April · 1996 -- Volume 13 Issue 2
State Law Changes
- Idaho - Effective: July 1, 1996 *** Law Type: Consumer Finance
- Indiana - Effective: July 1, 1996 *** Law Type: UCCC
- Kentucky - Effective: Pending *** Law Type: Sales Finance
- South Carolina - Effective: July 1, 1996 *** Law Type: Consumer Finance
- Texas - Effective: July 1, 1996 *** Law Type: Sales Finance/Regulated Loan
Other items of interest...
State Law Changes...................
* IDAHO *
Effective: July 1, 1996 *** Law Type: Consumer Finance
The parties to a consumer credit transaction in Idaho may contract for a delinquency charge which is the greater of 5% of the payment due or $10 on payments not made in full within 15 days of the due date. The current maximum is the greater of 5% of the payment due or $5.
* INDIANA *
Effective: July 1, 1996 *** Law Type: UCCC
The dollar amount brackets and ceilings relating to both consumer loans and consumer credit sales subject to the Indiana Code will increase to 300% of the base amounts. This most recent increase is equivalent to 10% of the original amounts. The maximum rate structure will reflect the change as follows:
The greater of:
(A) 36% per annum of Amount Financed to $900 plus, 21% per annum of the excess to $3,000 plus, 15% per annum of the remainder -or- (B) 21% per annum Simple Interest The maximum delinquency charge will increase to $15.00
* KENTUCKY *
Effective: Pending *** Law Type: Sales Finance
Effective 90 days after the adjournment of the legislature, the holder of a retail installment contract may charge a delinquency charge not to exceed the greater of 5% of the payment due or $10. A fee may be imposed on each payment which is in default more than 10 days.
As we went to press, the legislature was still in session. However, the State Constitution forbids the session to run later than the 15th of April in 1996.
* SOUTH CAROLINA *
Effective: July 1, 1996 *** Law Type: Consumer Finance
The dollar amounts in the South Carolina Consumer Protection Code Sections listed below will reflect a change to represent 250% of the base amounts. This most recent change is an additional 10% of the base amounts.
|
Consumer Protection Code Section |
Subject |
Change Dollar Amount From |
Change Dollar Amount To |
|---|---|---|---|
| 2.104 (1)(e) | Consumer Credit Sale | 60,000.00 | 62,500.00 |
| 2.106 (1)(b) | Consumer Lease | 60,000.00 | 62,500.00 |
| 2.203 (1) | Delinquency Charge - Sales |
12.00 | 12.50 |
| 2.203 (2) | Minimum Delinquency Charge - Credit Sale |
4.80 | 5.00 |
| 2.407 (1) | Security Interest - Sales |
720.00 2,400.00 |
750.00 2,500.00 |
| 3.104 (1)(d) | Consumer Loan | 60,000.00 | 62,500.00 |
| 3.203 (1) | Delinquency Charge - Loans |
12.00 | 12.50 |
| 3.203 (2) | Minimum Delinquency Charge - Loans |
4.80 | 5.00 |
| 3.510 | Land as Security - Supervised Loans |
2,400.00 | 2,500.00 |
| 3.514 | Attorneys' Fees - Supervised Loans |
2,400.00 | 2,500.00 |
| 5.103 (2), (3), & (4) | Deficiency Judgement |
3,600.00 | 3,750.00 |
* TEXAS *
Effective: July 1, 1996 *** Law Type: Sales Finance
The dollar amounts in the Texas Sales Finance rate structure will reflect an increase in the consumer price index.
The revised add-on rate structure is as follows:
12% per annum of Amount Financed to $2,200 plus, 10% per annum of the excess to $4,400 plus, 8% per annum of the remainder
Effective: July 1, 1996 *** Law Type: Regulated Loan
The dollar amounts in the Texas Regulated Loan rate structure will also reflect an increase in the consumer price index. The revised add-on rate structure is as follows:
18% per annum of Amount Financed to $1,320 plus, 8% per annum of the excess to $11,000
These adjustments reflect an increase to 440% of the original base amounts for both rate structures.
From Our Research Dept.............
"No Interest" and the A.P.R. (Part I)
The competition among retailers for the consumer's business dollar is as fierce these days as it has ever been. Among higher priced items, furniture, carpet, electronics etc., one incentive offered to consumers is financing with a "no interest" grace period. Just look at any newspaper and entire pages advertise "6 months no payment, no interest" and "no interest until 1998". How do these incentive plans compare to traditional financing schemes?
First, we must draw a distinction between a transaction that is truly "interest free" for, let's say as an example 90 days, a specified period versus one that conforms to the concept of "90 days same as cash". We have had many requests over the years for rate charts and software that were labeled "interest free" but was in actual practice a transaction with an extended first due date.
The true test is the amount of interest accrued immediately following the proclaimed "grace period". For instance, advertising that states financing with "no payment, no interest for six months" will accrue interest in one of two scenarios. The first scenario is synonymous with a "same as cash" approach and accrues no interest through the six month "grace period" but the creditor actually earns 6 months and one day of interest on the day following the end of the "interest free grace period".
In contrast, a financing plan that is truly "interest free" accrues no interest during the interest free period and the creditor earns one day of interest 6 months and one day into the contract.
These two scenarios often are advertised in the same manner, with the result that the true properties of a given financing plan cannot be determined. In fact, the creditor and retailer often believe they are offering a first interval that does not accrue interest and Carleton is requested to produce rate charts or create software for an "interest free" period, but when we get to studying the contract language we discover that, regardless of the label, there is no interest charge for the specified period if the initial price of the item is paid in full before the end of the period. When the transaction extends past the end of the "grace period", interest charges become retroactive and accrue from day one.
Is the distinction between the two really that great? Is it really that big of a deal knowing which plan is being executed? From the standpoint of computations, compliance, \ and Truth-in-Lending disclosures, the answer is a resounding YES.
Probably the best viewpoint to examine the difference between the two types of plans is from the standpoint of the common unit of measure in the consumer finance industry, the Annual Percentage Rate. Exhibit 1 below represents a "same as cash" approach while Exhibit 2 is truly an "interest free" transaction.
The data common to both Exhibits is the following:
Date of Contract 03/20/1996 Date of 1st Pmt 09/20/1996 Simple Interest Rate 14% Amount Financed $2000 Number of Pmts. 12
The respective monthly payments are:
Exhibit 1 ("same as cash") $189.92
Exhibit 2 ("interest free") $179.57
What annual percentage rate should be disclosed for each of these exhibits? If you are currently offering "no interest" financing, what A.P.R. would your system produce?
We will present our findings in the next issue.
Distribution of this newsletter is made with the understanding that the information contained herein has not been certified as legally acceptable for any particular statute, law, or regulation. For more timely and detailed information, subscribe to our Consumer Finance Newsletter and/or The Cost of Personal Borrowing in the United States compliance guide which are both published and updated ten times a year.
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