Written By: Dalton Thieneman - Short Strategy Group
House Enrolled Act 1397: Financial Institutions and Consumer Credit Authored by: Rep. Woody Burton, Sponsored by: Sen. Chip Perfect
Amends parts of the Indiana Uniform Consumer Credit Code (“IUCCC”) concerning permitted additional charges. The IUCCC is administered by the Department of Financial Institutions (“Department”). The passage of this legislation is effective on July 1, 2018 and makes significant changes to the historical approach regarding these products and the approval given to Indiana Approved Guaranteed Asset/Auto Protection (“GAP”) and Debt Cancellation (“DC”) Administrators by the Department.
Historically, the Department has reviewed and approved third-party administrators of such non-insurance products as GAP and DC. In approving the administrators, the Department has also historically approved the GAP agreements. These approvals were made by the Members of the Department under the authority granted them by Ind. Code §24-4.5-2/3-202. With the passage of HEA 1397, these charges will no longer be separately approved by the Members but rather permitted explicitly in statute.
A GAP Waiver sold after June 30, 2018, that does not meet all of the conditions outlined in the IUCCC may be treated by the creditor as a prepaid finance charge and included in the total finance charge, provided maximum credit service/finance charges permitted by Ind. Code §24-4.5 are not exceeded. If a GAP Waiver does not meet the required conditions and is not treated by the creditor as a finance charge, charges for such waivers will be treated during examinations as impermissible additional charges with full refunds due to consumers.
Impact to Indiana Automobile Dealers:
GAP Waivers Regarding Sellers
The following changes are effective July 1, 2018.
Sellers, including auto dealers, will not need specific approval from the Department to sell GAP.
However, sellers must comply with Ind. Code §24-4.5-2/3-202 as applicable.
No confirmation is required whether a GAP Administrator has been approved; however, a seller must ensure GAP programs that are sold strictly comply with Ind. Code §24-4.5-2/3-202 as applicable. Selling a product that does not comply with the statute could result in full refunds to customers.
Maximum customer cost of a non-refundable GAP Waiver is $400 as noted in the statute. This amount will no longer be tied to inflation and can only be adjusted through future legislative changes.
Any GAP Waiver agreements entered into after June 30, 2018 will have no maximum consumer cost for refundable waivers. Any waiver sold after this date with a consumer cost in excess of $400 must be refundable using a method no less favorable to customer than pro-rata basis.
Cancellation fees remain prohibited.
For GAP programs with a customer cost greater than $400, a rule of 78ths refund method is not permissible for agreements entered into after June 30, 2018.
Credit sellers who are registered under Chapter 2 of the IUCCC must continue to maintain an electronic database regarding sales and refunds of GAP Waivers.
Sellers of refundable GAP Waivers remain responsible for issuing timely refunds to consumers in the event of cancellation or prepayment in full. The Department will continue to review refunds as part of its examination process.
The following changes are effective July 1, 2018.
For a consumer related loan, a loan made by a lender that is not “regularly engaged”, the parties may contract for a loan finance charge, calculated according to the actuarial method, not to exceed 25% per year on the unpaid principal balance. This change results in consistent application regarding the finance charge permitted between consumer related loans and consumer related sales.
A creditor shall credit payment to a consumer’s account as of the date of receipt, except when a delay in crediting does not result in a finance charge or other charge, including a delinquency charge. A delay in posting is not a violation so long as the payment is credited as of the date of receipt. If a creditor specifies in writing requirements for the consumer to follow in making payments but accepts a payment that does not conform to the requirements, the creditor shall credit the payment within five (5) days of receipt of the payment.
The definition of “property” was amended by HEA 1397 to include property that a lessor holds complete and total ownership of, or ownership rights to. As a result, lessors who do not maintain inventory that could become subject to a rental purchase agreement must first obtain 100% ownership or ownership rights to the property from the retail merchant prior to entering into a rental purchase agreement with a consumer (“lessee”) for the property.
All lessors must maintain adequate books and records that demonstrate the lessor has acquired, prior to entering into a rental purchase agreement, complete and total ownership rights to the property subject to the rental purchase agreement. These changes add statutory clarification in line with the Consumer Credit Advisory Letter 2017-01 regarding RPAA Initial Payments.
Clarifications were added to Ind. Code §24-7-3-3 subsection (2) regarding the total number, total amount, and timing of all rental payment necessary to acquire ownership of the property. Any initial payment, not including the optional liability waiver and other optional products and services offered contemporaneously, must be included in the total.
Ind. Code §24-7-3-3 subsection (11) requires itemization of all charges and fees included in any initial rental payment.
An initial payment is separate and distinct from a regular rental payment; the legislation makes appropriate clarifications regarding this. HEA 1397 added a new section (Ind. Code § 24-7-4-1.5) regarding up-front or initial payments made by the lessee, regardless of to whom those payments are made.
Any upfront payment made at the time of (or before) a rental purchase agreement is entered into must be treated as an initial payment for the purposes of Ind. Code § 24-7.
As an initial payment, such monies are subject to all disclosure requirements of Ind. Code § 24-7 A Clarification was added that initial payments may be in a sum larger than a regular rental payment due under the rental purchase agreement.
Further clarifications were made that a lessor shall not require or permit a lessee to make any payment in addition to an initial rental payment and regular rental payments in order to acquire ownership of the property.
A lessor shall not require or permit a lessee to make any payment to a third party as a condition to entering into a rental purchase agreement.
If a lessee is liable to a lessor for the replacement cost of property subject to a rental purchase agreement, a lessor may not charge the lessee more than the fair market value for the property.
Pursuant to Ind. Code §24-7-5-10(b), the fair market value shall be determined by the lessor in the same manner, and using the same method, that would apply if the lessee were exercising an early purchase option under the rental purchase agreement.
Non-Sufficient Funds Fee
The following change is effective July 1, 2018.
Retail creditors, non-mortgage lenders, licensed small loan lenders, rental purchase companies, and debt management companies may assess a non-sufficient funds fee not to exceed $25 and may be assessed by the Department for each returned payment of a dishonored check, electronic funds transfer, negotiable order of withdrawal, or share draft.