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1.4.6 Retail Sellers

Another major class of non-depository creditor consists of retailers of consumer durable goods. Many consumers cannot afford to purchase big-ticket goods such as automobiles, furniture, refrigerators, and other appliances in cash. Retailers offer credit plans to boost sales and sometimes as an independent profit center. The terms of the installment credit sales contracts, including the maximum interest rate169 and other charges on the contract, are regulated in many states by retail installment sales acts or motor vehicle retail installment sales acts.170 However, most states have by statute exempted rent-to-own transactions from their retail installment sales acts, even though these transactions are equivalent in all essential respects to retail installment sales.171

Revolving credit plans such as “charge cards” offered by retailers are usually regulated separately from installment credit under state law. Most, if not all, major retailers, such as department stores, currently work in tandem with banks that offer retail customers proprietary credit cards to finance the purchase of merchandise at those stores. Because banks issue the credit cards, state laws generally do not apply to these revolving credit accounts.172

Retailers often sell or assign installment sales contracts soon after they are signed. They transfer them to other creditors, typically banks, finance companies, or “acceptance” companies, at a discount from the amount that the consumer is obligated to pay over the term of the contract. For example, if a consumer has contracted to pay a retailer $100 over a period of a year, the retailer might sell the contract to a finance company in return for an immediate payment of $85. The retailer and the finance company generally enter into a “master contract” under which the finance company agrees to purchase some or all of the retailer’s contracts on stated terms.

The assignment of a retail installment contract may or may not significantly affect the credit buyer. At the least, the buyer may receive a notice that payments should be made to the assignee rather than the retailer. If the buyer falls behind in payments, the effect may be greater. Depending on the terms of the master contract, either the assignee may sue the buyer on the contract or the contract will be reassigned to the retailer, which will have to enforce the contract itself.173 Alternatively, finance companies use assigned consumer contracts as a source of new customers, and if a buyer is not seriously in default, the finance company might use the opportunity of delinquency to convince the consumer to refinance the debt. Such refinancings can be extremely profitable for creditors, with the borrower’s obligation growing larger with each refinance. The costs of refinancing are explored in §§ 5.8, 5.9, infra.

Footnotes

  • 169 {161} Because the transaction is a sale rather than a loan, the charge assessed may be described as “time-price differential” or “finance charge” instead of “interest,” but the difference is purely semantic. § 1.2.4, supra.

  • 170 {162} See Anne Fleming, The Rise and Fall of Unconscionability As the “Law of the Poor,” 102 Geo. L. J. 1383, 1425–1426 (2014) (detailing the impetus for the enactment of the installment lending law in the District of Columbia; describing the role of “ghetto” merchants and their credit practices as a significant source of frustration in cities where unrest occurred in the mid-1960s, and judicial decisions that raised public consciousness of the problems in the low-income marketplace). See generally Ch. 11 (RISAs), Appx. C (summaries of state RISAs), infra.

  • 171 {163} See § 13.3.2.2, infra.

  • 172 {164} See Ch. 3, infra.

  • 173 {165} Contracts between sellers and the assignees that purchase consumer paper such as retail installment contracts are divided into “recourse” contracts, in which the assignee may force the credit seller to buy back the paper if the consumer defaults, “non-recourse” contracts in which the assignee has no such right, and “limited recourse” contracts in which the repurchase of the consumer contract can be compelled only for debts above a stated amount, for specified types of default, or for specified categories of transactions.