Flexible Credit Frequently Asked Questions
Answer: No.
The Flexible Credit Act defines a flex loan as an open-end credit plan. Specifically, Tenn. Code Ann. § 45-12-102(6) defines a “Flex loan plan” as “a written agreement subject to this chapter between a licensee and a customer establishing an open-end credit plan under which the licensee contemplates repeated noncommercial loans for personal, family, or household purposes, that:
(A) May be unsecured or secured by personal property;
(B) May be without fixed maturities or limitation as to the length of term; and
(C) Are subject to prepayment in whole or in part at any time without penalty;”
In a closed end loan transaction, the borrower cannot alter the number and amount of installments, the maturity date, and/or the credit terms which are in contrast to an open-end credit plan or loan; therefore, closed end loans are not included under the Act.
- Question: May an application for licensure under the Flexible Credit Act be accepted prior to January 1, 2015?
Answer: No.
Because the Flexible Credit Act becomes effective on January 1, 2015, and not before, applications for licensure under the Act may not be submitted nor accepted prior to the effective date of the Act. The Act requires that applications for licensure be submitted through the Nationwide Mortgage Licensing System and Registry (“NMLS”); however, the NMLS will not be able to accept and process an application prior to January 1, 2015.
It should be noted though that a “Company Record” in NMLS may be created at any point in time; therefore, it may be advantageous to complete this process even prior to January 1, 2015.
- Question: Will the Department accept audited financial statements for fiscal year-end/calendar year-end 2013 when applying for a flexible credit license beginning January 1, 2015?
Answer: No.
The Department is required to follow the clear and unambiguous language of the Flexible Credit Act, and the Act clearly requires that each application for a flexible credit license must be accompanied by an audited financial statement for the immediately preceding fiscal year end. Specifically, the Act states that each application for licensure shall be accompanied by:
An audited financial statement, including, but not limited to, a balance sheet, a statement of income or loss, and a statement of changes in financial position, for the immediately preceding fiscal year end, prepared in accordance with generally accepted accounting principles by a certified public accountant or public accounting firm, neither of which is affiliated with the applicant.” Tenn. Code Ann. § 45-12-106(a)(2) (emphasis added).
- Question: As a start-up company, are audited financial statements required?
Answer: Yes.
The Department is required to follow the clear and unambiguous meaning of the Flexible Credit Act, and the Act clearly requires that each application for a flexible credit license must be accompanied by an audited financial statement; however, the Act provides that a newly created entity may submit only a balance sheet and a projected income statement. Based on the language in the Act, the Department requires that financial statements be audited. Specifically, the Act states:
“For a newly created entity, the commissioner may accept only a balance sheet prepared by a certified public accountant or public accounting firm, neither of which is affiliated with the applicant, accompanied by a projected income statement demonstrating that the applicant will have adequate capital after payment of start-up cost;”
Tenn. Code Ann. § 45-12-106(a)(2).
- Question: Is a physical presence location in Tennessee required to be licensed under the Flexible Credit Act?
Answer: No.
The Flexible Credit Act indicates that while a physical presence in Tennessee is not required to be licensed under the Act, if a licensee is not physically located in Tennessee, other requirements apply. Tenn. Code Ann. § 45-12-103(b) states in pertinent part “Any nonresident person seeking a license under this chapter shall furnish the commissioner with the name and address of a resident of this state upon whom notices or orders issued by the commissioner, or process affecting a licensee under this chapter, may be served.” Therefore, a physical presence in Tennessee is not required; however, in accordance with Tenn. Code Ann. § 45-12-103(a), a separate license shall be required for each location from which the business of making flex loans is conducted.
- Question: May the net worth required for licensure under another act administered by the Department be used for purposes of satisfying the net worth requirements under the Flexible Credit Act?
Answer: No.
The purpose of the net worth requirement under the Flexible Credit Act is to ensure that the company or location (“person”), making flex loans has the financial ability to operate the business in accordance with the requirements set forth in the Act. The licensing requirements under each Act administered by the Department, including net worth requirements, are intended solely for the purpose of obtaining a license under each subject Act, and the net worth requirements under one Act may not be combined with, or substituted for, the net worth requirements under another Act.
- Question: Will TDFI accept fingerprint cards prior to the Flexible Credit Act’s effective date, January 1 2015?
Answer: No
Because the Flexible Credit Act becomes effective on January 1, 2015, and not before, applications for licensure under the Act, including submission of fingerprints, may not be submitted nor accepted prior to the effective date of the Act. Tenn. Code Ann. § 45-12-106(b)(1) states, in pertinent part, “The commissioner is authorized to require an applicant for a license to consent to a criminal history records check and to provide with the application fingerprints in a form acceptable to the commissioner.” (emphasis added).
- Question: May a licensee charge a customer a repossession fee in the event a vehicle is redeemed by the consumer following repossession and no attorney was used in the process?
Answer: No
The Act states, in Tenn. Code Ann. § 45-12-111(f) that; “(f) (1) In the event a customer defaults under the terms of a flex loan plan and the licensee refers the customer’s account to an attorney, including a regular salaried employee of the licensee, for collection, the licensee may:
(A) If the flex loan plan so provides, charge and collect from the customer a reasonable attorney’s fee; and
(B) If the flex loan plan, or in the case of secured plans, the security agreement or similar instrument, so provides, recover from the customer all collection and court costs, including, in the case of secured plans, all costs of enforcing the security agreement or similar instrument actually incurred by the licensee, including those incurred on appeal.
(2) A licensee may charge and collect interest following default of the customer or judgment in favor of the licensee at the periodic rate permitted by this section.
(3) Disposition of property after default shall occur in a commercially reasonable manner in accordance with title 47, chapter 9, part 6.”
It is clear that Tenn. Code Ann. § 45-12-111(f)(1) refers to the fees a licensee is allowed to collect and the circumstances required to allow the collection of fees; (f)(2) allows a licensee to charge and collect interest post-default; and (f)(3) requires licensees to dispose of property in a commercially reasonable manner (similar to the requirements of the Title Pledge Act).
- Question: TCA 45-12-111(f)(1) provides that “In the event a customer defaults under the terms of a flex loan plan and the licensee refers the customer’s account to any attorney, including a regular salaried employee of the licensee, for collection, the licensee may……recover from the customer all collection and court costs, including, in the case of secured plans, all costs of enforcing the security agreement. Does the foregoing allow the assessment of a repossession fee at redemption only in those instances where an attorney has worked the account?
Answer: Yes
Tenn. Code Ann. § 45-12-111(f)(1) is clear that a licensee may only charge fees after a borrower defaults if the licensee “refers” the matter to an attorney to collect (provided the loan agreement provides for them), (A) reasonable attorney’s fees, and (B) all collection and court costs, including for secured plans, the costs of enforcing the security agreement or similar instrument incurred by the licensee (including on appeal if it goes that far).
As the language is clear that fees may be collected post-default when the matter is referred to any attorney, it is the Department’s opinion that this language does not allow for the assessment of a repossession fee at redemption with the matter having been referred to any attorney.
- Question: TCA 45-12-111(f)(3) states that “Disposition of property after default shall occur in a commercially reasonable manner in accordance with title 47, Chapter 9, part 6.” The section referenced is the Secured Transactions – Default section of Tennessee’s UCC, which authorizes a secured party to apply the proceeds from a sale of collateral to the costs listed in TCA 47-9-615(a), including “the reasonable expenses of retaking, holding, preparing for disposition, processing, and disposing, and, to the extent provided for by agreement and not prohibited by law, reasonable attorney’s fees and legal expenses incurred by the secured party.” Thus, TCA 45-12-111(f)(3) would seem to provide for the recovery of the repossession fee upon the sale of the vehicle. Does this section also permit recovery of the repossession fee at redemption?
Answer: The answer to the question of whether a licensee may obtain a repossession fee at redemption from a borrower under Tenn. Code Ann. § 45-12-111(f)(3) is “no” unless the matter was referred to an attorney as described above. Additionally, Tenn. Code Ann. § 45-12-111(f)(3) does not allow for the recovery of a repossession fee upon the sale of the vehicle absent referral to an attorney as required in Tenn. Code Ann. § 45-12-111(f)(1).
Tenn. Code Ann. § 45-12-111(f)(3) only addresses, similar to the Title Pledge Act, the disposition of the secured property after default occurs. Disposition of property is covered by Tenn. Code Ann. § 47-9-610, “Disposition of collateral after default”, not Tenn. Code Ann. § 47-9-615 as referenced in the question. While Tenn. Code Ann. § 47-9-615 might be applicable to a situation not involving the Flexible Credit Act and a licensee thereunder, the Flexible Credit Act, specifically Tenn. Code Ann. § 45-12-111(f)(1), controls what fees and the circumstances allowing for the charges to a borrower’s account for a licensee.
- Question: May a licensee continue to charge the customary fee on a flex loan after default?
Answer: No
Tenn. Code Ann. § 45-12-111(f) addresses what flex credit licensees may charge and collect in the event of default. Tenn. Code Ann. § 45-12-111(f)(1) provides that licensees may, if the flex loan plan/security agreement so provides, collect a reasonable attorney’s fees, collection and court costs, and costs of enforcing the security agreement. Tenn. Code Ann. § 45-12-111(f)(2) provides that licensees may collect interest at the periodic rate permitted by the Act. The statute clearly says nothing about charging or collecting the customary fee after default, and based on the canons of statutory construction, it appears that the legislature’s omission of the customary fee from this section was intentional.