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Barbara Reid Alexander (207)289-3731
Offices located at:
Harry W. Giddinge Central Building
DEPUTY SUPERINTENDENT Hallowell Annex
DEPARTMENT OF BUSINESS REGULATION
BUREAU OF CONSUMER PROTECTION
STATE HOUSE STATION 35
AUGUSTA, MAINE 04333
ADVISORY RULING #49-A
NOVEMBER 7, 1980
November 7, 1980
The Bureau has had two requests to review and reverse Part I of Advisory Ruling #49 relating to Section 3.308 of The Maine Consumer Credit Code. After further research and consideration of the policy intended to be served by Section 3.308, Part I of A.R. #49 is hereby retracted and the following ruling is substituted:
Section 3.308 regulates balloon payments:
"With respect to a consumer credit transaction other than one primarily for an agricultural purpose or one pursuant to open-end credit:
1. No creditor shall at any time contract for or receive payments pursuant to a schedule of payments under which any one payment is not subsequently equal to all other payments, excluding any down payment receivable by the creditor or under which the intervals between any consecutive payments differ substantially."
Specifically, the Bureau was asked to rule that a delay in the first scheduled payment of a consumer credit transaction of up to 60 days did not run afoul of the prohibition that "intervals between any consecutive payments differ substantially." It was stipulated that intervals after the first payment remained equal (30 days) and that payment amounts were equal. A.R. #49 ruled that a delay in the first payment beyond 45 days was prohibited, relying in part on the definition of "interval" given in Section 2.503(4).
Section 3.308 as adopted in Maine is a nonuniform amendment to the Uniform Consumer Credit Code (1974). The Uniform version provides:
"(1) Except as provided in subsection (2), if any scheduled payment of a consumer credit transaction is more than twice as large as the average of earlier scheduled payments, the consumer has the right to refinance without penalty, the amount of that payment at the time it is due. The terms of the refinancing shall be no less favorable to the consumer than the terms of the original transaction."
ADVISORY RULING #49A
NOVEMBER 7, 1980
The source of the Maine version was probably the Model Consumer Credit Act (1969) published by the National Consumer Law Center and Section 3728 of the Home Repair Financing Act (Title 9, M.R.S.A.).
Section 2.402 of the NCLC version prohibits an agreement in which "the intervals between any consecutive installments differ substantially in time."
The Home Repair Financing Act also contains a prohibition on balloon payments (9 M.R.S.A. §3728):
"Every home repair contract shall provide for the payment of the time balance at substantially equal amounts. When appropriate for the purpose of facilitating payment, the contractor may provide for payments on a schedule which reduces or omits payments over a period or periods not in excess of 93 days in any 12-month period."
Therefore, the Maine version does two things. First, it prohibits a balloon payment contract while the UCCC merely gives the consumer the right to refinance the balloon payment contract with no penalty. Second, the Maine version clearly establishes a more strict definition of balloon payment (intervals and payment amounts shall not differ "substantially") as opposed to the UCCC which establishes a different test for payment amounts (twice the average payment) and does not regulate intervals at all.
In addition, the Maine version of Section 3.308(1) is almost identical to the regulation of balloon payments contained in Section 2.308. Section 2.308(1) in both the Maine Code and the UCCC (Working Draft No. 4, 1974) requires, for supervised loans of $1,000 or less (now $1,800, see Section 1.106), "substantially equal installments at equal periodic intervals," and establishes maximum loan terms. The only difference remaining between the balloon payment regulation of both Sections 2.308 (supervised loans of $1,800 or less) and 3.308 (any closed-end consumer loan or credit sale except agricultural transactions) is that intervals must be equal in 2.308(1) transactions and "substantially" equal in 3.308(1) transactions.
AR #49 took the position that the term "interval" in Section 3.308 included the period between the consummation of the loan and the first scheduled payment. It relied for this decision on the definition of "interval" in Section 2.503(4) which specifically references the time period between the date of the transaction and the due date of the first scheduled payment and allows a 15-day grace period in this first interval for a monthly computational period. This decision to rely on the Section 2.503(4) definition of interval for the purposes of Sections 2.308 and 3.308 is affirmed. Even if the definition in Section 2.503(4) is not considered, a gaping loophole in the prevention of irregular payment schedules would result if the period of time between the date of the transaction and the first payment was not regulated.
ADVISORY RULING #49A
NOVEMBER 7, 1980
AR #49 was wrong, however, to assume that the 15-day grace period in the first scheduled payment constitutes the limit of that allowed by Section 3.308.
First, if the definition of "interval" allows 45 days for the first payment, then the allowance for "substantially" equal intervals in Section 3.308 must allow something more. This is particularly obvious if it is assumed that Section 2.308, which requires "equal periodic intervals" would also rely on the Section 2.503(4) definition and consequently allow the 15-day grace period in the first interval for a monthly computational period.
Second, the policy behind Section 3.308 is not served by an overly strict interpretation. Indeed, to allow some flexibility in the payment schedule is clearly of potential benefit to consumers, particularly with regard to the first interval. The intent of Section 3.308 is to prevent the kind of irregularity in payment amounts and intervals that will "surprise" or mislead the consumer about the true nature of the obligation.
Therefore, the sole issue that remains is to define the degree of irregularity allowed by the "substantial" language in Section 3.308 concerning payment intervals. While the Bureau is not prepared to establish a definite rule on this matter (and, indeed, would do so by a rule-making proceeding in any case), it is proper to state that an extension of the first payment to 60 days would not be viewed as a violation of Section 3.308. In considering other variations in the payment schedule, the Bureau will look to 9 M.R.S.A. §3728 as well as actual consumer harm in considering compliance with Section 3.308(1).
I hope this serves to clarify our position in this matter.
Barbara R. Alexander
1. See Spanogle, John A., "Advantages and Disadvantages - A comparison of the Present Maine Law and the U3C," Maine L. Rev. 295, 316-317 (1970).
2. To complicate matters, the final draft of the UCCC inserted the word "substantially" prior to the phrase "equal periodic intervals" in Section 2.308(1).
3. Both Sections allow an exception to the balloon payment prohibition when the consumer's income is seasonal or intermittent. Section 2.308(1) and 3.308(2). The exception has not been raised with regard to the request for the AR.
4. Note that no flexibility is given in Section 2.308(1) for payment intervals.