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Consumer Credit Regulation: 4.5.2.4 Sham Services

Lenders may also increase the cost of credit surreptitiously by charging borrowers for sham services that are not in fact provided.152 Charges for services that the lender does not in fact perform are interest.153 For example, courts have held payments to lenders under sham consulting contracts to be interest.154

Consumer Credit Regulation: 4.5.3.1 Where Broker Is Related to the Lender

Loan broker commissions added to the principal may often be hidden interest. While loan brokers represent that they provide a service to the consumer by finding the best loan, often they have a relationship with just one lender and steer consumers to that lender, who does not offer the best deal.

Consumer Credit Regulation: 4.5.3.2 Where Lender and Broker Split the Broker Fee

Where the lender and the broker split an interest rate upcharge, this is often called a “yield spread premium.”175 The Alabama Supreme Court permitted a case that alleged this arrangement to be a concealed device to evade the state’s 5% cap on points to go to the jury.176 However, to the extent the decision held that a yield spread premium constituted “points” under a state law capping the number of points a lender can charge, the court overruled itself in a later decision.

Mortgage Lending: 3.3.1 Introduction

In analyzing a mortgage loan transaction it is helpful to look at where the money goes, to determine what portion of the loan proceeds benefits the borrower, what portion benefits the lender, and what portion goes to third parties. For this analysis it is absolutely necessary to have some document that itemizes the components of the note principal or amount financed.

Consumer Credit Regulation: 4.5.3.3 State Statutes Regulating Brokers

The 2008 SAFE Mortgage Licensing Act requires all states to have at least a basic licensing system for mortgage loan brokers.180 Non-mortgage loan brokers are also expressly regulated in most states. Some of these states also cap the fees that loan brokers may charge.181 However, these statutes frequently contain broad loopholes.182

Consumer Credit Regulation: 4.7 Non-Cash Compensation and Side Agreements

Lenders may exact non-cash bonuses in consideration for the extension of credit, and these may constitute hidden interest in the same manner as cash payments.193 For example, a lender’s requirement that the borrower assume a third party’s debt to the lender constitutes interest on the loan to the borrower.194 A provision giving the lender a share of the rents from the mortgaged property may be interest.195

Consumer Credit Regulation: Introduction

This appendix summarizes state Retail Installment Sales Acts (RISAs). These statutes typically cover installment sales of goods and services, but some regulate certain purchase-money consumer loans as well. Some states have a RISA that applies exclusively to installment sales contracts for motor vehicles or manufactured homes, and some have more than one RISA. Many RISAs include provisions for retail charge accounts. All these types of RISAs, for each state, are included in this appendix.

Consumer Credit Regulation: 11.2.1 Retail Installment Sales

Retail installment sales contracts (RISCs) are the most common means by which motor vehicle sales are financed, and they are also a common means of financing the sale of manufactured homes, furniture, and other goods and services such as gym memberships. The retail seller enters into a contract with the consumer for the sale of the goods that provides for the sale price plus finance charges to be paid in installments over time.

Consumer Credit Regulation: 11.2.3 Direct Financing

Cars and other vehicles may be financed in a number of ways other than the traditional RISC at the dealership model. While almost 80% of cars that are financed are financed at the dealership, another common method is through a direct loan from a third-party lender. In this model, the consumer enters into two transactions—one with a lender, and one with the seller, to whom the consumer pays the proceeds of the loan. The dealer does not assign a retail installment contract to the financing entity.

Consumer Credit Regulation: 11.2.4 Auto Leasing

Consumer leasing is common for new motor vehicles and less common but still utilized for used vehicle transactions. While common, auto leasing of new vehicles has declined recently, from over twenty-seven percent in 2020 to just over seventeen percent in 2022.

Consumer Credit Regulation: 11.2.5 Auto Rent-to-Own

A number of cars, especially at used-car dealerships and buy-here, pay-here dealerships, are offered on a rent-to-own (RTO) basis, similar to a traditional appliance or electronics rent-to-own transaction.15 They are marketed to those who have poor credit or believe they cannot obtain reasonably priced credit elsewhere. The payments are typically very high relative to the value of the car.

Consumer Credit Regulation: 11.2.6 Credit Card Financing

Another financing method, often used for motorcycles, jet skis, boats, snowmobiles, and even cars and other expensive items, is a credit card opened at the dealership. Most of the larger captive finance companies for motorcycles and other sports and recreation machines tout credit card offers for financing purchases.

Consumer Credit Regulation: 11.2.7 Auto Subscriptions

A relatively new arrangement is for car subscription services.23 Beginning in the late 2010s, manufacturers such as Cadillac, BMW, Ford, Mercedes-Benz, Hyundai, Audi, and Volvo began subscription services for new car transactions and a number of third parties such as FAIR and FlexDrive for used car transactions. Most of the manufacturer programs have since been discontinued.

Consumer Credit Regulation: 4.8.2 Late Fees As Interest; Contingency

To the extent that a common law treatment of late fees exists, the general rule is that late fees are excluded from interest because the fees are avoidable or, more precisely, are contingent on the performance of the borrower.213 Courts frequently view late payment as a voluntary act of the borrower and the late fee as a consequence of the borrower’s voluntary act. These courts are reluctant to allow the borrower to transform an otherwise valid contract into a usurious one through voluntary late payment.

Consumer Credit Regulation: 4.8.3 Late Fee Statutes

Statutes governing late fees are generally more advantageous for consumers than the common law rule. A common statutory formula allows the lender to collect the lesser of $5 or 5% of the regular installment as a late fee, and restricts the lender to one late fee per installment no matter how late the installment is paid.226 Some statutes also specify a minimum grace period which must be allowed before a late fee may be imposed.227

Consumer Credit Regulation: 4.8.5 Pyramiding Late Charges

The “pyramiding” of late charges is one method that creditors use to assess multiple late charges on an account after as little as one late payment. Pyramiding is accomplished by attributing a borrower’s current payments first to outstanding late charges or overdue amounts and only second to the installment which is currently due.

Consumer Credit Regulation: 4.8.6.1 Deferral Charges

Late fees should be distinguished from “deferral fees,” which are payments that a debtor may be permitted to make to delay the date when a payment is due and, thereby, to avoid default.257 When a creditor charges a deferral fee, the result is that the consumer skips a payment and the maturity date of the loan is extended.