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By Tom Hudson LEG A L NO GOOD DEED GOES UNPUNISHED Subprime loan programs with automatic interest-rate reductions are great for both dealers and their customers, but the magazine's legal eagle explains why they could run afoul of TILA standards. then to 18 percent, and so on. We'll call it the "Good Repayment Incentive Program," or "GRIP." Tere's a lot to like about a GRIP. Customers are rewarded with favorable rates for timely payment, and the program should deter the occasional ref nancing that results when a customer's credit rating improves and the customer is able to f nd a lower rate for his or her car f nancing. Such a program should also gain a public relations beneft for the company ofering it. Afer all, what could be fairer than rewarding realworld payment performance? A good deed! But, as the adage goes, no good deed goes unpunished, and this one's no diferent. Te punishment, in this case, comes from a combination of the federal Truth in Lending Act (TILA) and state and federal prohibitions against unfair and deceptive acts and practices (UDAP). I would be concerned that no Thomas B. Hudson is a partner in the law firm of Hudson Cook LLP and the author of several widely read compliance manuals available at CounselorLibrary.com. ©Counselor Library.com 2012, all rights reserved. Based on an article from Spot Delivery. Single print publication rights only, to Bobit Business Media. HC# 4819-2014-3636 (8/13). THudson@AutoDealerMonthly.com 20 AUTO DE ALE R MONTHLY • AUGUST 2013 ©ISTOCKPHOTO.COM/GRIVINA From time From time to time, an excited m i e cli c client will call with a subprime lendi ng p i g pro lending program idea that he believes is the v s believes i t best thing since sli sliced bread I've heard several bread. va variations o such a proposal, on bu but I think the basic program would really have an edge in the marketplace. Here's the idea: A bad credit customer who pays as agreed for a specifed period gets a rate break. What could be fairer? Wouldn't such a program make the regulators, including the Consumer Financial Protection Bureau (CFPB), smile? Te program would award subprime customers who meet their payment obligations with a "step down" to increasingly lower f nance charge rates. As an example, a customer whose credit warranted an initial rate of 24 percent APR and who made his or her f rst six payments on time might see the APR drop to 22 percent. Six more timely payments and the rate might drop to 20 percent, matter how well-intentioned, a GRIP's structure might leave it vulnerable to attack. My concerns arise from the treatment such a program would receive under the TILA and the potential for allegations of creditor abuse that might arise from that treatment. Under the TILA, federal disclosures are based on the contract between the parties, and creditors are permitted to make the assumption that the obligor will make all of his or her payments on time. In a GRIP, a creditor would assume that the customer would make every payment on time, and would disclose not a 24 percent APR, but a "blended" APR that would refect the drop in the APR rate over time due to the assumed timely payments. Tat disclosure would be accurate for the customer who actually paid on time and qualifed for progressively lower rates, but not, in retrospect, for the customer who doesn't. I believe this method of disclosure would be perfectly acceptable under federal disclosure laws, but I shudder to think about how regulators and consumer interest groups would react. Tese folks would immediately spot the possibility for abuse in such a program. A creditor ofering such a program would make the TILA disclosures correctly, showing a blended rate refecting the contractual agreement between the parties. Te fy in the soup,