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JOHN E. QUINN
DEPARTMENT OF BUSINESS REGULATION
BUREAU OF CONSUMER PROTECTION
STATE HOUSE ANNEX 51 Chapel Street
AUGUSTA, MAINE 04330
ADVISORY RULING #23
October 20, 1975
I am pleased to respond to your request to review copies of the proposed forms as follows that were submitted to this Bureau recently to ascertain compliance with The Maine Consumer Credit Code and Truth-in-Lending:
Demand Note and Disclosure Form;
Time Note and Disclosure Form;
Installment Note and Disclosure Form; and
Security Agreement Form.
DEMAND NOTE AND DISCLOSURE FORM
Under Item F is verbiage stating that the transaction is a demand loan and that the transaction is subject to increases and decreases in the Annual Percentage Rate. While I find nothing wrong with this wording on its face, I am concerned as to whether or not a new disclosure statement is given at the time the rate is either increased or decreased.
Please review Interpretation 226.810 of the Federal Reserve Board (copy enclosed) which sets forth the criteria that must be disclosed at the time of the consummation of the transaction for fluctuating rate loans so that disclosure need not be made at a later date when the rates change. It does not appear that the language contained in your note is specific enough to cover the conditions set forth in Para-graph C of the Interpretation. Of course, if a compete disclosure statement is given at the time the rate is changed, my comments in relation to the interpretation may be disregarded.
Pursuant to our recent telephone conversation, I have raised a question on the Right of Set Off and whether or not the Right of Set Off would ever be used on the type of loans that I reviewed the documents for. It is my position that the Right of Set Off is a type of security interest under
ADVISORY RULING #23
OCTOBER 20, 1975
both Truth-in-Lending and the Code and, therefore, must be so disclosed in the disclosure portion of the disclosure statement where the security for the loan is customarily disclosed. If the Right of Set Off is embodied in the contract, other than in the disclosure portion of the form, it would not fulfill the disclosure requirements of Truth-in-Lending in that our Regulation No. 1 (identical to Regulation Z, which your institution comes under) requires that all disclosures shall be in a clearly, conspicuously and meaningful sequence.
The Installment Note and Disclosure Form and the Time Note and Disclosure Form have a space in the SECURITY portion of the form under the caption, "Other" which would permit your bank to insert the proper language to indicate the Right of Set Off provisions. The Demand Note and Disclosure Form, however, has no provision in the disclosure section to insert this information.
I see no contractual provisions in the forms authorizing the Right of Set Off. In the absence of such language, it does not appear that you could utilize this type of security interest. I would recommend that you include this provision in your form, which was recently deleted, provided, of
course, that you desire to use the provision in the future. You should also include language to the effect that a Notice of Right to Cure will be issued, as required by Section 5.110 of the Code, before any action is taken to utilize the set off provisions, provided, of course, that the transaction is under the Code.
If you feel that further communications are needed to resolve the matter, I would be more than willing to discuss this with you or your counsel.
I hope that my comments will be of some benefit to you in attempting to comply with the statutes administered by our Bureau.
/s/ Harry W. Giddinge
Harry W. Giddinge