Hoosier Banker 35 COMPLIANCE CONNECTION Auto Dealer Loan Agreements New law effective July 1, 2020 Brett J. Ashton Partner Krieg DeVault LLP bashton@kdlegal.com Krieg DeVault LLP is a Diamond Associate Member of the Indiana Bankers Association. 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: Some of the recent loan agreements we have received from auto dealers in connection with our indirect auto program provide for a $150 loan origination fee. Are auto loans now allowed to include an origination fee under Indiana law? Answer: Yes, although it is important to carefully review the indirect loan contracts you receive to ensure your bank is servicing the loan, including the application of this new prepaid finance charge, in compliance with Indiana law. Auto loans are typically made pursuant to the Consumer Credit Sale chapter1 of the Indiana Uniform Consumer Credit Code.2 As of July 1,3 Indiana law permits a lender who makes an auto loan (considered a consumer credit sale) to receive a nonrefundable prepaid finance charge in an amount which is: (a) not more than $75 for an amount financed of $2,000 or less; (b) $150 for an amount financed of more than $2,000 but does not exceed $4,000; and (c) $200 for an amount financed of more than $4,000. The loan contracts used by auto dealers since the addition of this newly permissible fee have varied in their approach as to how the charge is collected, as has the interpretation and application of the language in those contracts by Indiana banks. In some cases, the loan contracts provide that finance charges will accrue on the unpaid balance of the loan, less the amount of the prepaid finance charge, but the bank’s servicing system automatically deducts the entire amount of the prepaid finance charge from the first loan payment, resulting in changes to the loan amortization schedule inconsistent with the underlying loan contract. In other cases, the loan contract is silent as to how the prepaid finance charge will be repaid, and the bank’s servicing system automatically includes the new charge 1 See I.C. § 24-4.5-2 2 See I.C. § 24-4.5 3 Senate Enrolled Act 395 containing the addition of the new prepaid finance charge for consumer credit sales, in addition to several other changes to the IUCCC, was passed by the 2020 General Assembly and became effective on July 1, 2020. 4 in.gov/dfi/files/SEA%20QA%20REVISED%208.14.20.pdf in its calculation of finance charge and amortizes the payment of the charge over the life of the loan. These varying approaches to the calculation of repayment of a financed prepaid finance charge, since this new charge became permitted on July 1, have prompted the Indiana Department of Financial Institutions to issue an updated version4 of its previously published guidance on recent legislative changes to the IUCCC. The Department’s guidance reinforces that banks should ensure they are servicing indirect loans in accordance with the terms of the underlying agreement, and notes that a “creditor’s agreement may indicate that the prepaid finance charge or any charge be deducted in the manner dictated by the creditor. An agreement may permit the creditor to deduct the prepaid finance charge from the first payment, or spread the prepaid finance charge throughout the installments over the life of the loan.” Finally, provided you do not exceed the maximum permitted rate under Indiana law, and the contract clearly discloses that any finance charges earned by financing the prepaid finance charge are included in the calculation of that rate, you can collect a finance charge on any prepaid finance charge assessed on an indirect auto loan. HB
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