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Line of Credit Products Continue to provide Diversification Opportunities

In The Know/Tranews

April 2010


Regulatory Environment Offers More Flexibility for Open-End Credit Products

While the recently enacted Credit Card Accountability, Responsibility and Disclosure Act (Credit CARD Act) of 2009 does address a myriad of consumer credit products, the legislation does not restrict all open-end credit products in the same manner, and line of credit (LOC) products remain a viable diversification option for many lenders.

At the recent Community Financial Services Association of America (CFSA) annual conference, attorney Blake Sims of Chambliss, Bahner & Stophel, PC discussed how the law will impact LOC products in a presentation "New Products and Technology." Noting that one of the most significant changes that the Act dictates is the manner in which fees, interest and the APR are disclosed, Sims also explained that for many lenders LOC accounts may be feasible alternative offerings for years to come.

With federal legislation such as the Credit CARD Act primarily regulating disclosures, lenders can look to their state statutes for opportunities with open-end credit products such as a LOC.

"In some states open and closed ended credit products are covered under different statutes, and there are distinct differences among states just as there are important differences between the product structures," Sims reports

Positioned as an open-end revolving account, the LOC offers consumers more flexibility in loan amounts, the potential of larger loan amounts and longer terms for repayment compared to traditional closed-end short-term products. In some states lenders are afforded more options to design open-end products to meet their clients' needs and remain profitable. According to Sims, each state stipulates a variety of restrictions dictating caps on rates, access fees, participation or annual fees, and all need to be evaluated separately and differently than closed-end products.

"It's also important that lenders considering a LOC product work with a software provider such as TranDotCom who understands the differences between closed and open-end products and will work with the lender to adapt their model. It really isn't as easy as just modifying a closed-end product, because many of the differences lay in the software. Lenders entering the market will need a good solid provider such as TranDotCom who understands the nuances in disclosures, replenishments, and flows," Sims suggests.

TranDotCom introduced its Line of Credit Module in 2009. It is adjustable to individual state rules and regulations, and supports a wide range of APR's, initial grace periods, cycle date calculations, and a variety of lender defined fees.

"We believe that the LOC product provides lenders with diversification as well as the ability to derive multiple revenue streams," according to Andrew Rains EVP Marketing and Sales, TranDotCom.

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