Current through Register Vol. 54, No. 12, March 23, 2024
(a)
Coverage of the SABCA.
(1)
The SABCA, enacted December 28, 1994, with an effective date of March 28, 1995,
amended Chapter 3 of the act by adding a new section 322 (7 P. S. §
322). Chapter 3 of the act (7 P. S.
§§
301-321) contains a number of
individual sections which provide institutions to which it applies the
authority to make loans subject to specific restrictions. The enactment of
successive sections of Chapter 3 over time, and amendments to them, have been
designed to afford institutions the maximum amount of flexibility in designing
credit products to meet the convenience and needs of the financial services
marketplace.
(2) Individual
sections of Chapter 3 of the act which deal with lending powers and charges are
alternative bases for extensions of credit and have been consistently
interpreted as such by the Department. Section 322 is an optional basis for
lending authority since section 322(d) is explicitly permissive with respect to
an institution's extension of credit under section 322. It is the position of
the Department that section 6 of the SABCA (7 P. S. §
322 note) repealing acts and parts of acts
which are inconsistent with section 322 is not intended to repeal the
individual sections of Chapter 3 of the act which deal with lending powers and
charges, including section 319 of the act (7 P. S. §
319).
(3) While section 322(b) provides that
section 322 "shall govern" (See subsection (c)(1)) all direct and indirect
extensions of credit by an institution, subject to enumerated exceptions, the
Department finds that the section was designed to make it clear that
institutions are authorized (not compelled) to use section 322, despite other
statutes that might otherwise be deemed to apply. Thus, section 322(b) confirms
that courts are not to apply Pennsylvania installment sales laws (such as the
Goods and Services Installment Sales Act (69 P. S. §§
1101-2303) or the Home Improvement Finance
Act (73 P. S. §§
500-101-500-602)) to invalidate
seller-assisted loans made under the authority of section 322 (See subsection
(c)(2)). An interpretation to the effect that section 322(b) exclusively
governs all extensions of credit would conflict directly with paramount Federal
law. Section 521 of the Depository Institutions Deregulation and Monetary
Control Act of 1980 (12
U.S.C.A. §
1831d) and section 85 of the
National Bank Act (12
U.S.C.A. §
85) authorize
Pennsylvania-chartered institutions and National banks to "borrow" the periodic
interest rates and other interest charges permitted by Pennsylvania law to
other borrowers, such as licensees under the Consumer Discount Company Act
(7 P.
S. §§
6201-6219) and the Secondary
Mortgage Loan Act (7 P. S. §§
6601-6626).
(4) The new section 322 does not purport to
be applicable to extensions of credit or agreements to extend credit under
open-end plans which are in effect prior to March 28, 1995. If, however, a
creditor has the specific ability to change the terms of an agreement in
existence prior to March 28, 1995, and the creditor elects to comply with
section 322, then section 322 will be applicable to that existing credit by
virtue of that election.
(b)
Agreements for the extension of
credit.
(1)
Formal
requirements.
(i) Section 322(d),
which provides that an institution may extend credit under a written agreement
fully completed prior to any signature by the customer, is designed to ensure
that customers are fully advised of their legal commitments before becoming
obligated to the issuer. It does not change current law or require a change in
current practices as to which documents must be signed. Thus, the term
"agreement" need not be set forth in a single document and will be deemed to
include a promissory note or credit line agreement and all related
documentation, such as mortgages, other security agreements and credit
insurance certificates.
(ii) With
respect to credit cards, the typical procedure is for consumers to sign a
credit application, and then receive an agreement, together with written
information concerning the customer's credit limit, at a subsequent date. The
customer is then advised to sign the credit card to provide an authorized
signature and is usually advised that the use of the card is governed by the
terms of the cardholder agreement. The customer is thus given all cardholder
contract information and Truth in Lending disclosures prior to using the credit
card. The Department finds that this industry practice meets the requirements
of an agreement under section 322(d).
(2)
Form and contents.
(i)
Amounts of available credit.
Providing a customer with timely written information setting forth
the "credit limit" satisfies section 322(d)'s requirement that a credit
agreement disclose the amounts of available credit and the procedure or means
by which it may be obtained. This requirement does not impose upon an
institution the duty to disclose to a customer the institution's practice of
allowing customers to exceed stated credit limits where this practice exists,
but an institution should disclose any applicable fee relating to this
practice. This requirement does not prohibit the institution from adjusting the
credit limit (upwards or downwards) with notice to the customer as is otherwise
required.
(ii)
Interest
rate limitations. The interest rate limitation based upon Treasury
Note yields will be established on the first business day in the quarter. Each
quarter that this rate exceeds the NCUA rate, the Department will announce this
rate and then publish it in the Pennsylvania Bulletin. Lenders
are authorized to rely upon the rate limitation announced by the Department,
recognizing that there will be a lag time between the calculation and
publication of the rate. Section 322(d) includes a nonexclusive list of the
types of fees and charges which an institution may impose in addition to
periodic interest. Among the types of charges which this subsection does not
explicitly list are charges typically referred to as "application fees,
commitment fees, points." The Department finds that these charges, while not
specifically enumerated, are authorized to be made by institutions under the
additional fee authority provided by section 322(d). The SABCA indicates that
these charges are in addition to periodic interest charges and will not be
included in any calculation of the maximum rate of interest under section
322(d)(iii) above.
(iii)
Default rights. The Department also finds that section
322(d)(vi)'s prohibition against acceleration of a loan or repossession of
collateral unless there is a default pursuant to the credit agreement does not
preclude an institution's use of "demand notes." This section's reference to
"extension charges" in section 322(d)(v) does not impose on an institution a
requirement that it disclose or declare the amount of that charge at the time
an agreement is entered unless the charge will be imposed automatically without
the customer's consent at the time of the extension.
(iv)
Balloon payments. On
loans requiring amortization of principal, the SABCA prohibits lenders from
requiring a final payment more than double the regularly scheduled installment
payment, exclusive of overdue or extended payments. There is no requirement
under the SABCA for level payments or for any amortization of
principal.
(3)
Changes in terms.
(i)
Section 322(f)(iv) provides for the option of the customer to agree to
increases in periodic interest or charges on open end credit plans by incurring
additional indebtedness but does not preclude other, more direct methods of
customer consent, such as explicit written consent signed by the
customer.
(ii) Section 322(f)
states that no change may be made in a fixed rate of interest or other charges
payable with respect to the outstanding balance of indebtedness or in the
amount or due dates of required installment payments on closed-end credit
unless there is a written consent of the customer at the time of the change
except for an extension of any due date or an option granted by the institution
to the customer to omit payments and except as may be otherwise provided in an
agreement for an extension of credit which is not for personal, family or
household purposes. This prohibition applies solely to closed-end credit. The
payment schedule on a variable-rate closed-end loan for personal, family or
household purposes may be modified in accordance with changes in the interest
rate and a methodology disclosed in the loan documentation.
(4)
Extensions of credit
through intermediaries.
(i) In
addition to the normal requirements of section 322, section 322(i) imposes
specific requirements on closed end motor vehicle loans made through
intermediaries. It does not restrict lenders from making other types of loans
through intermediaries.
(ii) The
SABCA does not preclude an institution licensed as a sales finance company from
purchasing from a dealer an installment sale contract (when the contract
finances a motor vehicle and other related goods or services) so long as the
contract is pursuant to the Motor Vehicle Sales Finance Act. Essentially, an
institution financing the purchase of goods or services through the seller may
elect, at its option, to structure the credit extension as a direct loan under
the SABCA (or any other applicable provision of law) or as the purchase of an
installment sale contract under the Motor Vehicle Sales Finance Act
(69
P. S. §§
601-637), Goods and
Services Installment Sales Act or the Home Improvement Finance
Act.
(c)
Case law.
(1) In construing
the language of a statute, there is a presumption that the drafters did not
intend a result that is absurd, impossible of execution or unreasonable
(1
Pa.C.S. §
1922) (relating to
presumptions in ascertaining legislative intent). In interpreting statutes,
Pennsylvania appellate courts have declined to construe "shall" as mandatory
and "may" as discretionary.
Commonwealth v. Ferguson , 514 Pa.
Super. 84, 552 A.2d 1075, 1079 (1988). Rather, the courts will look to the
intention of the Legislature:
[I]t has long been the rule in Pennsylvania that the word
"shall," although usually mandatory or imperative when used in a statute, may
nonetheless be directory or permissive, depending upon the Legislature's
intent; we ascertain this intent after reviewing the entire act, its nature,
object and purpose, the respective consequences of various constructions of the
particular statute, and after determining whether the action allegedly mandated
by the statute is the essence of the thing to be done pursuant to it.
Tyler v. King, 344 Pa. Super. 78, 496 A.2d 16
(1985)
(2)
See, for
example, Anderson v. Automobile Fund, 258 Pa. Super. 1, 391 A.2d 642
(1978) (court evenly divided on recharacterizing loan as installment sale
contract subject to Motor Vehicle Sales Finance Act); In re
Brown, 134 B. R. 134 (Bkrtcy. E.D. Pa. 1991) (loan financing home
improvement recharacterized as installment sale subject to Pennsylvania Home
Improvement Finance Act.)