24 NOVEMBER / DECEMBER 2017 Brett J. Ashton Partner Krieg DeVault LLP Submit Compliance Connection questions to Erika Steuerwald, Indiana Bankers Association: esteuerwald@ indianabankers.org. Krieg DeVault LLP is a Diamond Associate Member of the Indiana Bankers Association. Article author COMPLIANCE CONNECTION Charging Loan Origination Fees Loansharking Law guidelines Question: I heard that the Indiana Department of Financial Institutions has issued a warning, indicating that charging a loan origination fee violates the criminal usury law. My bank charges a $150 loan origination fee on all consumer loans. Is this practice now illegal? Answer: No. The Indiana Department of Financial Institutions (Indiana DFI) recently issued its Advisory Letter 2017-021 (the “Advisory”) with respect to “nonrefundable prepaid finance charges”2 under the Indiana Uniform Consumer Credit Code (IUCCC, or the “Act”) and compliance with Indiana’s criminal loansharking statute (the “Loansharking Law”).3 The Advisory provides guidance to financial institutions regarding the potential to inadvertently violate the Loansharking Law when charging a nonrefundable prepaid finance charge. The Loansharking Law provides in part, “A person who, in exchange for the loan of any property, knowingly or intentionally receives or contracts to receive from another person any consideration, at a rate greater than two (2) times the rate specified in I.C. § 24-4.5-3-508(2)(a)(i), commits loansharking, a Level 6 felony.” Any loan made in violation of the Loansharking Law is void.4 For reference, I.C. § 24-4.5-3-508(2)(a)(i) provides for a 36 percent finance charge limit, making the criminal usury limit 72 percent. The IUCCC provides for a $50 nonrefundable prepaid finance charge that may be charged in addition to the loan finance charge permitted by I.C. § 244.5-3-508(2) when computing the calculation of the maximum permissible finance charge. Some banks choose to charge a larger prepaid finance charge. While this practice is certainly permissible under the Act,5 the Advisory indicates that, regardless of whether a nonrefundable prepaid finance charge (which can include, but is not limited to, what has traditionally been coined a “loan origination fee”) is permitted under the IUCCC, any prepaid finance charge must be calculated as part of the maximum permissible finance charge for purposes of compliance with the Loansharking Law. For example, if a bank makes a $2,000 loan to a borrower and assesses a $150 prepaid finance charge, the first $50 would be excluded from the calculation of the loan finance charge under I.C. § 24-4.5-3-508(2) for purposes of compliance with the maximum permissible finance charge under the IUCCC, but the additional $100 would be included. Under the Loansharking Law, the entire $150 would be included in calculation of permissible “interest” that must not exceed 72 percent. The Advisory provides an excellent reminder to banks that, especially when charging a larger prepaid finance charge on smaller-dollar loans that may carry higher finance charges to begin with, the potential exists to inadvertently exceed the limits of the Loansharking Law. If a bank does contract for a loan origination fee that exceeds $50, a bank must be certain to otherwise comply with the IUCCC regarding prepayment. With violators subject to criminal penalties, and the potential for a loan to be declared void, this is an area of the law where it pays to talk to your compliance
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