Truth in Lending: 2.7.7 Securities or Commodities Accounts
Brokers and other dealers in securities often extend credit to their customers to allow them to purchase securities.
Brokers and other dealers in securities often extend credit to their customers to allow them to purchase securities.
Under a typical home fuel budget plan, the fuel dealer estimates the total cost of fuel for the season, bills the customer for an average monthly payment, and makes an adjustment in the final payment for any difference between the estimated cost of fuel and the actual cost of fuel. The dealer delivers the fuel as needed and the customer may withdraw from the plan at any time.
The official interpretations state that layaway plans are not credit unless the consumer is contractually obligated to continue making payments.465 This is true even if amounts paid towards the cash price of the merchandise are not refunded.466 However, if the consumer is contractually obligated (under applicable law) to continue making payments, then the layaway plan is not excluded from the definition of credit.
Neither the original Act nor its accompanying Regulation Z contained an exemption from TILA or an exclusion from any of the definitional prerequisites for tax liens, tax assessments, and court judgments.467 The Federal Reserve Board (FRB) staff issued two letters in 1969 that addressed questions related to the payment of taxes and the scope of the definition of “credit” for TILA purposes. The first discussed whether the payment of delinquent taxes in monthly installments bearing interest was credit.
A question not directly addressed in the official interpretations is whether a sale, transfer, or assignment of an involuntary tax obligation accompanied by the right to enforce the tax lien to a third party that collects on the obligation and allows repayment through installments is covered by the exclusion.
Property Assessed Clean Energy (PACE) programs are approved by local authorities under state legislation. These programs provide a financing option for energy efficiency improvements to residential and commercial properties that serves as an alternative to traditional loan structures.490 PACE allows a property owner to finance specific improvements by voluntarily contracting to allow the addition of an assessment to the property’s tax bill secured by a lien against the property.
The Home Energy Renovation Opportunity (HERO) program in California was the most widely adopted residential PACE program in the United States. It was offered in forty-eight counties in California.511 The HERO program ceased operation when its program administrator, Renovate America filed bankruptcy.512 The following discussion remains relevant as many of the PACE programs in California have similar guidelines and transactional documents as the HERO program.
A HERO transaction involves several documents.522 A review of these documents and the program handbook reveal the following characteristics of HERO transactions. These documents have been revised over time.523 The discussion below notes relevant differences between two versions of the handbook and of the transaction papers.
Insurance premium installment payment plans are exempt if each installment represents the payment for insurance coverage for a certain future period, unless the consumer is contractually obligated to continue making payments.586 This exclusion makes some sense, because such a payment plan is really a “pay-as-you-go” arrangement rather than an extension of credit. While exempt from TILA, insurance premium installment payment plans may be regulated under state law.587
Insurance premium financing contracts are covered by TILA. In these transactions, a finance company pays the insurance premium directly to the insurer, and the consumer repays the money to the finance company in installments.588 If the consumer fails to pay the finance company, it has the authority to ask the insurer to cancel the insurance.
“Borrowing” against the accrued cash value of an insurance policy is not considered credit if there is no independent obligation to repay.591
Mortgage assistance plans administered by a government agency are exempt if the agency pays a portion of the consumer’s monthly payment but does not charge interest on the subsidy amount.602 If the consumer later signs a note to finance the unpaid subsidy that has become due, that transaction would be considered credit.603
Borrowing against a pension account is exempted, if there is no independent obligation to pay, i.e., if the creditor can only collect from the pension account and not directly from the borrower, if the borrower defaults.604 This exemption may be significant, as some consumers borrow against retirement accounts for other consumer purposes, such as financing home purchases or college tuition.
Sale-and-repurchase or sale-and-leaseback transactions are often thinly disguised loans. They may involve personal property,643 but are particularly insidious where real property is at issue, as the creditor may try to deprive the homeowner of rescission rights as well as the TILA disclosures.644 Foreclosure rescue scams often employ sale-and-repurchase or sale-and-leaseback agreements.645
In order to show that the buyer/lender extends credit “regularly,” as required for TILA coverage,651 it may be helpful to produce evidence of other disguised credit transactions.
In many sale-and-leaseback or sale-and-repurchase schemes, the buyer/lender takes out another mortgage on the property from a bank or other mortgage lender. Sometimes the payments on this mortgage are made directly by the original homeowner, even though the mortgage is not in his or her name.
Rent-to-own (RTO) transactions are the method by which (unfortunately) a significant number of low-income consumers purchase consumer goods such as appliances. Purchasing items via RTO usually boosts the cost of the acquisition tremendously.661 The effective APR on RTO contracts is most likely to be a triple-digit number.
“Payday” or “check advancement” loans are extremely high-interest, short-term loans. Typically, the consumer gives the payday loan outlet a post-dated check (dated for the consumer’s next payday) and receives an amount of cash that is less than the face value of the check.
Tax refund schemes are another means of disguising an extension of credit.705 Most tax refund lenders acknowledge that their transactions are loans and that TILA disclosures must be made,706 but a few fringe operators attempt to cast their transactions in a format that will enable them to avoid complying with TILA and other credit legislation.
Overdraft loans714 are a form of disguised high-cost credit offered by banks and credit unions.715 These plans offer short-term credit at triple-digit rates.716 Overdraft loans can be accessed by writing checks as well as, in many cases, by withdrawing cash from an automated teller machine (ATM) or using a debit card at a point of sale.717
Overdraft loans clearly fit under TILA’s definition of credit as “the right granted by a creditor to a debtor to defer payment of a debt or to incur debt and defer its payment.”726 Several of the federal banking regulators (including the FRB) issued a joint guidance on overdraft loans in 2005.727 These agencies acknowledged that overdraft loans are credit, stating “[w]hen overdrafts are paid, credit is extended,” and “[o]verdraft balances should be reported on regulatory reports as loans.”