HOUSE BILL REPORT

HB 1215

BYRepresentatives Appelwick and Padden

Discusses variable interest rates in relation to the uniform commercial code.

House Committe on Judiciary

Majority Report:  Do pass.  (19)

      Signed by Representatives Appelwick, Chair; Crane, Vice Chair; Padden, Ranking Republican Member; Belcher, Brough, Dellwo, Hargrove, Inslee, P. King, Locke, R. Meyers, Moyer, H. Myers, Patrick, Schmidt, Scott, Tate, Van Luven and Wineberry.

House Staff:Pat Shelledy (786-7149)

AS PASSED HOUSE FEBRUARY 24, 1989

BACKGROUND:

The Uniform Commercial Code article three governs commercial paper. The law requires that a writing must, among other requirements, contain an unconditional promise to pay a "sum certain" and be payable upon demand at a "definite time."  A sum payable is a "sum certain" if the amount is to be paid with "stated interest" or by "stated installments."  The code does not define "stated."  Floating rate or variable rate promissory notes or variable payment note were uncommon when the code was adopted. They are common today in both consumer and commercial loans.  An example is mortgage loans where the rate is referenced to a cost of money index. Many lenders sell loans on the secondary market. Cases have arisen in other states questioning the negotiability of promissory notes that provide for changing interest rates or payments.  Those states have similar language to Washington's law requiring "stated" interest and installments. The secondary market could be adversely effected if Washington courts followed other states and found that variable rate loans were non- negotiable.

SUMMARY:

This bill will amend article three to define "stated interest" and "stated installments" to include variable rates of interest or variable installment payments so that such notes may be negotiable promissory notes.  The rate is "stated" if it is readily ascertainable by reference in the note to a published statute, regulation, rule of court, generally accepted commercial or financial index, compendium of interest rates, or announced or established rate of a named financial institution.  Payments are "stated"  and are made in a "definite time" if they are graduated, variable, annuity or price level adjusted payments, provided the document provides for such payments.

Several other states have adopted similar language.

Fiscal Note:      Not Requested.

House Committee ‑ Testified For:    Donald Brazier, Washington Savings League; Randy Durham, Washington Retail Association.

House Committee - Testified Against:      None Presented.

House Committee - Testimony For:    This bill assures that variable interest rate notes are negotiable instruments.  This would avoid litigation over the issue and reflects current commercial practice.

House Committee - Testimony Against:      None Presented.