|
Question: I was wondering about the demand feature box in the payment section of our note for a consumer (non-real estate) loan. Some of the notes we've done in the past have the demand box checked, then the note says something like, "on demand, but if no demand is made then I will pay the loan in 12 payments of $100 each". Other notes show the same payment verbiage but don't have the demand box checked or the demand verbiage. Since our document provider software provides both options, I'm assuming the bank can do as it chooses, but thought I'd get your opinion because this clearly seems like a State law issue to me.
Answer: The answer to your question is, yes the bank can do as it chooses in certain circumstances. If the loan is a single payment simple interest loan, there is no statutory or code language prohibiting it. If it is a Finance Code Chapter 342 loan (consumer loan, non-real estate), there is language prohibiting it (unless a condition of the demand is that the borrower is in default). Under Chapter 342, the borrower is granted a right to repay the loan in installments according to the provisions of the chapter. Any clause giving the lender the right to demand payment violates the borrower’s codified right to repay the loan in installments. This would in effect be a waiver of this right, and §342.507 strictly prohibits this for consumer loans. Sections 343.406 and 344.506 formerly prohibited demand clauses for home loans and secondary mortgage loans, but §343.406 and Chapter 344 were repealed.
Of course, a loan bearing interest at ten percent per annum or less is not governed by Chapter 342 and may be made without regard to the disclosure, licensing, and other limitations in Chapter 342.
So a lender is permitted to have the demand feature in first lien real estate loans (to which Chapter 342 does not apply) and secondary mortgage loans (Subchapter G of 342), and loans under 10%. Additionally, the lender may not have a demand feature in real estate loans subject to HOEPA in Reg Z, §226.32(d)(8).
|  |
