Changes To The Tennessee Thrift Statute

Warning to those recipients who are not consumer finance nerds:  this week’s e-mail is particularly wonky with respect to the details of Tennessee statutes governing the interest rates that Tennessee thrifts can charge to borrowers.  The short version is that Tennessee thrifts can charge a higher interest rate on some loans; the long version is that the law is now clear as to the math necessary to figure out which loans are eligible for the higher rate.

As most readers of these email blasts know, a $250,000.00 consumer residential loan has much more paperwork than does a $2,500,000.00 commercial loan.  The additional paperwork, of course, is often dictated by federal statutes like the Truth-in-Lending Act (“TILA”) and its implementing Regulation Z (“Reg. Z”).  TILA and Reg Z have very detailed rules about how items such as “Amount Financed,” “Finance Charge,” “Total of Payments” and “Annual Percentage Rate” are calculated (and what fees or charges must or may be included therein) in consumer credit documents and retail installment contracts. 

In Tennessee, as in many other jurisdictions, there is a similar degree of regulatory scrutiny, under state law, over “Industrial loan and thrift companies,” which are governed by the Industrial Loan and Thrift Companies Act, as amended, Tennessee Code Annotated § 45-5-101 et seq. (the “Thrift Act”). 

In 2017, the legislature amended the Thrift Act to increase the permissible rate of interest on loans between $100.00 and $5,000.00 from 24% to 30%, and to continue the interest rate cap of 24% for loans “where the total amount of the loan” is more than $5,000.00.  These changes were made to bring Tennessee law in line with the trend amongst other states with respect to interest rate caps on loans by thrifts.  The problem was that the amendments relied on the phrase, “total amount of the loan,” which while defined in the Thrift Act at Tennessee Code Annotated § 45-5-102(25), nonetheless caused confusion amongst registrants as to how to calculate whether a loan is for more than $5,000.00 (and thus, subject to a different maximum interest rate).  In short, the issue was whether the “total amount of the loan” is the aggregate of the amount of principal borrowed, including “loan charges,” insurance charges and, crucially, precomputed interest (precomputed interest being a relic of calculating loan amounts prior to the widespread use of computer programs).  The math is a little complicated for the purposes of this e-mail, but the idea is that if the “total amount of the loan” includes precomputed interest, registrants could loan more money for a shorter term but less for a longer term; and requiring a shorter term seems to be at odds with one of the aims of the Thrift Act, which is to make credit available to certain consumers.

Several of our clients recognized this problem, and in 2018, we—along with industry representatives and our clients—primarily drafted a revision to eliminate the “total amount of the loan” language and replace it with the “amount financed.”  Tenn. Code Ann. § 45-5-301(2)(A)(ii)-(iii); 2018 Pub.Acts, c. 600, § 3.  For simplicity’s sake, the “Amount financed” was added to the Thrift Act as a defined term, and “means the amount financed as disclosed under” TILA and Reg. Z.  Tenn. Code Ann. § 45-5-102(27).  A commensurate change was established for Tennessee Code Annotated § 45-5-401(a) and (c).  These changes became effective March 23, 2018.  2018 Pub.Acts, c. 600. 

If all of this sounds boring, I admit that Ernie, Lisa and I have a bizarre sense of what we find exciting.  But as attorneys, this is exactly what we are paid to do.  If you or your business have any questions about consumer finance regulations, would like to draft new consumer loan documents or make sure that your current documents are up to date, would like to explore changes to consumer finance regulations, or would like to discuss efforts to revise state law, send us an email at mikeschwegler@mbslawtn.com, erniewilliams@mbslawtn.com and lisarosado@mbslawtn.com.

Next week we’ll discuss collecting on judgments when the (otherwise broke, but not Bankrupt) judgment debtor has lots of assets in tax advantaged retirement accounts and/or lots of real estate assets.  If you are interested in looking at the back catalogue of Ernie's and my e-mail blasts, please visit our website, www.mbslawtn.com, where they will be archived in the coming weeks.

Michael Schwegler