SENATE 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

Senate Committee on Financial Institutions & Insurance

Senate Hearing Date(s):February 23, 1988

Majority Report:  Do pass.

      Signed by Senators von Reichbauer, Chairman; West, Vice Chairman; Kreidler, McCaslin, Moore, Rasmussen, Smitherman.

Senate Staff:Benson Porter (786-7470)

                  February 24, 1988

AS REPORTED BY COMMITTEE ON FINANCIAL INSTITUTIONS & INSURANCE, FEBRUARY 23, 1988

BACKGROUND:

Industrial loan companies may calculate interest on loans using two different methods:  the precomputed interest method or discount method, and the simple interest method.  The precomputed or 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 precomputed or discount method to calculate interest on a loan, the company is limited to charging 10 percent per annum or less.  For any loan with a term greater than two years, the company may calculate interest using the simple interest method and charge up to 25 percent per annum.  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 2 percent of the loan amount for loan investigation and servicing costs.  This 2 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 61 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 61 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 2 percent fee that may be charged by an industrial loan company is limited to 2 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 precomputed or 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 37 months.  Unearned interest on loans for a term in excess of 37 months must be calculated by the actuarial method.

Appropriation:    none

Revenue:    none

Fiscal Note:      none requested

Senate Committee - Testified: Earl Murray, Beneficial Corporation (for); Jeff Houtteman, Household International (for)