30 MAY / JUNE 2020 COMPLIANCE CONNECTION Brett J. Ashton Partner Krieg DeVault LLP bashton@kdlegal.com Krieg DeVault LLP is a Diamond Associate Member of the Indiana Bankers Association. Loan Origination Fees Must refund if loan prepaid? This information is provided for general education purposes and is not intended to be legal advice. Please consult legal counsel for specific guidance as to how this information applies to your institution’s circumstances or situation. Question: Our bank was recently cited by the Indiana Department of Financial Institutions for failing to refund loan origination fees when a borrower prepaid its unsecured consumer loan. We have always charged a $150 loan origination fee, and we are aware of other Indiana banks charging higher origination fees. What is Indiana law on this issue? Answer: The answer to this question will depend on whether you are extending a consumer loan before or after July 1, 2020. Under current Indiana law, a bank can charge a loan origination fee (called a prepaid finance charge) of $50 at the time of closing.* This $50 fee is considered to be earned at closing and is nonrefundable to the customer regardless of when, or if, the customer prepays the loan. The Indiana Department of Financial Institutions, however, has interpreted this section of the Indiana Uniform Consumer Credit Code to allow banks to exceed this statutory threshold if they included any loan amount charged over the $50 into the calculation of finance charge at the time of closing. When a customer prepays, depending on how much the additional fee being charged is and how early the payoff is, the bank may inadvertently exceed the maximum permissible finance charge under the IUCCC and be forced to refund. While Indiana-based banks are required to follow Indiana law with respect to rates and fees regardless of whether they hold state or federal charters, federally chartered institutions which convert to state charters are generally caught off guard by this issue. These lending parameters will change on July 1, 2020, as a result of Senate Enrolled Act 395, which * See Ind. Code § 24-4.5-3-201(8)(b) makes several changes to the IUCCC with respect to consumer loans, including increasing the permissible loan origination fee from $50 to $200, depending on the size of the loan. In particular, SEA 395 provides that a bank may charge a loan origination fee of: • Up to $75 on a loan with a principal amount of $2,000 or less; • Up to $150 on a loan with a principal amount of more than $2,000 but less than $4,000; and • $200 on a loan with a principal amount of more than $4,000. Banks are still permitted to charge for a loan origination fee that exceeds these amounts, but as in the past any amount that exceeds these limits will have to be included in the calculation of the finance charge at closing, and then refunded if the loan prepays. If your bank will not exceed these new larger loan origination fee limits, then you will no longer have to calculate refunds of loan origination fees in the event of prepayment on a consumer loan. If, however, your bank charges more than these new higher fees, you will need to adjust your refunding calculation to accommodate the change. SEA 395 also added the same loan origination fee structure to the consumer credit chapter of the IUCCC, providing banks financing consumer credit sales-added fee income opportunities. Additionally, it eliminated the use of pre-computed interest on all consumer loans. HB
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