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The Head-Butt Bill

August 2009, F&I and Showroom - WebXclusive

by Thomas B. Hudson

Sometimes I’m asked if I’m a pro football fan. My stock reply is, “No, I follow the Washington Redskins.” I respond this way because the ‘Skins are more of a soap opera than a sports team, with an owner who chases each “star of the moment” the way that politicians seem to be chasing skirts.

I was reminded of “the team I love to hate” when I read through S500, a measure presently pending in the Senate. Once upon a time, the ’Skins had a young quarterback named Gus Frerotte, who decided to celebrate after a successful play by head-butting a wall. Even with his helmet on, the blow knocked him silly and injured his neck. Watching, my first thought was, “Gus, you really didn’t mean to do that ...”

Reading S500, I had the same reaction: “Hey guys, do you really mean to do this?”

What is “this,” you ask?

The bill, if enacted in its present form, would wipe out the payday lending business. That’s because the bill imposes a 36 percent rate cap. Sen. Dick Durbin (D-Ill.), the bill’s sponsor, evidently believes that those who make the typical short-term loans will be adequately compensated by imposing that generous rate on the amounts they lend. 

Let’s see now. If I’m a payday lender and I charge 36 percent on a $100 loan for one week, that’s 36 percent X $100 = $36 divided by 365 = .098 cents per day, or about 70 cents for a week. Who in his right mind would lend someone with challenged credit $100 for a week and charge seventy cents for the loan? Would Mr. Durbin make that loan? I’m thinking maybe not. Will banks step in and service this market at these rates? Not on your life.

The problem for payday lenders and other short-term, small-dollar lenders is that any sensible return that reflects the cost of the transaction and the risk involved results in APRs that are through the roof. Those high APRs offend Mr. Durbin and others, so their response is to eliminate an industry.

Payday lenders will have some company as they slide down the chute. Title lenders are also typically short-term lenders, with economics that look a lot like those of payday lenders. Ditto for pawn shops. So that’s three industries wiped out.

Do the proponents of measures like this think the demand for these financial services is going to disappear? When S500 wipes out these companies, which are regulated in many states and by a host of federal laws, who do you suppose will satisfy the demand for short-term credit?

Maybe S500 should be called “The Organized Crime Relief Act.” And you know how careful the Mob will be to give proper disclosures, maintain their customers’ financial privacy, refrain from discriminating and adhere to all those other pesky consumer protection laws.

Now let’s turn from those businesses your government wants to destroy and focus for a moment on the ones it merely wants to maim. “Who’s that?” you ask. Why you, dear dealer.

S500, as I said, caps rates at 36 percent. If that 36 percent was calculated with the formula used to calculate the currently-required APR disclosure under the federal Truth in Lending Act, there wouldn’t be a large objection to it from car dealers. 

However, Mr. Durbin wants to calculate the rate another way. In addition to those amounts that would be properly included in the finance charge under present TILA and Reg. Z rules, Mr. Durbin wants to include fees and charges that are excluded from the finance charge under current law. His additions include optional credit insurance premiums and all charges for ancillary products sold in connection with or incidental to the credit transaction. This sweeping language will pick up charges for things like GAP coverage, and perhaps even service contracts. In addition, his formula would include default fees, as well as late fees and returned check fees in excess of certain amounts, in effect imposing a federal maximum on late fees and NSF charges (someone will need to explain to me how you include in a calculation a fee or charge that may never materialize).

S500 will essentially eliminate dealer income from the sale of F&I products that can’t be accommodated in the 36 percent finance charge calculation. Dealers really need that kind of pressure on profits in this economy.

"Hey guys, do you really mean to do this?"

Gus would be proud of this bunch.

Tom (thudson@special-finance.com) is a partner, in the law firm Hudson Cook, LLP, and the author of several books. For information regarding the books, call 410-865-5411 or visit www.counselorlibrary.com. Copyright Counselor Library.com 2009, all rights reserved. Based on an article from Spot Delivery. Single print publication rights only, to Special Finance magazine. HC# 4831-8113-2291 (7/09).

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