HOUSE BILL REPORT

HB 1760

BYRepresentatives Chandler, Winsley, Nutley, Todd, Ferguson, Lux, Betrozoff, Hargrove and Sanders

Revising provisions for industrial loan companies.

House Committe on Financial Institutions & Insurance

Majority Report:  Do pass.  (13)

      Signed by Representatives Lux, Chair; Zellinsky, Vice Chair; Anderson, Betrozoff, Chandler, Crane, Day, Dellwo, Dorn, Ferguson, P. King, Nutley and Winsley.

House Staff:John Conniff (786-7119)

AS PASSED HOUSE FEBRUARY 10, 1988

BACKGROUND:

The Washington statute governing industrial loan companies permits two methods of calculating interest on loans made by industrial loan companies: the precomputed interest method or discount method and the simple interest method. The discount method determines the amount of interest owed for the entire term of a loan on the full principal amount, adds the two amounts together, and then allows for even payments over the term of the loan contract. The simple interest method determines the amount of interest which is owed at any given time by multiplying the outstanding balance by the interest rate for the payment period. Because each method results in a different yield to the lender, the statute sets different interest rate limits for each method of computing interest and sets limits on any additional fees that may be charged by the lender.

If the industrial loan company is using the discount method to calculate interest on a loan, the company is limited to charging ten percent per annum or less and the loan term is limited to two years. If the company is using a simple interest method to calculate interest on a loan, the company may charge up to twenty-five percent per annum and the loan term is limited to five years unless the loan is secured by real property or is an open-end loan. If the loan is an open-end loan, the company may only use the simple interest method to calculate interest owed on the loan.

In addition to the interest that may be charged by the industrial loan company, the company may charge a maximum of two percent of the loan amount for loan investigation and servicing costs. This two percent fee may be deducted from the loan amount in advance of making the loan. A company is also permitted to charge for the filing and recording of security agreements and for the appraisal of any security offered by the borrower. The appraisal fee may not be collected if the company subsequently rejects the loan application.

Regulations adopted by the Division of Banking govern the method that must be used by an industrial loan company in calculating a refund of unearned interest when a loan is paid before its final due date. If the term of the loan is for a period under sixty-one months, the company must use the "rule of seventy-eights" to determine the amount of interest that must be refunded to the borrower. If the loan is for a term in excess of sixty-one months, the actuarial method must be used.

The "rule of seventy-eights" method of calculating the amount of unearned interest that must be refunded to a borrower is based upon a formula which is the sum of the remaining number of payments divided by the number of payments actually made and multiplied by the outstanding balance. The actuarial method of calculating an interest refund is the allocation of loan payments between principal and interest using a simple interest rate calculation to determine how much interest was earned at the time the loan was satisfied. Generally, the "rule of seventy-eights" results in greater yield to the lender the longer the term of the loan.

SUMMARY:

The two percent fee that may be charged by an industrial loan company is limited to two percent of the loan amount advanced to or for the direct benefit of the borrower. The fee may not be calculated on the total of principal and interest.

Industrial loan company authority to charge filing and appraisal fees are combined in a new subsection granting companies the additional authority to charge for title insurance. Appraisals must be conducted by independent, third party appraisers. The company may not use its own in-house appraiser.

An industrial loan company may not use the discount method when making any loan secured by real property.

Industrial loan companies may not use the "rule of seventy-eights" to calculate a refund of prepaid interest on any loan for a term in excess of thirty seven months. Unearned interest on loans for a term in excess of thirty seven months must be calculated by the actuarial method.

Fiscal Note:      Not Requested.

House Committee ‑ Testified For:    Jeff Houtteman, Household Finance Company and Earl Murray, Beneficial Finance Company.

House Committee - Testified Against:      None Presented.

House Committee - Testimony For:    These changes will benefit consumers by prohibiting certain unfair methods of calculating interest and fees.  Permitting loan companies to charge for title insurance conforms to the power granted to make real property loans.

House Committee - Testimony Against:      None Presented.