HF5162

Purpose

• The bill aims to limit how much financial institutions can charge in finance charges (APR) for loans and credit cards. It also sets rules for calculating those charges, requires refunds when prepayment would push charges above the cap, and establishes inflation-based adjustments to dollar amounts used in these rules over time.

Key provisions

• Loan APR cap
  • For loans (including open-end credit but not credit-card open-end credit), the maximum finance charge may be the greater of:
  • 21.75% APR, or
  • A tiered rate: 33% per year on the portion of the unpaid balance up to $1,425, plus 19% per year on the portion above $1,425.
• Credit-card/open-end credit cap
  • For open-end credit tied to a credit card, the APR may not exceed about 18% per year.
• Single-APR conversion
  • If a loan uses graduated/tiered rates, the bill requires a single APR (nearest 0.1%) that would produce the same total finance charge when paid under the contract, calculated using the actuarial method.
• Alignment with federal rules
  • The charge is considered within the maximum if the contracted charge does not exceed the equivalent maximum APR calculated under federal rules (CFR 12 CFR 226), using the bill’s definition of finance charge.
• Flexibility in calculation methods
  • The bill does not limit how the finance charge is calculated (e.g., addon discounts, points, precomputed charges, etc.) so long as the APR does not exceed the cap.
• Prepayment refunds
  • If a borrower prepays, the lender must refund the portion of the charge that would cause the APR yield to exceed the cap.
  • Real estate loans: refund is required to the extent the APR yield would exceed the cap; the refund need not be paid if it is less than $9.50.
  • All other loans: the same refund rule as real estate loans; again, no refund if the amount is less than $9.50.
  • For loans paid in substantially equal monthly installments, refunds can be calculated on an actuarial basis for all remaining payments after prepayment, using the original APR and assuming payments are paid on due dates.
• Inflation-adjusted dollar amounts
  • The specific dollar amounts used to determine caps (and related figures) will be adjusted periodically based on the implicit price deflator for the GDP (base year 2005 = 100), using December 2011 as the reference base.
  • Adjustments occur on July 1 of each even-numbered year if the index change meets or exceeds 10%, with rules about rounding and multiples of ten percent.
  • The commissioner must publish changes each year and notify the state’s Revisor of Statutes to update the statutes accordingly.
  • If the index is revised or superseded, the bill specifies how the new index is to be used; if a person relies on the last published amounts, they won’t be in violation.
• Administrative and legal notes
  • The commissioner and the Revisor of Statutes handle publishing and updating the dollar amounts and base indices as required.

How this bill would change current law

• Sets explicit caps on APRs for loans and for credit cards, replacing or tightening existing rates.
• Requires lenders to present or convert to a single APR when graduated rates are used, for easier consumer comparison.
• Introduces a structured refund mechanism tied to prepayment that protects borrowers from excess charges if they pay off early.
• Establishes an automatic, inflation-based updating process for the numeric dollar amounts tied to the caps, ensuring the figures stay in line with economic changes.
• Clarifies that while various methods to calculate the finance charge are allowed, they must stay within the new APR caps.
• Creates procedural requirements for state agencies to publish and update the updated dollar amounts and indices.

Implementation and administration

• Who is responsible
  • The commissioner is required to publish annual changes and work with the Revisor of Statutes to update the official text.
  • The Revisor of Statutes will reflect the changes in the state code in the next edition.
• Timing and process
  • Dollar amount changes are announced by April 30 in the year changes occur and take effect on the specified adjustment dates.
  • Adjustments follow specific indexing rules (GDP implicit price deflator, base index, and rounding rules).
• Compliance
  • The bill provides a safe pathway: if a party relies on the most recent published dollar amounts, they are not violating the chapter.

Relevant Terms - annual percentage rate (APR) - finance charge - loans - open-end credit - credit card - maximum annual percentage rate (max APR) - tiered rates (up to certain balances) - 33% per year / 19% per year - real estate loan - prepayment - refund of the charge - actuarial method - single APR - implied price deflator for the GDP (implicit price deflator) - December index / reference base index - index adjustments (GDP-based) - July 1 adjustments - commissioner (state official) - Revisor of Statutes - CFR 12 CFR 226 (federal regulation standard for APR comparison) - Laws 1995 chapter 202 (historical reference for adjustments) - index revision / rebasing - Laws and Minnesota Statutes updates