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Robert A. Burgess (207)289-3731
Offices located at:
Harry W. Giddinge Central Building
DEPUTY SUPERINTENDENT Hallowell Annex
DEPARTMENT OF BUSINESS REGULATION
BUREAU OF CONSUMER CREDIT PROTECTION
STATE HOUSE STATION 35
AUGUSTA, MAINE 04333
ADVISORY RULING #74
SEPTEMBER 22, 1983
September 22, 1983
RE: Disclosure procedures for variable rate transactions (§3-310) when no caps exist or rates
The Bureau has received an inquiry concerning how a supervised lender (which is not a supervised financial organization) making an adjustable rate mortgage loan is to comply with the disclosure requirements of §3-310 when there are no caps on the movement of the rates charged. In particular, the question was asked as to how the hypothetical example required by paragraph H of subsection 1 was to be provided when there was no upward limit on the movement of the rate and, hence, no identifiable "worst case" situation.
Specifically, paragraph H requires that the creditor provide:
"H. A hypothetical calculation showing the effect on the transaction's other terms and schedule of payments if the annual percentage rate when the credit is extended were increased once by the maximum amount disclosed under paragraph C. With respect to open-end credit transactions, the calculation will consist of a comparison of the finance charge that the increased annual percentage rate will yield on $1,000 for one billing cycle with the finance charge that the annual percentage rate in effect at the time the agreement is executed will yield."
Paragraph C further provides that the creditor must disclose the maximum amount by which the annual percentage rate may increase at any one time. If there is no maximum limit on the increase, it becomes virtually impossible to comply with paragraph H.
The legislative intent behind the enactment of § 3-310 was clearly to provide some control over the new types of consumer credit transactions that variable rate transactions represented. Without disclosure of the terms now required to be disclosed under § 3-310, consumers could easily be led into agreements that subsequent events (rising interest rates) could make impossible for them to afford. Section 3-310 was thus clearly designed to raise some red flags; paragraph H especially so.
Not long after § 3-310 was enacted, however, it was recognized that paragraph H was deficient in that the hypothetical disclosure required to be made could not possibly be made for open-end credit plans because the unpaid balance would be unknown. As a result, the Bureau issued Advisory Ruling #55 as a stopgap measure and then later proposed corrective legislation, which was enacted as P.L. 1981, c. 579. This legislation added the second sentence of paragraph H
ADVISORY RULING #74
SEPTEMBER 22, 1983
which established the $1,000 hypothetical amount to show the impact of variable rate changes on open-end accounts.
Because legislative intent is clear that proper warning of the possible effects of changes in the terms of variable rate transactions should be made to consumers, it would be inapposite to conclude that no form of disclosure be made when changed conditions make it impossible to fulfill the exact disclosure requirements of §3-310. While further legislative change is warranted, the Bureau would consider the following disclosure procedure to comply with paragraph H.
In the case of a variable rate transaction in which there is no upward or downward limit on the movement of interest rates, an example using a 5% increase in rates over the rate initially contracted for would satisfy the hypothetical example requirement of paragraph H.
In two related matters, paragraphs C and E of subsection 1 of § 3-310 require disclosure of maximum movements in the interest rates applied to variable rate transactions. If, as in this case, there is no upward limit on the rate, then that fact should be disclosed in lieu of the what would otherwise be required if there were caps on the rate movement. Unambiguous language such as "the annual percentage rate may increase without limitation" is recommended.
/s/ Robert A. Burgess
Robert A. Burgess