Summary of Consumer
This "Summary of Consumer Credit Laws" is from the U.S. Department of Commerce
publication,Credit and Financial Issues:Responsive Business Approaches
to Consumer Needs May 1995. For information, contact the Office of Consumer
Affairs, U.S. Department of Commerce, Washington, D.C. 20230, Phone: 202-482-6007.
Consumer credit transactions are regulated both at the Federal and the
State level. Some of the Federal laws influencing the credit industry
While there is considerable variation among State laws governing consumer
credit transactions, most are based on Federal laws and various versions
of State laws covering several standard areas. Some of those areas are
- The Uniform Consumer Credit Code
- Usury or rate ceiling laws
- Consumer loan acts
- Mortgage lending acts
- Mortgage banker and broker acts
- Secondary mortgage acts
- Retail installment sales acts
- Seller and lender credit card acts
- Home solicitation sales acts
- Home improvement contracts acts
- Rental purchase agreement acts
For a full explanation of the relevant laws in the jurisdiction(s) in
which you do business you can consult:
- Legal counsel
- State attorney general office
- State banking commission, consumer credit or financial institutions
- Trade associations, such as the International Credit Association,
the Associated Credit Bureaus, local credit associations, national or
state bankers associations, savings associations, mortgage banker associations,
national and state consumer finance associations, or national or state
retail merchants associations.
Note: To help both business and consumers understand consumer
credit laws, businesses should encourage financial trade associations
and offices of consumer protection to compile and distribute summaries
and comparisons of State laws governing consumer credit transactions.
Federal Law Summaries
All consumer credit businesses should be aware of the Federal laws summarized
below. These summaries are not, however, intended to serve as a substitute
for legal counsel and a thorough understanding of the laws themselves.
Truth in Lending Act (TILA) (effective 1969;
amended by Unsolicited Credit Card Act, effective 1970; amended by the
Truth in Lending Simplification Act, effective 1982; amended by the Home
Equity Loan Consumer Protection Act, effective 1989; amended by the Fair
Credit and Charge Card Disclosure Act, effective 1989; amended by the
Home Ownership and Equity Protection Act, effective October 1995). This
act and the acts which amended or added to its provisions were primarily
enacted to prevent abuses in consumer credit cost disclosures and to require
uniformity in such disclosures throughout the credit industry by making
terms of credit known to consumers.
The specific provisions of the act are implemented by Regulation Z. Regulation
Z explains in great detail who and what is covered by the regulation and
gives the specific disclosure and other requirements that have to be met
for open-end and closed-end credit transactions. It should be noted that
disclosures of the costs involved in credit card plans offered by mail,
telephone or by applications distributed to the general public are subject
to the disclosure requirements laid down in Truth in Lending and Regulation
The act covers among others any person who regularly extends credit used
primarily for personal, family or household purposes if the credit is
subject to a finance charge or payable by a written agreement in more
than four installments. The act also covers advertising of such credit
transactions. Credit transactions of over $25,000 are exempt from the
act (unless there is a security interest taken in real property or a mobile
Specific and detailed disclosure requirements exist for all the various
types of consumer transactions which fall under the disclosure mandates
and prohibitions. For example:
- Open-end credit disclosures cover credit cards, charge cards and open-end
consumer credit transactions. Under such circumstances, the act requires
certain disclosures before the initial disclosure statement for credit
and charge card applications and solicitations and it requires certain
early disclosures and prohibits certain practices for home equity lines
of credit. In addition, an initial disclosure statement, disclosures
on monthly billing statements and sometimes disclosures on subsequent
statements are usually required on openend transactions. Each type of
statement has its own mandated list of disclosures. Particular provisions
also require that a cardholder be given 15-days prior notice of a change
in terms. All disclosures must be made clearly, conspicuously and in
- A miscellaneous provision prohibits the issuing of a credit card unless
it is in response to an oral or written application or as a card renewal.
This does not prohibit creditors from distributing unsolicited applications
for credit or from issuing renewals or substitutes for a card previously
accepted by the consumer.
- A provision provides for a statutory $50 maximum limit on the amount
of money a cardholder is required to pay for the unauthorized use of
a card before the card issuer has been notified by the consumer.
- Closed-end credit disclosures are also carefully delineated and regulated
under the act and its Regulation Z. The law requires disclosures to
be made clearly, conspicuously, in writing and in a form that the consumer
may keep and read prior to the loan closing. If the disclosures are
incorporated into the loan agreement they must be separated from all
other loan details; for example, they may be placed in a boxed section
on the form or be separated by bold print dividing lines (often referred
to as the SFederal Boxy).
- Additional disclosures were mandated in the Home Ownership and Equity
Protection Act of 1994 (effective approximately October, 1995). Under
this new act, creditors must make additional disclosures and comply
with prohibitions against certain practices on closed-end home equity
loans meeting specific triggers relating to APR or points and fees.
- The act also requires advertisers of consumer credit to clearly and
conspicuously provide certain information if they use specific triggering
terms in their credit ads. The act requires that the credit terms advertised
actually be available.
Note: The requirements of the Truth in Lending Act and Regulation
Z are complex and detailed, therefore, it is recommended that those who
are regulated by the act and its regulation refer questions to an attorney
who is knowledgeable about the act, all of its provisions, and the regulation.
Real Estate Settlement Procedures Act (RESPA) (effective 1974)
requires home mortgage lenders to:
- Provide loan applicants with good faith estimates of the costs of
settlement services (costs related to the making of a real estate loan).
- Make disclosures when the lender refers settlement business to a company
affiliated with the lender.
- Provide loan applicants with disclosures regarding the possible transfer
of the servicing of loans (both the lender and the new servicer must
provide notices when servicing is transferred).
- Provide disclosure of actual costs and charges for settlement services
at the loan closing.
- Not give any fee or kickback to any person for providing settlement
Note: Effective August 1994 RESPA also applies to second mortgage
Federal Trade Commission Rule on Preservation of Consumers' Claims
and Defenses (effective 1976), the Holder-in-Due Course RuleS, requires
sellers of goods and services to include a clause in certain credit contracts
which preserves all the sale related claims and defenses (such as breach
of contract, breach of warranty, misrepresentation or fraud) which the
consumer could assert against the seller so that such claims and defenses
may also be asserted against future holders of the consumer credit contract.
This rule does not apply to cash purchases of consumer goods and services,
real estate transactions nor purchases by businesses or associations.
It also does not govern credit card transactions which are covered by
the Fair Credit Billing Act.
Federal Trade Commission Credit Practices Rule (effective 1985)
defines certain unfair credit practices for a seller or creditor executing
The rule declares it an unfair credit practice to take a contract containing
a confession of judgment, a waiver of exemptions granted by state law,
a wage assignment or a non-possessory security interest in household goods
other than a purchase money security interest. The rule also prohibits
certain acts or practices in which the creditor directly (or indirectly)
misrepresents the nature or extent of a cosigner's liability. The rule
requires that before a creditor can obligate a co-signer, the co-signer
must be informed of the nature of his or her liability as a co-signer.
The rule also provides a specific notice to be given to co-signers prior
to executing an agreement.
The required notice reads as follows: "You are being asked to guarantee
this debt. Think carefully before you do. If the borrower doesn't pay
the debt you will have to. Be sure you can afford to pay if you have to,
and that you want to accept this responsibility.
You may have to pay up to the full amount of the debt if the borrower
does not pay. You may also have to pay late fees or collection costs,
which increase this amount. The creditor can collect this debt from you
without first trying to collect from the borrower. The creditor can use
the same collection methods against you that can be used against the borrower
such as suing you, garnishing your wages, etc. If this debt is ever in
default that fact becomes a part of your credit record.
This notice is not the contract that makes you liable for the debt."
Note: Creditors are also prohibited from charging multiple late
fees for one late payment.
Fair Credit Reporting Act (FCRA) (effective
1971, amended 1978, 1989, 1992 and 1994) requires:
- Creditors to notify consumers of the name and address of credit reporting
agencies (credit bureaus) whose reports were used as a basis for adverse
- Credit reporting agencies, upon request: To disclose to consumers
the nature and substance of information in their credit bureau records;
to reinvestigate disputed information and make corrections; and, to
allow consumers to file their explanations if reinvestigations do not
- Credit reporting agencies to notify recent recipients (as specified
by the consumer) of the credit reports, of corrections that may have
been made, or, in certain instances, the consumer's side of the story,
and to include this material in future reports.
- Credit reporting agencies to exclude from consumer reports adverse
credit records more than seven years old (ten years for bankruptcies.)
- Credit reporting agencies to furnish reports only to those who have
a Permissible purposes for the information.
Note: The FCRA was amended in 1992 and imposes an obligation upon
a credit reporting agency to include overdue child support in a consumer
report, provided that information is reported to the agency by a party
charged with the collection of the child support.
Equal Credit Opportunity Act (ECOA) (effective
1975; amended 1977, 1988 and 1991) prohibits creditors from:
- Discriminating against credit applicants because of sex, race, color,
national origin, age, marital status, religion or because a consumer's
income comes from a public assistance source (e.g., social security
or disability benefits). The act does permit the use of gages as a variable
in an empirically derived, statistically sound, credit scoring system
provided that the age of an elderly applicant (62 or over) is not assigned
a negative factor or value. In addition, creditors may not discount
or refuse to consider income because it comes from retirement benefits,
part-time employment or alimony/child support.
- Denying credit because the consumer, in good faith, exercised rights
under the Consumer Credit Protection Act (such as disputing a credit
card bill under the Fair Credit Billing Act or a credit bureau report
under the Fair Credit Reporting Act.)
- Failing to provide written notice of adverse action within specified
time frames when a consumer's application is denied or when certain
other adverse actions are taken. The notice must either disclose the
reasons for the denial or adverse action or inform the consumer of the
right to obtain those reasons.
Fair Credit Billing Act (FCBA) (effective 1975)
applies only to open-end credit transactions. Among other things, the
act specifies a step-bystep procedure for error resolutions. The procedure
is as follows:
- The consumer must give written notice of a billing error, in a letter,
within 60 days of receiving the bill in question.
- The creditor must respond within 30 days and resolve the dispute within
two billing cycles, but not longer than 90 days. Within 90 days, the
creditor must either explain why the bill is correct or correct the
- During the resolution period no collection activity is permitted on
the disputed amount and no finance charges may be collected as well.
The account may not be reported as delinquent, nor can it be closed
nor restricted because of the consumer's failure to pay the disputed
amount, and/or related charges.
- If the consumer still believes the billing to be in dispute after
the resolution period, the consumer must again notify the creditor in
writing. During this period, the creditor may not report the account
delinquent without also reporting that the amount is in dispute. The
creditor must also report to the consumer the name and address of each
person to whom the creditor is reporting information about the delinquency.
- The creditor must also report how the matter was resolved, to anyone
who received a report on the delinquency.
- Creditors must include an address on periodic statements to which
consumer billing inquiries can be addressed.
Right to Financial Privacy Act (RFPA) (effective
1979) provides privacy protection to customers of financial institutions
when the Federal government is seeking financial record information about
an institution's customers. The act defines a financial institution as
any office of a bank, savings bank, other type of regulated financial
institution or a Card issuers (retailers who issue cards must comply).
The act prohibits government authorities from gaining access to information
contained in the financial records of any customer of a financial institution
or card-issuer, unless:
- The customer has authorized access to the customer's records in a
written statement as set down in the act.
- The financial records are disclosed in response to an administrative
subpoena. The customer must be mailed a copy of the subpoena, giving
the customer the right, within 10 days of receiving the notice, of filing
a motion to prevent disclosure.
- The financial records are disclosed in response to a search warrant.
- The financial records are disclosed in response to a judicial subpoena.
A copy of the subpoena must have been served on the customer on or before
the date on which the financial institution was served.
- In the absence of a subpoena, the financial records are disclosed
in response to a formal written request which must meet guidelines specified
in the act. A government agency may gain access to a consumer's financial
records without notice to the consumer if the agency is investigating
the financial institution, not the consumer.
Consumer Leasing Act (CLA) (effective 1976)
requires certain disclosures about consumer leases. The act requires leasing
companies to do the following in writing:
- Give a brief description of the leased property.
- Disclose the total amount of the initial payment required, number
of payments, amount of each payment, due dates and total amount of payments.
- Disclose in writing the total amount of payments under the lease,
including, the amount of the security deposit (if required), monthly
payments and additional charges, such as for licenses or taxes.
- Disclose the total amount of official fees and all other charges,
including penalties for late payments or delinquencies.
- Identify any express warranty and the party responsible for the product's
maintenance and service.
- Provide a description of any security interest.
- State whether the customer has the option to purchase the leased property
and provide certain related information.
- Disclose early termination rights, if any.
- Disclose the customer's liability for the difference between the estimated
value of the property and its realized value to the lessor at early
termination or the end of the lease (plus customer appraisal and other
- Disclose the terms and conditions of the transaction, including guarantees,
required insurance and any consumer liability at the end of the lease.
- Limit penalties or other charges for delinquency, default or early
termination, to amounts which are reasonable in light of the anticipated
or actual harm caused by the delinquency, default or early termination.
Note: The act also requires advertisers of consumer leases to clearly
and conspicuously provide certain information if those advertisers use
specific triggering terms in their lease ads. The act also requires that
the lease terms advertised actually be available.
Fair Debt Collection Practices Act (FDCPA)
(effective 1978, amended 1986) applies to everyone who collects consumer
debts for someone else, including attorneys who collect consumer debts.
While creditors collecting their own accounts are excluded from the act,
most creditors follow the act's mandates and prohibitions in the interest
of using sound and fair business practices. Debt collection prohibitions
under the act include:
Note: In addition, the act specifies: which third-parties can be
contacted about a debtor for debt collection; how and when collectors
can communicate to third-parties for debtor location information; and,
what acts are considered to be false, misleading or unfair.
Electronic Fund Transfer Act (EFTA) (effective 1979) applies to
electronic fund transfers (EFTs) involving asset accounts, including the
use of automatic teller machines (ATMs) to access and deposit to accounts,
telephone transfer systems, direct deposits, and automatic preauthorized
payments to third parties. Some of the act's provisions are as follows:
- Prohibits issuance of unsolicited access devices such as ATM cards,
unless the access devices cannot be used for EFTs, until validated by
the financial institution, at the consumer's request.
- Limits consumer liability to $50 for unauthorized transfers involving
an access device or card, if the financial institution is notified within
two business days from the date the consumer discovers the loss of a
- Limits consumer liability for unauthorized transfers involving an
access device or card, to $500 if the financial institution is notified
more than two days after the loss of a card. However, consumer liability
is unlimited if the financial institution is not notified within 60
days after the consumer's receipt of a periodic statement.
- Provides for correction or recrediting of an account after oral or
written notice of errors is received.
- Makes a consumer liable for billing errors if the consumer fails to
notify the financial institution within 60 days of receiving a statement
containing an error, unless there are mitigating circumstances that
prevent the consumer from notifying the institution.
- Allows financial institutions 45 calendar days, after notice from
a consumer, to resolve an error appearing on a periodic statement. If
the error cannot be resolved within ten business days, the account must
be provisionally recredited until the investigation is completed.
- Establishes a consumer's right to issue a gstop payments for preauthorized
- Prohibits creditors from requiring the use of EFTs to repay loans
as a condition of credit although a creditor may give a costrelated
discount for EFTs. Employers and providers of government benefits may
require the use of EFTs, but must give consumers the choice of financial
institutions to be used.
The Bankruptcy Reform Act (effective 1979;
amended 1984, 1986 and 1994.) This act is known as the Bankruptcy Code
and replaces the Bankruptcy Act of 1898. Different types of bankruptcy
are named after chapters of the Bankruptcy Code. The most common types
of bankruptcy are as follows:
- Chapter 7-a "straight" bankruptcy under which assets are liquidated
in order to pay creditors.
- Chapter 11-a chapter which provides primarily for a business bankruptcy,
so that a business can Reorganize through a plan to pay all or part
of its business' debts to its creditors.
- Chapter 13-a chapter for consumers with a regular income. Under Chapter
13 bankruptcies consumers develop plans to pay all or part of their
debts to their creditors over a specified time period.
Note: Upon the filing of a bankruptcy petition, an Automatic Stays
provided for by the Bankruptcy Code requires creditors to immediately
stop all efforts to collect a debt, take possession of collateral, enforce
a lien, set off a debt or collect receivables of a debtor. Any relief
from these restrictions must be requested of the bankruptcy court by the
creditor. Creditors with further questions on bankruptcy should contact
their local attorney or the bankruptcy court.
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