Variable rate loans

Current law imposes various requirements and limitations on variable rate loans, including limitations on adjustments to the interest rate of a variable rate loan. If interest rate adjustments correspond to an index, the index must be an approved index. An approved index is an index that is either one of certain specified indexes or is an index readily verifiable by borrowers, beyond the control of an individual lender, and approved by the applicable state regulator, such as the Division of Banking in the Department of Financial Institutions (DFI) or the Office of Credit Unions attached to DFI. Interest rate adjustments must correspond to upward and downward changes in the approved index, except: the lender may decrease the interest rate or decline to increase the interest rate at any time; and, the lender may decline to decrease the interest rate if this offsets prior interest rate increases declined by the lender. Also, interest rate decreases may be limited only if interest rate increases are limited at least to the same extent.

This bill allows a lender making a variable rate loan based on an approved index to include a lower, discounted initial interest rate. During the initial interest rate period, provisions of current law related to the approved index do not apply, but they do apply after expiration of the initial interest rate period. The bill also eliminates the provision that interest rate decreases may be limited only if interest rate increases are limited at least to the same extent.