Generally, this principal step-down option for covered short-term loans must have the following
features:
1. The loan is not open-end credit;
2. The first loan has a principal amount no larger than $500, and second and third loans
made within 30 days of a prior loan reduce the principal amount by at least one-third
from the prior loan. Once a consumer has had a sequence of three covered short-term
loans under the principal step-down option, there is a mandatory 30-day cooling off
period before the consumer can take out additional covered short-term loans under the
principal step-down option.
3. The lender and any service provider do not take security interest in the consumer’s
motor vehicle; and
4. The consumer has not in the past 30 days had an outstanding covered short-term loan or
covered longer term balloon-payment loan.
The principal step-down option cannot be used in certain circumstances, such as where a
consumer has already been in debt on covered short-term loans for more than 90 days or has
had six such loans in the last 6 months. Where such limitations apply, lenders would have to
use the general ability-to-repay analysis to determine whether the consumer could afford
another covered short-term loan. After making a covered short-term loan under the principal
step-down option, a lender and its affiliates cannot make any other type of loan to that
consumer while the principal step-down is outstanding and for 30 days thereafter.
A lender that provides the principal step-down option must provide certain disclosures to the
consumer. The disclosures required for these step-down covered short-term loans must be
substantially similar to those provided as the model forms in Appendix A of the Rule and must
be provided in writing or through electronic delivery and in a retainable form. These required
disclosures must be separate from all other written materials provided to the consumer in
connection with the loan. For these alternative short-term loans, the lender must provide the
consumer certain disclosures at two points in time:
1. When a lender makes a first loan in a sequence of loans. This disclosures provide a
consumer with notice that, among other things, the consumer should not take out the
loan if the consumer is unsure of being able to repay the total amount of principal and
finance charges on the loan by the contractual due date and contains a statement that
informs the consumer that Federal law requires a similar loan taken out within the next
30 days to be for a smaller amount. This disclosure also informs the consumer of the
principal step-down requirements for additional loans.