Personal Loans Not Secured by RE - Disclosures

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Question:

What disclosures are required on personal loans not secured by real estate when the interest rate structure is in place? Reduced rate structure: Fixed interest rate equal to prime rate at time of inception except that if loan defaults the rate will increase 2%. Floor of 6.5 and ceiling of 10%. Is this considered a variable rate loan and what disclosures are required by Federal law?

Answer:

Because you have provided for this rate increase by contract, you should make variable rate loan disclosures. The general rule in 226.20 is that changes because of the consumer's default do not trigger additional disclosures. However, there are several exceptions including: "A change in the payment schedule or a change in collateral requirements as a result of the consumer's default or delinquency, unless the rate is increased..." Since you are providing for the rate increase, you should disclose the variable rate feature as described in 226.28(f). However, the APR and payment schedule should be based on the fixed rate for the loan assuming no default.

First published on BankersOnline.com 3/19/07