Variable Rate Credit

Variable rate loans have become an alternative for consumer lenders in an attempt to deal with fluctuations in money market rates and in anticipation of the eventual removal of rate controls on savings accounts and saving certificates. Variable rates started in the home mortgage market and now have expanded into such areas as automobile loans, open-end credit plans, and other shorter term transactions. Variable rates, nonetheless, are still a relatively new development in the more heavily regulated area of consumer lending, and the operational and legal problems accompanying their use remain to be identified and resolved. In setting rates, lenders should choose indexes beyond their control to avoid subsequent challenges relating to illusory contracts or fraudulent manipulation. Those creditors not subject to federal or state rules on adjustable rate mortgages (ARM) should examine such rules, for they could be held to represent an overriding expression of public policy and be employed to validate charges of unconscionability or unfair or deceptive trade practices.