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1.2.1 Analyzing a Credit Transaction

First Step: Gather the Necessary Information

  • ● Obtain copies of the contract documents, including any security agreements. See § 5.11.3, infra.
  • ● Interview the consumer to find out the history of the relationship with the creditor and what went on behind the scene. See § 5.11.2, infra.
  • ● However a transaction is presented, look to the underlying substance of the transaction to determine the applicable law—substance, not form, controls the determination of whether a transaction is governed by a particular consumer credit statute. See § 3.9, infra.

Second Step: Review the Applicable Consumer Credit Statutes

  • ● Find the applicable consumer credit statutes, using the tips provided at §§ 1.2.21.2.16, infra.
  • ● In many states, a creditor has a choice among multiple statutes, so all applicable statutes must be identified.
  • ● Typically, a creditor must be licensed or registered in order to operate under a consumer credit statute; determine the creditor’s licenses.
  • ● Special laws may apply to certain consumers. The Military Lending Act limits the APR on loans to active duty members of the military and their dependents, and the Servicemembers Civil Relief Act requires the interest rate to be reduced for active-duty servicemembers for obligations they incurred before going on active duty. See §§ 2.2.4, 2.2.5, infra.
  • ● Identify creditor attempts to evade the applicable statute by changing a transaction’s form despite its substance. See § 3.9, infra. Examples:
  • ○ A loan that appears to be too large to be governed by a particular state credit statute may turn out to have been unlawfully inflated. See § 3.11.8.2, infra.
  • ○ A transaction that is structured as the sale of an asset or another noncredit transaction may be a loan in reality. See §§ 3.9, 14.2, 14.3, infra.
  • ○ Rent-a-bank arrangements and faux tribal lending are common ploys by which high-cost lenders seek to take advantage of a bank’s ability to export its home state’s interest rates or a tribe’s immunity from suit. It is often possible to show that the bank or tribe is merely a straw party and not the real originating creditor. See § 9.6.3, infra. In addition, there may be claims that can be brought against the bank or tribe. See § 9.6.3.4.1, infra.

Third Step: Analyze the Facts and Contract Documents

  • ● Do the contract documents contain terms prohibited by the applicable statutes?
  • ● Did the creditor take a forbidden security interest?
  • ● Do the finance charges exceed those allowed by statute?
  • ○ Do origination fees or other flat-fee finance charges exceed the amounts allowed by statute, or are they improperly kept out of the finance charge?
  • ○ For tips on performing necessary interest rate calculations, see Chapter 5, infra.
  • ● Did the creditor lead the consumer to believe that purportedly voluntary credit insurance or other add-on products were required? See § 6.5, infra.
  • ● In many states a single statute will allow the creditor a choice of multiple interest rate calculations, so it may be necessary to perform multiple calculations.
  • ● Did the creditor impose charges that are not authorized by the contract documents, or fail to credit the consumer’s payments?
  • ● If the current credit transaction is one of a string of transactions, each of which has been rolled over or refinanced into the next transaction, analyze the earlier transactions as well as the current one.
  • ○ The creditor may have failed to make proper rebates when the earlier transactions were refinanced. See § 5.8, infra. This requires a review of the payment history, which the creditor may produce voluntarily, but often must be obtained through discovery once suit is filed.
  • ○ If earlier transactions were usurious, the usury may taint the current transaction. See § 7.7.3, infra.
  • ○ The string of transactions as a whole may be unconscionable, gradually moving the consumer into an unaffordable obligation. See §§ 2.4.8, 10.2.6.2, infra.
  • ○ Mandatory electronic repayments that are permissible for a single balloon-payment loan may not be permissible for a recurring string. See § 9.2.1, infra.