The following opinion is presented on-line for informational use only and does not replace the official version. (Mich Dept of Attorney General Web Site - www.ag.state.mi.us)



STATE OF MICHIGAN

FRANK J. KELLEY, ATTORNEY GENERAL


Opinion No. 5486

April 30, 1979

HOME IMPROVEMENT FINANCE ACT:

Computation of default charges

RETAIL INSTALLMENT SALES ACT:

Computation of default charges

MOTOR VEHICLE SALES FINANCE ACT:

Computation of default charges

Pursuant to the Home Improvement Finance Act, the Retail Installment Sales Act of the Motor Vehicle Sales Finance Act, a seller may not assess two default charges for the same delinquency period. Therefore, a seller may not collect both the statutory delinquency charge and interest computed after the due date of an installment payment.

Mr. William F. McLaughlin

Director

Department of Commerce

P.O. Box 30004

Law Building

Lansing, Michigan 48909

You have requested my opinion as to whether a seller who enters into a transaction governed by the provisions of either the Home Improvement Finance Act, 1965 PA 332, MCLA 445.1101 et seq; MSA 19.417(101) et seq, the Retail Installment Sales Act, 1966 PA 224; MCLA 445.851 et seq; MSA 19.416(101) et seq, or the Motor Vehicle Sales Finance Act, 1950 PA 27, MCLA 492.101 et seq; MSA 23.628(1) et seq, may impose default charges when the seller has opted for the declining unpaid balance method for computing interest in these transactions.

Each of the above statutes provides a creditor with the option of computing finance charges by declining balance method or the add-on method and each contains similar provisions relating to default charges. Under the add-on method, on a $1,000.00 debt at 12% per annum interest, the total payment will be $1,120.00 (of which $120.00 is interest) payable in equal monthly installments over a one year period. However, since the debtor will be paying interest in a smaller unpaid principal each month, the effective annual rate will actually be greater than 12% per annum.

Under the declining balance method, the interest will be exactly 12% since the interest will be paid on a lower unpaid principal each month. However, to prevent a seller from taking unfair advantage of the higher return by using the add-on method, the legislature has required that, regardless of which method is used, the annual percentage rate of interest shall not exceed the maximum statutory percentage. In addition, regardless of the method used, the seller must disclose the finance charge in terms of the annual percentage rate.

The default provisions contained in sections 209 and 406 of the Home Improvement Finance Act, 1966 PA 224, supra, are typical of the provisions discussed herein and provide as follows: (1)

Section 209:

'A home improvement installment contract may provide for the payment by the buyer of a delinquency and collection charge on each installment on default for a period of not less than 10 days in an amount not in excess of 5% of such installment or $5.00, whichever is less. Only 1 such delinquency and collection charge may be collected on any such installment regardless of the period during which it remains in default. A contract may also provide for the payment of court costs actually incurred and attorney fees not exceeding 20% of the amount due and payable under such contract if the attorney is not a salaried employee of the contractor or holder for collections.'

Section 406:

'No person shall charge, collect or receive from a buyer, directly or indirectly, and further or other amount of cost, credit investigation charges, insurance premiums, examination, appraisal, service, brokerage, commission, interest, discount, expense, fee, fine, penalty or other thing of value in connection with a home improvement installment contract other than the charges authorized by this act. Any such unauthorized charge shall be unenforceable. Any payment thereof shall be applied to the next maturing installment, or, if the contractor has been fully paid, remitted to the buyer and the buyer shall be entitled to recover all such unauthorized charges.'

1978 PA 96 amended the Home Improvement Finance Act by adding a section detailing the rights and liabilities of creditors who utilize the declining balance method of computing interest. Section 309, as added to the Home Improvement Finance Act, provides: (2)

'Instead of a finance charge computed on the principal amount financed as determined under section 203 or 308, the seller may charge from time to time a finance charge consisting of interest on the amount of the unpaid balance of the contract. In this event, the transaction shall be subject to this act as modified by the following provisions:

(a) Finance charge shall mean the estimated amount of consideration in excess of the cash price which the buyer will pay in the form of interest assuming that each scheduled payment is made on the date it is due and in the scheduled amount.

d) The holder of the contract shall have the option of deferring interest charges which accrue due to installment payments being received later than the periodic installment due date. The deferred interest charge shall be computed on the basis of additional interest charges accruing for late installment payments and appropriate interest reductions for installment payments made before the due date. On contracts providing for equal monthly installments, if the final installment is more than 105% of a previous installment as a result of the deferred interest charges, the installment buyer shall be given the option to pay the deferred interest charges not less than 25 days after the date the last installment payment is due.' (Emphasis added) MCL Sec. 445.1309; MSA Sec. 19.417(309)

The continued computation of interest after default as provided by 1978 PA 96, Sec. 309, supra, is allowable as damages for retaining money due and owing another, Amluxen v Eugene J. Stephenson, Inc., 340 Mich 273, 275, 276; 65 NW2d 807 (1954). Further, 1978 PA 96, Sec. 309(a), supra, omits interest computed on an installment payment after the due date of payment from the characterization of a finance charge. Since the legislature has characterized this computation of interest as a default charge rather than a finance charge, it is necessary to harmonize and construe 1978 PA 96, Sec. 309, supra, with other statutory default provisions.

The legislature in enacting 1978 PA 96, Sec. 309, supra, has established the exclusive means of assessing default charges when a debtor fails to meet timely his installment obligations. The authority of the legislature to limit remedies was recognized in Cosby v Pool, 36 Mich App 571, 576; 194 NW2d 142 (1971), wherein the court stated:

'The legislature may modify, limit or alter the remedy for the enforcement of a contract without impairing its obligation, but in so doing it may not deny all remedy or so circumscribe the existing remedy with conditions and restrictions as seriously to impair the value of the right. Richmond Mortgage & Loan Corp v Wachovia Bank & Trust Co (1937), 300 US 124, 128, (57 S Ct 338, 339; 81 L Ed 553, 555; 108 ALR 886, 889).'

As a result of the legislative remedial limitation an apparent conflict has resulted. Specifically, 1978 PA 96, Sec. 309, supra, provides that a creditor may, among other things, when utilizing the declining balance method of computing interest, continue to charge interest on late installment payments. The question then becomes whether this right to continue the computation of interest beyond the due date of an installment payment is in addition to the creditor's right of assessing a default charge in accordance with the statutory default provisions or in lieu of assessing late charges pursuant to those provisions.

In the interpretation of a statute effect must be given to every word, sentence and section and to that end the entire act must be read and the interpretation to be given to a particular word in one section arrived at after due consideration of every other section so as to produce, if possible, a harmonious and consistent enactment as a whole. Dussia v Monroe County Employees Retirement System, 386 Mich 244; 191 NW2d 307 (1971). Close scrutiny of the 1966 PA 224, Sec. 309(d) supra, as added by 1978 PA 96, indicates that it is, in fact, an option. Therefore, reference to other default provisions in the statute is necessary if the creditor is to have a choice between two alternatives. Absent an alternative, the term 'option' would be superfluous. It is clear that the legislature did not intend to allow a seller to assess two default charges for the same delinquency period, a result which would occur if a seller were allowed to collect both a statutory delinquency charge and interest computed after the due date of an installment payment.

It is, therefore, my opinion that a creditor who elects to compute finance charges under the Home Improvement Finance Act (3) may not continue the computation of interest after the due date of an installment and also assess an additional delinquency charge.

Frank J. Kelley

Attorney General

(1) Corresponding Sections of the Retail Installment Sales Act and Motor Vehicle Sales Finance Act are:

(a) Retail Installment Sales Act, 1966 PA 224, MCLA 445.851 et seq; MSA 19.416(101) et seq, Sections 9 and 18.

(b) Motor Vehicle Sales Finance Act, 1950 PA 27, MCLA 492.101 et seq; MSA 23.628(1) et seq, Sections 20 and 31(a).

(2) Corresponding Sections of the Retail Installment Sales Act and the Motor Vehicle Sales Finance Act are:

(a) Retail Installment Sales Act, 1966 PA 224, MCLA 445.851 et seq; MSA 19.416(101) et seq, Section 123, Section 123(a) and Section 123(e).

(b) Motor Vehicle Sales Finance Act, 1950 PA 27, MCLA 492.101 et seq; MSA 23.628(1) et seq, Section 41, Section 41(a) and Section 41(d).

(3) The same conclusion applies to The Retail Installment Sales Act and The Motor Vehicle Sales Finance Act.