The below article is the Special Focus section of the June 2019 Compliance Journal. The full issue may be viewed by clicking here.
The Wisconsin Consumer Act (WCA) continues to be a frequent topic for the WBA legal call program. We have compiled some of the most frequently asked WCA questions and present them in the article below. Note that this article is not, nor intended to be, a recital of all applicable State and Federal laws and regulations for specific transactions.
What transactions does the WCA cover?
The WCA applies to loans and credit sales to individuals for personal, family, or household purpose when the amount financed is $25,000 or less and the loan is not secured by a first lien real estate mortgage or equivalent security interest.
Note the exception for an “equivalent security interest,” sometimes referred to as a “1st lien equivalent.” The concept of a “1st lien equivalent” is unique to Wisconsin. For example, Bank A takes a 1st lien mortgage on a purchase. The customer returns to Bank A for a line of credit, and Bank A secures the line with another lien on the same property. If there is no intervening creditor, that additional lien is effectively a 1st lien equivalent. On the other hand, if that customer comes back to Bank A for a line of credit, and at that time there is an intervening creditor who has taken a lien on the same property sometime after Bank A took the 1st lien on the purchase, Bank A’s new lien for the line of credit would be “true junior mortgage” rather than a 1st lien equivalent.
Does the WCA give the ability to prepay?
Yes. The WCA provides the consumer the right to prepayment in full or part at any time without penalty.
Are deferral fees permitted by the WCA?
Not for simple-interest transactions. Under the WCA deferral fees are permitted for precomputed transactions but they are not permitted for simple-interest transactions.
Does the WCA impose maximum rates of finance charges?
No. The creditor and customer may agree to a maximum finance charge per the terms of the contract. However, the rate may not be unconscionable.
Does the WCA restrict how interest is calculated?
No. However, if the 1/360th method is utilized, it must be disclosed conspicuously.
Does the WCA restrict rates after default?
Yes. The interest rate after the final scheduled maturity date may not exceed the greater of 12% per year or the annual rate of finance charge assessed on the transaction.
Does the WCA require a right to cure default?
Yes. The WCA prohibits a bank from taking any action with respect to default until notice requirements have been met. The notice must be given to the customer, and inform them how to cure the default.
Does the WCA have requirements for delinquency charges?
Yes. For closed-end transactions, late charges are restricted to the lesser of $10 or 5% of the unpaid amount of the installment.
The Wisconsin Department of Financial Institutions has explained that an installment is considered current when a payment is made on its due date or within the 10 days following its due date, creating a grace period.
If an installment is received on or before its scheduled or deferred due date, no delinquency charge may be assessed for that payment even though an earlier installment or delinquency charge has not been paid in full.
A delinquency charge may be collected only once on any installment.
When assessing late charges, the WCA requires payments be applied first to current installments and then to delinquent installments.
Finally, if interest is charged after the final scheduled maturity date, no delinquency charge may be assessed on the final scheduled payment.
For open-end credit, there is no limit on the amount nor a grace period, but the charge must still be agreed to by contract.
What are some of the requirements for variable rate loans under the WCA?
There are two types of variable rate transactions under the WCA: approved index loans and non-approved index loans.
For approved index loans:
- Adjustments in rate are based upon changes in an approved index (e.g. Wall Street Journal Prime).
- Index approved by the Secretary of WDFI.
- Index must be beyond control of creditor.
- Index must be verifiable by consumer.
- Limitations on decreases allowed only if similar limitations placed on increases.
- No carry-over provision.
For non-approved index loans:
- Index is set by the creditor and is not tied to an approved index.
- Additional limitations and disclosure requirements, including:
- May not increase rate during first 3 months following consummation of transaction.
- Rate increases may not exceed 2% per year.
Are there subsequent notice requirements for variable rate closed-end loans under the WCA?
Yes. A creditor must mail or deliver a written notice of every rate change at least 15 days prior to the change in rate if implemented by a change in periodic payment, other than the final payment. The notice must be given no later than 30 days after any other change.
Notice is not required, however, for closed-end loans if the rate change is based on an approved index and there is no change in the periodic payment (other than the final payment).
Are there subsequent notice requirements for variable rate open-end loans under the WCA?
No notice is required if the adjustment is made in a variable rate transaction pursuant to an open-end credit plan that is based upon changes in an approved index.
Does the WCA require any notices to customers, co-signers, and guarantors?
Yes. The creditor must furnish the customer with an exact copy of each instrument, document, agreement and contract signed by the customer and which evidences the customer’s obligation before any payment is due to the creditor. The creditor must also provide the customer with copies of every writing evidencing the customer’s obligation to pay upon request of the customer. One such copy must be furnished at no charge to the customer. Subsequent copies must also be furnished, but the creditor may charge a reasonable fee for production and delivery.
Each person signing the guaranty or as co-signer in addition to signing the guaranty or note must receive either: copies of each instrument, document, agreement, and contract signed by the customer and which evidences the customer’s obligation, or an explanation of personal obligation. A sample notice appears in the WCA and is reproduced on the WBA 156 or 156A (for open-end credit) Explanation of Personal Obligation forms.
In connection with open-end credit, if any subsequent change would increase or extend con-tingent liability of the guarantor or co-signer, an explanation of change must be provided conspicuously disclosing that if such person wishes to terminate liability with respect to future transactions, that person must notify the creditor in writing.
While this article is not comprehensive in its consideration of all WCA issues, WBA hopes it will serve as a helpful guide to some of the more common questions we receive. For a full understanding of the applicable rules WBA recommends consulting Chapters 421 through 427 of the Wisconsin Statutes for the full scope of the WCA.
By, Ally Bates