Opinion ID: 1974671
Heading Depth: 1
Heading Rank: 2

Heading: Maine Consumer Credit Code

Text: Appellant Moore asserts that the bank's transaction with her in December, 1976, at 12 per cent was a refinancing of her 7.5 per cent June loan with an increase in the rate of finance charge exceeding ¼ per cent per year in violation of section 2.504 of the Maine Consumer Credit Code. That section provides, in pertinent part, as follows: Subject to section 2.308 [not applicable here], with respect to a consumer credit transaction, the creditor may by agreement with the consumer, refinance the unpaid balance and may contract for and receive a finance charge based on the amount financed resulting from the refinancing at a rate not exceeding by ¼% per year the rate charged in the original agreement and stated to the consumer pursuant to the provisions on disclosure.. . . For the purpose of determining the finance charge permitted, the amount financed resulting from the refinancing comprises the following: 1. If the transaction was not precomputed, the total of the unpaid balance and the accrued charges on the date of the refinancing, or, if the transaction was precomputed, the amount which the consumer would have been required to pay upon prepayment pursuant to the provisions on rebate upon prepayment, section 2.510, on the date of refinancing, except that for the purpose of computing this amount no minimum charge shall be allowed; and 2. Appropriate additional charges, section 2.501, payment of which is deferred. 9-A M.R.S.A. § 2.504 (Supp.1979-80). Canal Bank argues that it did not refinance appellant's loan within the meaning of section 2.504 but implemented the variable rate feature of the loan in the amount and manner agreed on in the original transaction in June. It contends that the words refinance and refinancing are used in section 2.504 in a special technical sense to denote a transaction the terms of which are not fully controlled by those of the original loan agreement; in other words, that they denote a transaction requiring some element of new bargaining between the parties. Even though the bank's own Preferred Rate Agreement (Employees Only), which appellant executed in June required in terms that the employee-borrower refinance the unpaid balance of the loan on leaving the bank's employment and referred to the contingent later transaction as a refinancing, the Bank says the later transaction did not fall within the scope or purpose of section 2.504. The rate of the new finance charge and the duration of the new loan, the Bank observes, were both objectively ascertainable from the provisions of the original loan agreement and depended only on the state of the loan and the current percentage rate at such time as the employee might leave the employment. In support of its construction, the Bank says that the purpose of the statutory provision limiting any increase in the rate of finance charge is to remove one incentive for flipping; that is, to remove any incentive lenders might have to take advantage of troubled debtors by refusing to refinance their loans unless they agree to a considerable increase in the finance charge, and that this purpose is not served by applying the statute to the implementation of a variable rate loan because the increase in rate has been settled by the original loan agreement. Thus, the Bank seeks an equitable interpretation of section 2.504 to exclude the December transaction entered into precisely in accordance with the provisions of the June loan agreement. Appellant Moore urges us to hold that the word refinance, as used in section 2.504, has a plain meaning that must obviously include her December transaction. However, the problem cannot be properly resolved by mere resort to the plain meaning rule when the very issue is whether to adopt an equitable construction of the provision. It is necessary to analyze the language in an effort to determine its purpose in the context of state and federal consumer credit legislation. As the trial justice observed, there is no definition of refinance in the Maine Consumer Credit Code or in the Uniform Consumer Credit Code of other jurisdictions that have enacted it. Dictionary definitions are not helpful in this case. The prohibition in section 2.504 against increasing the rate of finance charge by more than ¼ per cent in the refinancing of most types of consumer credit transactions is the result of a nonuniform variation from the language of section 2.504 of the 1974 Uniform Consumer Credit Code, 7 U.L.A. 583, 684 (1974). With respect to most consumer loans, the 1974 uniform version of section 2.504 is substantially the same as that of Maine except that the uniform version would permit refinancing at a rate of finance charge not exceeding that permitted by the provisions on finance charges for consumer loans, viz., subsections (1) and (2) of section 2.401. The Comment to section 2.504 of the Uniform Consumer Credit Code contains the following statement: In the refinancing of a precomputed transaction the balance owing is treated as though it is prepaid and the consumer is credited with all refunds computed, except that minimum charges permitted under Section 2.510(2) for prepayments of precomputed transactions are not allowed in refinancing in order to remove any incentive the creditor may have to `flip' the consumer through repeated financings. A finance charge is then calculated on an amount financed which is the balance owing less refunds. Comparison of the Maine and uniform versions of section 2.504 with respect to their impact on precomputed consumer loans shows that (1) both versions remove any incentive to flipping that might otherwise arise either out of imposition of penalty charges on prepayment or out of failure to allow the debtor the refund he is entitled to on prepayment, and (2) the Maine version, but not the uniform version, removes any incentive to the creditor to refinance that might arise from the prospect of increasing beyond ¼ per cent the rate of finance charge. In the case of a precomputed consumer loan, the effect of Maine's nonuniform provision is to diminish the lender's incentive to refinance only in cases where the original rate of finance charge is more than ¼ per cent smaller than the generally permitted maximum for that type of loan under the act. [9] The mischief in the kind of flipping that has been remedied by both versions of section 2.504 was that the lender could keep the portion of the finance charge that had not been earned by the time of refinancing; that is, by the time the unpaid balance of the first loan was paid out of the proceeds of the second. It was also thought unfair that the debtor should have to pay any prepayment penalty agreed on in the original loan agreement when he did not really terminate the debtor-creditor relationship but continued it, in effect, by the refinancing. H. Kripke, Consumer Credit 103 (1970). Thus, in two ways, the unsophisticated debtor could have been required, before enactment of the Code, to pay a higher rate for his refinancing loan than he might have supposed from the lender's mere statement of an interest rate for it. The peculiar Maine variation from the uniform version of section 2.504 is not explainable on quite the same grounds. Before the Code, by flipping a consumer loan the creditor could acquire certain unearned interest and penalties, relying for his right to do so on language in the original loan agreement which the ordinary consumer-debtor would not have recognized as applicable to a refinancing. The two devices that formerly made the flipping of loans lucrative and are now implicitly barred by both the Maine and uniform versions of section 2.504 were effective partly because the debtor was usually unaware of the fact that they were being employed by the lender. Flipping was thus open to objection not merely as being unfair but as contravening a policy, now strongly expressed in the Code, in favor of full disclosure. However, the policy against nondisclosure cannot serve even as a partial explanation for the special prohibition in Maine against increasing by more than ¼ per cent the rate of charge on a refinancing. In the case of refinancing which is negotiated during the life of the original loan and the terms of which are not controlled by the original loan agreement, if the creditor duly observes all the truth-in-lending requirements for disclosure at the time of the new loan, the consumer-debtor who seeks the refinancing is apprised of the new rate of finance charge and may govern his conduct accordingly. In the case of a refinancing the terms and conditions of which are fully controlled by the original loan agreement, if the creditor observes all the truth-in-lending requirements for disclosure at the time of the original loan, the consumer-debtor has been duly apprised at least of the fact that a higher rate of finance charge will become applicable. In either case, whatever his problems at the time of refinancing may be, they are not the result of nondisclosure of unfavorable terms. It is necessary, therefore, to seek some other purpose behind the special limitation in the Maine version of section 2.504. The prohibition against refinancing with more than ¼ per cent increase in the annual percentage rate cannot be explained by reference either to the evils traditionally associated with flipping, which are dealt with in other provisions of section 2.504, or to the Code policy favoring full disclosure. Neither the Maine Consumer Credit Code nor the federal Truth in Lending Act prohibits variable rate loans as such. [10] They are certainly not barred by anything in Regulation Z. In 1976, when the loan here in question was made and refinanced, the Federal Reserve Board's Official Interpretation § 226.810 [11] set forth the information which, before October 10, 1977, the creditor had to disclose concerning the variable rate feature of such a loan. That interpretation and later amendments of section 226.8 of Regulation Z make it clear that, for purposes of disclosure, an increase in rate in accordance with the disclosed conditions of a variable rate loan is not a refinancing of the original agreement requiring new disclosures. In the present case, Canal Bank fully disclosed the variable rate feature of its June 18 loan even though it violated Regulation Z by disclosing it in a separate document. For purposes of disclosure under the federal act, the December, 1976, transaction was not a refinancing. The idea behind the Federal Reserve Board's treatment of variable rate loans for disclosure purposes is that the later transaction is essentially an automatic implementation of the variable rate feature of the original loan and no give-and-take bargaining is involved in the later, refinancing transaction. If the terms of the original loan were fully disclosed, the debtor has no reason to be surprised or aggrieved by a virtually automatic increase in rate in accordance with those terms. The refinancing that takes place on the occurrence of a contingency triggering a variation in rate involves no element of bargaining between creditor and debtor. In the present case, the amount of the percentage rate on refinancing was pegged in the original loan agreement to the rate offered generally to members of the public for loans of similar type and risk; appellant Moore does not contend that that provision gave the bank any discretion in setting the amount of the new rate. Section 2.504 is designed to cover primarily the common situation in which a consumer-debtor, unable to meet payments due under a loan, seeks to negotiate a refinancing that will reduce the size of each payment, or lengthen the payment intervals, and extend the period of the loan. In that type of case the object of the Maine version of section 2.504 is clearly to limit to ¼ per cent any increase of the annual percentage rate to prevent undue exploitation by the creditor of the debtor's necessity. In practical effect, to hold that the refinancing referred to in section 2.504 includes a transaction of the kind here in question would render variable-rate loans nearly useless as a financing device  a drastic result that could not be justified in the absence of some manifestation of legislative disapproval of variable-rate loans elsewhere in the consumer credit laws and regulations. It makes more sense, especially in view of the underlying purpose of most of section 2.504 to discourage flipping to hold that the term refinance as used in that section does not include the virtually automatic implementation of a disclosed variable-rate feature of a variable-rate loan. Regulation Z has taken that approach to refinancing of variable-rate loans in its rules and interpretations on disclosure. There is some merit in construing section 2.504 of the Maine Code in harmony with existing disclosure rules. We hold, therefore, that Canal Bank did not refinance appellant Moore's loan within the meaning of 9-A M.R.S.A. § 2.504 and was thus not bound by the ¼ per cent limit on increase in the annual percentage rate. The trial court's judgment for defendant Canal Bank on appellant's second claim for relief is affirmed. It must not be assumed that our interpretation of the meaning of refinance and refinancing in section 2.504 carries any implication that the flipping practices that are in effect prohibited by subsection (1) of that section are not prohibited in the case of variable rate loans. Since, for purposes of disclosure and application of section 2.504, a transaction that automatically implements the (disclosed) variable-rate feature of the original variable-rate loan is to be regarded merely as a step in the progress of the original lending arrangement, the creditor may not treat the original loan as prepaid or otherwise terminated at the time of the implementing transaction. In effect, the creditor in such a situation, like the creditor who refinances a single-rate loan, must observe the limitations provided by subsections (1) and (2) of section 2.504. Though the creditor on the variable-rate loan is not refinancing the loan, technically speaking, the implementing transaction is to be considered as subject to the same restrictions as apply to the refinancing of a single-rate loan under those subsections. Finally, in the circumstances of this case, the trial justice did not abuse his discretion in denying plaintiff's motion for class certification under Rule 23, M.R.Civ.P. The entry is: Appeal sustained. Judgment for defendant on plaintiff's first claim for relief, under the Federal Truth in Lending Act and Regulation Z, vacated. Judgment for defendant on plaintiff's second claim for relief, under 9-A M.R.S.A. § 2.504, affirmed. Order denying class certification, affirmed. Remanded for further proceedings consistent with this opinion. McKUSICK, C. J., and WERNICK, J., did not sit. DELAHANTY, J., sat at argument but did not otherwise participate.