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Consumer Credit Regulation: 11.7.8 State UDAP Statutes

Unfair and deceptive acts and practices (UDAP) statutes clearly apply to a dealer’s manufactured home sale practices. As with car financing, there is an issue though whether some state UDAP statutes apply to credit practices.603 But even in these states, the sale of the home and services related to the financing should still be covered.604

Consumer Credit Regulation: 11.8.1 Holder-in-Due-Course Doctrine Inapplicable

A holder in due course of a promissory note arising out of a consumer transaction is immune from most of the consumer’s seller-related claims and defenses.610 In addition, under the “shelter rule,” one who acquires a promissory note from a prior holder in due course has this same protection, even if the new holder would not qualify as a holder in due course, as long as the new holder did not engage in fraud or illegality affecting the instrument.611

Consumer Credit Regulation: 11.8.2 Assignee Liability and Waiver-of-Defense Clauses

Since an assignee of the installment sales contract is not a holder in due course, the general rule under the UCC is that the assignee stands in the shoes of the seller and is subject to seller-related defenses.619 (When the consumer wishes to bring an affirmative claim against the assignee for seller-related conduct, the consumer will have to find an alternative theory.620) Only if there is an enforceable waiver-of-defense clause can the creditor avoid the defenses that would be good a

Consumer Credit Regulation: 11.8.3.2 Notice Required by Rule Provides Consumer Rights

The FTC Holder Rule requires credit sellers to place a notice in the installment sales agreement (the FTC Holder Notice) that the holder is subject to all claims and defenses related to the seller.626 Even when there is a direct loan from a lender to the consumer, the seller must still arrange for the notice to be included in the note when the seller refers the consumer to a lender or has a business relationship with that lender.627 The FTC Holder Rule and state analogs are discussed in detail i

Consumer Credit Regulation: 11.8.3.3 The Consumer’s Maximum Recovery

If the consumer’s defenses and claims are significant enough, the consumer’s claims and defenses can offset all remaining indebtedness, and the consumer can also recover any amount paid under the loan or contract. This is a maximum amount that the consumer can recover from the assignee or lender for the seller’s misconduct. Of course, the consumer can recover amounts over and above the FTC Holder Rule maximum if the consumer has independent claims against the holder for the holder’s own conduct (for example for collection abuse).632

Consumer Credit Regulation: 11.8.4 Assignee Liability Provisions of State RISAs

The preceding subsections examine assignee liability under the UCC and the FTC Holder Rule. In most cases, the FTC holder liability suffices and there is no need to seek assignee liability using a provision found in the state RISA. For example, use of the FTC holder notice is not a basis for the defendant to remove the case to federal court.642

Consumer Credit Regulation: 11.8.5 Assignee’s Liability for TILA and ECOA Violations

The Truth in Lending Act (TILA) places obligations on the originator of a credit agreement—the dealer in the case of a RISC.648 TILA makes assignees liable for disclosure violations only that are apparent on the face of the contract.649 (For non-disclosure violations, the assignee may be liable even if not apparent on the face of the contract, such as a violation of the right to rescind a non-purchase-money security interest in a manufactured home.650

Consumer Credit Regulation: 5.1 Introduction

The other chapters in this treatise focus on the interpretation and application of usury statutes and other state restrictions on the cost and terms of non-mortgage credit. By contrast, this chapter focuses on mechanics: on how to make sense of—and check—the numbers in individual consumer credit transactions.

Consumer Credit Regulation: 5.2.1 Calculation Rules

Nearly every schoolchild (even those who grow up to be lawyers) learns that the formula for savings account interest is I = P × R × T, where I = Interest ($), P = Principal ($), R = Rate of interest (%), and T = Time. The following example will illustrate the application of this formula.

Consumer Credit Regulation: 5.2.2 Payday Loan Interest and APR Calculations

Most types of consumer credit do not involve single-payment loans. For example, it would be unheard-of for a lender to make a consumer mortgage loan whereby the consumer borrowed $200,000, paid nothing for thirty years, and then repaid the principal plus thirty years of interest. However, single-payment loans predominate in payday lending. Since the term of a payday loan is usually one month or less, the interest rate calculations described in the preceding subsection have to be adjusted to take account of this shortened term.

Consumer Credit Regulation: 5.3.1.3.1 How negative amortization works

As discussed above, one of the principal features of amortization of actuarial interest transactions is “declining balances,” in which the unpaid principal balance declines or decreases as payments are made. The more time that has passed, and the more payments that have been made, the faster the rate of decline; with successive payments, less interest is earned every period, so that a larger portion of each payment is applied to principal.

Consumer Credit Regulation: 5.3.1.3.2 Balloon payments

Balloon payments can be produced in a number of situations. A negatively amortizing loan produces a balloon payment that is larger than the original principal, because it includes some of the interest that accrued while the principal was outstanding. Instead of a single balloon payment at the end, it may require a series of higher payments. With an interest-only loan, at the end of the term the borrower owes a balloon payment consisting of the full principal plus the final installment of interest.

Consumer Credit Regulation: 5.3.2.2 Add-On Interest in Split Rate Transactions

A still more complicated example involves “split rates” in which two or more add-on rates apply to the transaction. For example, a usury statute might allow a creditor to apply an add-on rate of 10% to the first $500 of principal and an add-on rate of 8% to any original principal balance above $500. If a consumer borrows $748.28 and agrees to repay the loan in twenty-four monthly installments, what is the maximum amount of interest that can be charged under these add-on rates?

Consumer Credit Regulation: 5.3.3.1 Description of Discount Interest

The method for calculating discount interest is similar to that for calculating add-on interest. Discount interest, like add-on interest, is a method for calculating “precomputed” interest49 in which the consumer agrees to pay the total of payments, which includes both interest and principal, as opposed to agreeing to pay the principal plus interest as it accrues at a certain rate.

Consumer Credit Regulation: 5.3.3.2 Examples of Discount Interest Calculations

A few examples will help clarify the discount interest method. Suppose a consumer takes out a one-year loan with a $1,000 “face amount” at 8% discount interest. The simple interest charge on a one-year loan with a $1,000 “face amount,” if only one payment is made at the end of the term, is $80 ($80 = $1,000 × 8% × 1). However, the $80 interest charge is “discounted” or deducted from the $1,000 “face amount,” leaving only $920 in principal which is given to the consumer. At the end of the year, the consumer is obliged to pay $1,000 to the lender. The effective annual interest rate is 8.7%.

Consumer Credit Regulation: 5.3.3.3 Calculating Discount Interest for a Given Principal

Readers who want to calculate maximum discount interest charges in real-life consumer finance situations may object to the above formulas, which start with the total amount of the obligation rather than the amount the consumer wants to borrow. If a consumer wants to receive $1,000 in cash as a loan, the discount loan company (and the consumer law practitioner) must calculate what the face amount of the loan must be so that, after subtracting interest at the specified rate, the consumer receives $1,000.

Consumer Credit Regulation: 5.3.4 Split Rate Interest—Graduated Rates

Consumer credit laws sometimes authorize lenders to charge “split” or graduated interest rates on some loans.61 In a split rate loan, one actuarial interest rate is applied to one part of the loan and a different actuarial interest rate is applied to the remaining part of the loan.62 The overall interest charge for each payment on a split rate loan is the aggregate of the interest charges for each step. Usually, the highest interest rate is applied to the lowest part of the loan amount.

Truth in Lending: 5.12 Special Disclosures for Variable Rate Loans

5.12.1 Introduction5.12.1.1 Overview

In 1981, Regulation Z was revised to require a few disclosures for all variable rate transactions.1211 Those regulations—which apply only to transactions that are not secured by the consumer’s principal dwelling and to transactions that are secured by the principal dwelling but have a term of one year or less—are discussed at § 5.12.2, in