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Consumer Credit Regulation: 5.9.4 Small Loan Example

Here is an example of how it works.624 A Pennsylvania consumer made a retail purchase for $747 on a “90-day same as cash” basis. The seller assigned the paper to a finance company, a common introduction to finance company borrowing. Over the course of the next six years, the consumer received approximately $6,000 from eleven separate advances, each of which was accomplished through a refinancing. Each of the advances was a small sum, less than $1,000.

Consumer Credit Regulation: 5.9.5.2 Compounding

The calculations in a refinancing transaction should be checked to see whether, in determining the payoff on the prior loan, the lender improperly compounded interest. One of the reasons it is so expensive for borrowers to bring delinquent accounts current via refinancing is that earned, but unpaid, interest from the delinquent account is added to the principal in the new account, thus swelling the basis upon which interest on the new account is calculated.

Consumer Credit Regulation: 5.9.5.5 Is the New Rate Proper?

The economic injury caused by refinancing or consolidation is compounded when the new loan is written at a higher rate than the loan being refinanced. In some cases, the rate increase can be challenged.

A few states explicitly restrict the right of a lender to raise the interest rate on a refinanced loan. For example, in Iowa, if the rate on the original loan exceeded 18%, the rate cannot be increased on the refinancing of the unpaid balance.660

Consumer Credit Regulation: 5.9.6 Refinancing Calculations in Action: Another Walk-Through Case Study

This subsectio662n examines a finance company loan, secured by a second mortgage, and the calculations that the lender would make to prepare the refinanced loan. By highlighting the numerous calculations that must be made in deriving the figures for the new loan, this example demonstrates the myriad opportunities for improperly calculating rebates, or ignoring rebates, that may give rise to a usury claim. The example thus suggests information that should be sought through discovery in cases involving refinanced loans.

Mortgage Lending: 8.4.1 General

One of the specified purposes of the Real Estate Settlement Procedures Act (RESPA) is to eliminate referral fees, kickbacks, and charge splitting that unnecessarily increase the cost of certain settlement services.217 This ban is implemented through 12 U.S.C. § 2607 (section 8 of RESPA) and sections 1024.14 and 1024.15 of Regulation X.

Consumer Credit Regulation: 5.11.1 Developing a System for Analyzing Consumer Credit Issues

Generally, clients do not complain to their attorneys about specific usury issues. For example, it would be fairly unusual for a client to waltz into a law office saying, “I think the bank overcharged me $0.39 for credit insurance which is arguably interest and possibly a usury violation.” More likely a client will appear after the transaction has gone sour for one reason or another. It then becomes the attorney’s job to analyze the facts and issues relevant to the transaction.

Consumer Credit Regulation: 5.11.2 Gathering Information from the Client

The first step is to gather as much information as possible directly from the client. Obviously the client must be carefully and methodically interviewed, to get the entire story, from the beginning to the end of the transaction. As explained below, the client must also be asked to give the lawyer all of the relevant documents from the transaction.

In the hypothetical, the following questions suggest possible lines of inquiry regarding the financial aspects of the transaction for the client interview:

Consumer Credit Regulation: 9.1.1 Introduction

There is no universal definition of “payday loan.” State laws refer to payday loans by many different terms and define them with even greater variation.1 Nevertheless, a payday loans is typically considered a short-term, unsecured, high-cost loan repayable on the borrower’s next payday.2

Consumer Credit Regulation: 9.1.2.2 Bank Payday Loans

Beginning around 2011, banks began offering their own versions of payday loans, generally referred to as “deposit advance products.” A bank would advance funds to a consumer, typically for a fee such as $7.50 or $10.00 per $100, and the funds would be automatically repaid upon the consumer’s next direct deposit.41 According to a 2011 study, the median loan length was ten days.42 If the loan was not repaid in full within a designated time—usually thirty-five days—the bank forced repayment by sweeping

Consumer Credit Regulation: 9.1.3 Is the APR a Fair Cost Measurement for Payday Loans?

Most payday lenders quote the cost of credit using add-on interest,58 such as $30 per $100 borrowed. But the federal Truth in Lending Act requires payday lenders to disclose the annual percentage rate (APR) of loans, which is an actuarial rate that better discloses the true cost of the credit because it takes into account the term of the loan as well as both interest and fees.

Consumer Credit Regulation: 9.1.5 Problems and Abuses

A growing body of independent academic research has documented the adverse impact on consumers who use payday loans. Cash-strapped consumers rarely have the ability to repay the entire loan when their payday arrives because doing so would leave little or nothing on which to live until the next paycheck. Lenders encourage consumers to repay one loan with another or to return for new credit a few days after paying off a previous loan.87 The result is that the consumer pays another round of charges and fees and remains trapped in debt.

Consumer Credit Regulation: 9.2.1 Conditioning Payday Loan on EFT Repayment

Since they cannot conveniently accept paper checks, internet-based payday lenders commonly have the borrower authorize an electronic fund transfer to repay the loan.111 The Electronic Funds Transfer Act (EFTA) prohibits any person from conditioning the extension of credit upon the consumer’s repayment by means of a preauthorized electronic fund transfer.112 In order to fall within this ban, the transfer must both meet the definition of an “electronic fund transfer” (EFT) and be a “preauthorized,

Consumer Credit Regulation: 9.2.3 Bad Check Prosecutions

Another payday lending abuse occurs when a lender aggressively uses a state bad-check law to claim large penalties when a check is dishonored. The check in a payday loan serves a dual function—it is security for the loan and a method of repaying the debt at a later time.130 As a result, any default will necessarily involve bouncing a check.