Truth in Lending Act (Possible Remedies with Payday Loans

All right members, here is another dry dusty moldy law to get familar with. This law gives possible defenses relating to pay day loans but you gotta dig deep to find it. Have fun.
Cajunbulldog



To know more read the article -
"http://www.abanet.org/rppt/publications/edirt/2005/1/Simmons.pdf"

Ah, gotta love Reg Z. Last year I had a state auditor from the Dept of Financial Institutions write me up on a bunch of contracts she said I didn't properly disclose the interest rate. So I pulled out my trusty copy of Reg Z and made about 5 pages of calculation, by hand, on each account she wrote me up on. On paper, I proved that my contracts were well-within TILA. The state later rescinded its complaint against my company.

Yea it can be painful and make your eyes cross reading it. I shared it on the chance them payday lenders have their records screwed up.Give you additional resources to call on.

Hey Cajun,
Thanks for sharing this one! We can never be too educated on this subject. I'm apologizing for my ignorance here, but in reading this, it seemed to me that Reg Z is just for secured loans, like those on a house or a car. Where does a non-secured loan like a PDL fall?

If you notice, the Pay Day Loans identify the "check" as the collateral. They use that as the "security".

If you notice, the Pay Day Loans identify the "check" as the collateral. They use that as the "security". The way to get them with the TILA is where they identfy a "pre-payment penalty." Look closely at the language identifying the pre-payment penalty.

Some TILA discloures state it will be an "additional amount". We are arguing that the lack of a clear and conspicuous statement refering to the prepaymant charges kills the dislcosure.

Good point,
I have received numerous PDL's in my time, before I saw the light and can remember only getting statements on the storefronts--which were cumbersome and never read by the customers. Thanks for clarifying that.

Reg Z governs any credit transaction, be it secured or unsecured. It even has provisions for open-ended credit (credit cards) that they must follow.

Closed-ended credit (installment notes / any loan with a set payment plan, even paydays) have to give you a TILA disclosure. The TILA disclosure should mimic the following box: (PS don't don't why the system puts so much space before my table, just scroll down...)
<TABLE border="1">
<TR>
<TD> Annual Percentage Rate
The cost of your credit as a yearly rate.</TD>
<TD> Finance Charge
The dollar amount the credit will cost you.</TD>
<TD> Amount Financed
The amount of credit provided to you or on your behalf</TD>
<TD> Total of Payments
The amount you will have paid after you have made all the payments as scheduled.</TD></TR>
<TR>
<TD>468.00%</TD>
<TD>$90.00</TD>
<TD>$500.00</TD>
<TD>$590.00</TD></TR>
<TR>
<TR><TD> </TD></TR>
<TD>Your Payment Schedule will be:</TD>
</TR>
<TR>
<TD>Number of Payments</TD>
<TD>Amount of Payment</TD>
<TD>When Payments Are Due</TD>
</TR>
<TR ALIGN="center">
<TD>1</TD>
<TD>$590.00</TD>
<TD>03/01/2007</TD>
</TR>
</TABLE>

I have seen that (or something close to it) many times when I was PDL'ing and now know what it was about, thanks.

As a side note, the apr is somewhat illusionary. Reg Z requires creditors to list the interest % as a yearly rate/APR. 468% seems god-awful!! But the fact is when you take a payday loan, you're not borrowing the money for a full year; you're only borrowing it for 14 days (theoretically...).

Most people assume they take the rate shown in the box, multiply it times the amount borrowed, and that's how much interest they will pay. But that's not true.

In the above example, $500 is the loan amount and 468% is the APR. To get the actual (nominal) rate, you would divide the APR by 365 (number of days in year). 468%/365 = 1.28% ... this means that you would pay 1.28% per day in interest ... $500 X 1.28% = $6.4109/day. Multiply that by the number of days you will have the loan (14), and we see $6.41 X 14 = $89.74 (off by 26 cents, but Reg Z allows a margin of error of .0125%).

As you can see, if the payday stores were able to say "we charge 1.28% per day," that would sound a heck of a lot better then "we charge 468% per year." But it is RegZ that makes them disclose the annual rate, not the daily rate.

I am not taking the payday stores' side... but let's look at the equation if they charged 18% APR on a $500 loan for 14 days .... 18%/365 = .0493% per day ... X $500 = 24.658 cents per day ... X 14 days = $3.45. If the paydays charged 18%, they would only stand to make $3.45 off of a loan.

In comparison, look at your 5% APR mortgage on a $140,000 balance ... using the same calculation as above 5%/365 X $140,000 = $19.17/day X 30 days = $575.34 interest in the first month of your mortgage. And that's at 5%.

My conclusion is that, while a rate may seem high or low, you need to compare it to the amount borrowed in order to get an accurate picture of the actual interest charged. 200% APR may seem ridiculous, but computed against $300 borrowed, it amounts to $23.01 in interest over 14 days. That is the whole purpose of TILA and Reg Z, to give you an accurate picture of what you're getting yourself into when you borrow money.