Credit CARD Act: 15/45 Days; Payday Lending

Posted by Anthony Demangone

Last week, Sarah did a great job of highlighting when and how the Credit CARD Act 45-day change in terms notification kicks in this month.  Here's a link to her post.   She pointed out that it will only apply to credit cards on August 20 of this month.  In other words...

The 45-day notice does not apply to other, non-credit card lines of credit - and not even to HELOCs that are accessed via a credit card device.  Here's the language of the interim final rule, with emphasis added.  The 45-day requirement will kick in later for other open-end (non credit card loans) and the Fed has a proposal out right now that would address HELOCs.

Credit Card Accounts
The interim final rule preserves, in § 226.9(c)(1) and associated staff commentary, the existing change-in-terms notice requirements for home-equity plans and other openend plans that are not credit card accounts. These rules are substantively identical to the current rules under § 226.9(c), except for several technical and renumbering changes. 
    The Board notes that open-end (not home-secured) lines of credit that are not credit card accounts will be subject to the revised change-in-terms notice requirements contained in the January 2009 Regulation Z Rule when that rule becomes effective. In particular, changes made in January 2009 to § 226.9(c) and (g) have not been withdrawn. However, the January 2009 Regulation Z Rule is not yet effective, and unsecured lines of credit that are not credit card accounts are not subject to the advance notice requirements in the Credit Card Act. Therefore the existing rules have been preserved for such lines of credit for the period between the effective date of this interim final rule and the date the January 2009 Regulation Z Rule becomes effective. Thus, creditors offering open-end (not home-secured) lines of credit that are not credit card accounts may continue to comply with the existing change-in-terms notice requirements, which have been adopted in this interim final rule as renumbered § 226.9(c)(1).
    The Board notes that it also is currently reviewing those portions of Regulation Z that pertain to home-equity lines of credit, and the applicable notice requirements for such products may be amended in the course of that rulemaking.

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NCUA just issued Letter to Credit Unions 09-FCU-05.  Access it here.  Note that this is a letter to federal credit unions.  And why is that?  The usury ceiling looms large in this letter.  NCUA, in a well-written and straight-forward manner, reminds FCUs that if they have a payday lending program, they must abide by the usury ceiling of 18 percent.  They have one example of a no-no that really caught my eye:

An FCU offers loans with a stated 0% APR and charges an application fee of 20% based on the loan amount. The FCU has essentially the same processing costs for all payday loans regardless of amount. The 20% fee does not accurately reflect the costs of processing applications so the fee should be considered a finance charge under Reg Z and be included in calculating the APR. This would raise the APR above the 18% ceiling. (Emphasis added.)

I take two things away from that section.

1. First, an application fee based on a percentage of loan proceeds is a no-no.

2. But the guidance implies that an application fee should accurately reflect the costs of processing an application.  Is your application fee based on an accurate reflection of the costs of processing your loans?  If it is, how have you documented that fact?  Inquring minds (examiners) may want to know.