138.056 Variable rate loans.

(1) Definitions. In this section:

(a) “Approved index" means any of the following:

1. The national average mortgage contract rate for major lenders on the purchase of previously occupied homes, as computed by the federal home loan bank board.

2. The monthly average of weekly auction rates on U.S. treasury bills with a maturity of 3 months or 6 months made available by the federal reserve board.

3. The monthly average yield on U.S. treasury securities adjusted to a constant maturity of 1, 2, 3 or 5 years, made available by the federal reserve board.

4. An index readily verifiable by borrowers and beyond the control of an individual lender and approved by:

b. The office of credit unions, if the lender is a credit union;

c. The commissioner of insurance, if the lender is an insurance company; or

d. The division of banking for all other lenders.

(b) “Dwelling" includes a cooperative housing unit and a mobile home or manufactured home.

(bd) “Manufactured home" has the meaning given in s. 101.91 (2).

(bg) “Manufactured home transaction" means a consumer credit sale, as defined in s. 421.301 (9), of or a consumer loan, as defined in s. 421.301 (12), secured by a first lien or equivalent security interest in a mobile home or manufactured home.

(bm) “Mobile home" has the meaning given in s. 101.91 (10).

(d) “Variable rate loan" means a manufactured home transaction or a loan as defined in s. 138.052 (1) (b), the terms of which permits the interest rate to be increased or decreased.

(2) Required terms. Except as provided in sub. (2m), a variable rate loan contract shall:

(a) Provide for a term of not more than 40 years.

(b) Use an approved index if it provides for adjustments to the interest rate corresponding to an index. Subject to sub. (2m), the initial index value shall be the most recently available value of the index prior to the date of closing of the loan. The interest rate at adjustment shall reflect the difference, in reference to the interest rate of the variable rate loan at the date of closing or, if sub. (2m) is applicable, upon expiration of the initial interest rate period, between the initial index value and the index value most recently available as of the date notice of the interest rate adjustment is mailed under sub. (4) except the lender may decrease the interest rate or decline to increase the interest rate at any time. The interest rate shall be decreased to reflect any downward movement of the index except to the extent the decrease offsets increases in the index not implemented as interest rate increases. An increase in the index permitting the lender to increase the interest rate but declined by the lender for any rate adjustment interval may be carried over and applied in succeeding interest rate adjustment intervals to the extent the increase is not offset by subsequent decreases in the index.

(c) Provide for no more than a one percent increase in the interest rate not more than once each 6 months and permit decreases in the interest rate to be made at any time, if it does not provide for adjustments to the interest rate corresponding to an approved index. If an increase is waived, the lender may at any time increase the interest rate to a rate equal to the interest rate if all increases were made at the first opportunity.

(2m) Discounted initial rate. A variable rate loan contract may include a discounted initial interest rate that is lower than the rate established under sub. (2) (b). Upon expiration of the initial interest rate period, sub. (2) (b) shall apply. For purposes of sub. (2) (b), the initial index value shall be the most recently available value of the index immediately prior to the expiration of the initial interest rate period. This subsection applies to variable rate loan contracts entered into on or after July 3, 2015.

(3) Fees prohibited. No costs or fees may be charged in connection with adjustment to the interest rate of a variable rate loan or an adjustment to the payment, principal balance or term implementing an interest rate adjustment.

(3m) Prepayment penalties.

(a) Notwithstanding s. 138.052 (2) (a), and except as provided in s. 428.207, a lender may not include a prepayment penalty in a variable rate loan using an approved index unless all of the following are satisfied:

1. The lender also makes variable rate loans without prepayment penalties and the lender provides the borrower with a written statement that the lender also makes variable rate loans without prepayment penalties.

2. At the time of the offer of the variable rate loan, and the borrower acknowledges, in writing, receipt of the statement specified in subd. 1.

3. The penalty is limited to prepayment that is made within 3 years of the date of the loan.

4. The prepayment is not made in connection with the sale of a dwelling or manufactured home securing the loan.

(b) This subsection applies to variable rate loans made, refinanced, renewed, extended, or modified on or after March 25, 2006.

(4) Notice of interest payment changes.

(a) If a change in the interest rate occurs, the lender shall give the borrower notice of the change:

1. At least 15 days before the change if an increase in periodic payments other than the final payment is required.

2. Not later than 30 days after any other change.

(b) The notice shall be mailed to the borrower's last-known address and shall contain all of the following information:

1. The effective date of the interest rate change.

2. The amount of the interest rate change.

3. The changes in any index which cause the interest rate change.

4. The amount of the contractual monthly principal and interest payments required as a result of the change.

5. The prepayment rights of the borrower.

(c) This subsection does not apply to a loan secured by an equivalent security interest as determined as of the date that the loan is made.

(5) Negative amortization. The principal balance of a variable rate loan may be increased to implement an interest rate adjustment only if within 10 years after the loan is made, and at least every 5 years thereafter, the payment amount is adjusted to a level at least sufficient to amortize the loan at the then existing interest rate and principal balance over the remaining term of the loan. The payment amount shall be maintained at least at that level until subsequently adjusted under this subsection, except that the payment amount shall be decreased to reflect any decrease in the interest rate.

(6) Disclosure. Before making a variable rate loan, the lender shall disclose all of the following information to at least one of the borrowers:

(a) That the loan contract contains a variable interest rate provision.

(b) An identification of any approved index used in the loan contract and the current base of the approved index.

(c) The borrower's prepayment rights on receiving notice of a change in the interest rate.

(d) That a notice of any interest rate increase must be given to the borrower.

(7) Priority. Any interest accrued or added to the principal of a variable rate loan to implement an interest rate adjustment retains the priority of the original mortgage or equivalent security interest.

(8) Applicability. This section does not apply to any of the following:

(a) A loan or forbearance to a corporation or a limited liability company.

(b) A loan that is primarily for a business purpose or for an agricultural purpose, as defined in s. 421.301 (4).

(c) A reverse mortgage loan, as defined in s. 138.058 (1) (b).

(d) A transaction initially entered into before November 1, 1981.

History: 1981 c. 45; 1983 a. 232; 1985 a. 325; 1991 a. 221; 1993 a. 88, 112; 1995 a. 27, 336; 1999 a. 9, 53; 2003 a. 33, 257; 2005 a. 128, 215; 2007 a. 11; 2015 a. 54.