[lumullins1121]

When we make a consumer loan and the APR exceeds usury limits for the state, we have a process we use to lower the interest rate in increments until it gets below the usury limits. If it is a small loan amount or maybe a short term loan it may require us to remove our origination fee to get within limits. Is this a pretty common practice? Is this how other banks are handling this situation?

Topic

[Kimberly Boatwright, CAMS, CRCM]

Good afternoon:

I can’t really respond based off business practices of other FIs. However, from a fair lending perspective have you covered this in procedures to ensure equal treatment for all borrowers that fall into this scenario? Based off your question it appears you may have different types of scenarios based on loan amount or length of time. I would want to make sure these are covered in procedure so that you can track them for analysis based on numbers, volume, product type, and how often you are having to remove fees etc.

I’m hoping other FIS can weigh in on how they handle this.

Best,
Kimberly

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[elebra]

We do exactly the same but we usually lower the origination fee in increments first.

[Send2k1]

While this comes up very rarely, it would be our practice to lower to usury. This variance would be documented on an “exception” log with the reason, and included in periodic analysis.
This is similar in my mind to matching competitor rates, but the support is usury instead of docs from another FI.

If you’re going on a usury amount from as long ago as you can remember, you may check with legal to see if there’s a higher value that may apply. Below are some citations that may help. I’m in KY; most of this is from a notice from KY Bankers Association from 2019.

12 USC 85 allows national banks to lend at the highest rate available to any lender in the state where the bank is located. This is commonly referred to as “Most Favored Lender” status.

12 USC 1831d allows for a similar “Most Favored Lender” status for state-chartered banks

KRS 286.3-214 also allows for a similar “Most Favored Lender” status for state-chartered banks, but we noticed recently that the language is much broader than either of the federal statutes, in that it does not appear to have the same limit on interest charged and specifically states that a bank may charge “interest at any rate allowed national banking associations by the laws of the United States of America.”

[pcorder]

Good morning,

Are you speaking of the usury maximum for the interest rate? We interpreted it as usury max on APR for a long time, until we realized the maximum threshold was actually the actual interest rate itself (*see below). We also opt use the Credit Union statute for rate, even though we are not a Credit Union. Bank’s max is 8% per annum, but credit union’s is a little more flexible.

286.6-435 Interest rate. (Credit Unions)
The *interest rates* on loans shall be determined by the board of directors, not to exceed two percent (2%) per month on unpaid balances.
Effective: July 13, 1984/ History: Created 1984 Ky. Acts ch. 408, sec. 44, effective July 13, 1984./ Formerly codified as KRS 290.435.

The only time the APR exceeded 24%, was when we had a small loan amount, with a short payback. It helped when we set the minimum loan amount to $1,000, but then we took another look and interpreted it to mean actual interest rate, and not APR as we once thought.

When we did exceed 24% APR (in the past), we lowered fees first. If that didn’t work, we would lower the rate accordingly…just enough to land under the max. We tried to make sure and be consistent, to avoid any fair lending criticism by our (FRB) regulators.

**I’m sure hoping someone will either agree with me in reference to the INTEREST rate vs ANNUAL PERCENTAGE rate, and/or clarify the statute.** =]

[Author]

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