Insights

The Montana legislature meets for 90 legislative days every two years in the “odd” years, unless specially convened. So, when these lawmakers get together, you can expect a lot of rapid activity on a bill, or the bill will simply die. With this year’s legislative session drawing to a close, the legislature has been active. It has amended the Retail Installment Sales Act (“RISA”), the Montana Consumer Loan Act (“CLA”), the Montana Mortgage Act, and by the time you read this, the Governor will likely also have signed a new GAP waiver law. So, stay tuned.

Many of the amendments to the Montana RISA “cleaned-up” licensing requirements, enforcement issues, and rulemaking authority. Of more immediate concern for current licensees offering closed-end credit are changes to disclosures in the retail installment sales contract and “clarification” of permissible late charges.

To make sure all finance companies have to print new contracts (or edit electronic forms), the “Notice to Buyer,” which must conform to the statutory language, has been changed. The notice must provide as follows:

1. Notice to the buyer. Do not sign this contract before you read it or if it contains any blank spaces other than blank spaces for the serial number of the goods or other similar information and the due date of the first installment if the goods have not been delivered to you at the time you sign the contract.

2. You are entitled to an exact copy of the contract you sign bearing your signature.

3. Under the law, you have the right to pay off in advance the full amount due and to obtain a partial refund of the finance charge.

The statute also changes the “standard” for three disclosures from a specific type-size standard to a “conspicuous” standard. Under the amended statute, “conspicuous” means that: (i) a heading is in capital letters equal to or greater in size than the surrounding text or in contrasting type, font, or color than the surrounding text of the same or lesser size; or (ii) language in the body of a record or display is in larger type than the surrounding text, is in contrasting type, font, or color than the surrounding text of the same size, or is set off from the surrounding text of the same size by symbols or other marks that call attention to the language.

The recent amendment also “clarifies” that late charges are now permissible on both pre-computed contracts and daily accrual contracts, but doesn’t do it very “clearly.” Historically, the regulator has interpreted the late charge provision in the Montana RISA to allow a late charge only on pre-computed contracts and not on contracts that accrue finance charges on a daily basis (sometimes referred to erroneously, but conveniently, as “simple-interest” contracts).

Under the law, as “clarified,” a holder of a contract may collect a delinquency charge on each installment in default for a period not less than 10 days in an amount not to exceed $10. Clear so far. Then the statute goes on to say that “alternatively, the holder may calculate a fixed delinquency fee that is expressed as an interest rate not exceeding 15% of each installment in default. The delinquency charge expressed in this subsection… as a simple interest rate represents a method of calculating a fixed delinquency charge and is not interest.” Not so clear. Here’s what the regulator says this means. A holder may charge a late charge of $10. Or, a holder may charge a late charge of 15% of an installment that is in default. But, these alternative late charges may not be addressed in the contract as “the greater of” or “the lesser of.” Rather, the holder has to determine, at the time a contract is signed whether the late charge will be $10 or will be 15% of the past due payment, and complete the contract accordingly. In either case, the grace period is 10 days.

The RISA amendments will be effective for contracts used on and after October 1, 2013.

The amendments to the CLA are generally “clarifying” and “housekeeping” amendments which conform the statute to current regulatory practices and procedures in connection with licensing. But, a few of the amendments are substantial and worth addressing. First, the statute authorizes the regulator to utilize the nationwide licensing system for licensing purposes. Prior to the amendment, participation in the system was limited to mortgage loan bankers, brokers and originators. When the Montana regulator promulgates implementing regulations, which we are advised will likely be in 2014, the nationwide licensing system may be utilized for non-mortgage lenders as well. Second, the cap on civil penalties for a single administrative action for violations of the CLA, currently at $5,000, has been eliminated. The statute retains the $1,000 per violation limit, but does not define “violation.” This amendment creates substantially greater risk for violating the CLA. Finally, the CLA now expressly prohibits licensees (or those who should be licensed) from making loans with “precomputed” interest. In 2007, the CLA was amended by deleting references to precomputed interest (what the statute erroneously referred to as “add-on” interest). The regulators, who recommended the 2007 amendments, believed that deleting references to precomputed interest made such interest impermissible. Contrary to this stated view of the regulators, the 2007 amendments eliminated limitations on precomputed interest in the statute, but did not make it impermissible. The current amendments make it clear that precomputed interest will no longer be permitted.

The CLA amendments will be effective December 31, 2013.

Geoffrey C. Rogers is a partner in the Cifton Park, NY office of Hudson Cook, LLP. Geoff can be reached at 518-383-9591 or by email at grogers@hudco.com.