By the Division of Banks

The Applicability Of The Small Loan Rate Order To Late Fees and Student Loans Which Capitalize Interest

Under 209 CMR 26.06(3), the Division of Banks' definition of "actuarial method" would be the same as that used in Appendix J of the federal Regulation Z, except for the purpose of computation, whether at the maximum rate or less, in which case a month shall be that period of time from any date in a month to the corresponding date in the next month and if there is no such corresponding date then to the last day of the next month, and a day shall be considered one-thirtieth of a month when computation is made for a fraction of a month. Student loans involve extensions of credit for educational purposes where the repayment amount and schedule are not known at the time credit is advanced. Furthermore, students typically do not make any payments until the term of repayment commences pursuant to the note at which time the unpaid finance charge becomes part of the amount financed. It is the position of the Division that this practice is consistent with the Small Loan Rate Order. Accordingly, unpaid interest charges may be capitalized at the time of prepayment consistent with the terms of the note or any other agreement, pursuant to 209 CMR 26.00 et seq. Because there is no provision for the assessment of late fees within the Small Loan Rate Order, such fees cannot be charged by a small loan agency as part of a small loan program.