incorrect, lay it on me!