Socrates once said that the secret to change is to focus all your energy not on fighting the old, but on building the new. The Texas Office of Consumer Credit Commissioner recently took this concept to heart when it revised regulations concerning the content of motor vehicle retail installment sales contracts and certain consumer loan documents that took effect on November 5, 2015. The OCCC did not fight the old by making dramatic changes to the contract requirements. Minimal changes were made that will require all creditors, including motor vehicle dealers, motor vehicle sales finance companies, and lenders, to use new retail installment sale contract forms or loan documents by January 1, 2017.
Texas law requires motor vehicle retail installment sales contracts and certain consumer loan documents to be written in plain language. The plain language requirement applies to consumer loan documents for unsecured consumer loans, personal property secured consumer loans, and junior lien real property secured consumer loans with a rate greater than 10% per year.
OCCC regulations prescribe model provisions that meet the plain language requirement. Creditors may also use a contract that contains provisions other than the model provisions - a nonstandard contract - after submitting the non-standard contract to the OCCC for review for compliance with the plain language requirement
All Credit Contracts
The revised regulations amend certain model provisions to clarify their use or to conform to current practice. The most obvious change is to the content of the OCCC complaints notice. The notice text was revised to clarify the OCCC’s role in resolving complaints and to include the new OCCC website and email addresses. The revised regulations also clarify that the model “after maturity interest” provision that states a creditor can charge the higher rate of 18% per year or the maximum rate allowed by law does not apply to simple interest contracts that use the true daily earnings method. For those contracts, a creditor can continue to charge the contract rate of interest after maturity
Second, the revised regulations change the process for submitting non-standard contracts for review. Non-standard contracts must be submitted for review in both Microsoft Word format and PDF format. Paper forms will no longer be accepted. In addition, a non-standard contract cannot exceed a maximum Flesch-Kincaid Grade Level score to be written in plain language. The maximum Flesch-Kincaid Grade Level score is as follows for the type of credit contract noted:
8 for unsecured consumer loans of $1,340 or less subject to Subchapter F of Chapter 342;
9 for all other unsecured and personal property secured consumer loans;
10 for junior lien real property secured consumer loans; and
11 for motor vehicle retail installment sale contracts.
Non-standard contracts with a Flesch-Kincaid Grade Level score in excess of the maximum score will be rejected. Finally, the certification of readability that must accompany a nonstandard contract must now include the list of typefaces and font sizes used in the contract and the Flesch-Kincaid Grade Level score.
Motor Vehicle Retail Installment Sale Contracts
The revised regulations amend certain model provisions in retail installment sale contracts to clarify their use or to conform to current practice. First, the “agreement to keep motor vehicle insured” provision was amended to state the maximum insurance deductible the buyer can have. The change introduces a plain language disclosure in response to an OCCC bulletin issued in December 012 that permits a holder of a contract to require a maximum deductible.
Next, the revised regulations explain how to properly disclose the vehicle inspection fee in the Itemization of Amount Financed box. A dealer can include the part of the fee paid to the state in the “Government license and registration fees” section and the part paid to the inspection station in the “Government vehicle inspection fees” section. Alternatively, a dealer can include the entire fee in the “Government vehicle inspection fees” section and separately disclose the amount paid to the state and the amount paid to the inspection station immediately below the section.
Finally, the revised regulations add two new model provisions. First, a new model provision requires disclosure of the returned check charge. Previously, the holder of a contract could collect the charge, but the charge was not stated in the contract. Second, a new model provision for commercial contracts subject to Chapter 353 of the Texas Finance Code states that the chapter applies, even though those contracts are not required to comply with the plain language requirement.
Unsecured and Personal Property Secured Consumer Loans
The revised regulations amend or add new model provisions for unsecured consumer loans of $1,340 or less subject to Subchapter F of Chapter 342. The changes expressly state which provisions are only applicable to precomputed loans that have an installment account handling charge and adds new provisions for interest bearing contracts in response to the 2013 legislative change permitting interest bearing contracts as an alternative to those with an installment account handling charge.
The revised regulations do not otherwise amend the model provisions for unsecured and personal property secure consumer loans.
Junior Lien Real Property Secured Consumer Loans
The revised regulations amend model provisions for junior lien real property secured consumer loans to reflect changes to Regulation Z. The lender’s NMLS ID, the originator’s name, and the originator’s NMLS ID have been added to the notes and security instruments due to the new Regulation Z requirement to include that information in the documents. In addition, the TILA disclosure box was removed from notes as this disclosure is now made in the TILA-RESPA integrated Closing Disclosure form. The payment schedule from the disclosure box was relocated to the promise to pay model provision because Texas law requires this disclosure in all notes. Finally, the model late charge provision was also revised to add the 4% late charge permitted for high cost mortgage loans in Regulation Z.
Next Steps for Creditors
Texas creditors using a model contract or a non-standard contract that was submitted for review do not have to immediately revise their contracts. The OCCC is allowing a delayed implementation date to reduce the financial burden on the creditors. Creditors may use current contract stock until their supply is depleted, but only until December 31, 2016. Any retail installment sales contracts or loan documents executed on or after January 1, 2017, must comply with the revised regulations. In addition, any non-standard contract submitted for review after the November 5th effective date must comply with the revised regulations.
Texas creditors must be aware of these changes to ensure that they are using retail installment sale contracts and loan documents that comply with Texas law.