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Consumer Credit Regulation: 10.2.6.2.2 Examples of the application of an unconscionability standard to high-rate installment loans

State ex rel. King v. B&B Investment Group144 is an example of the application of a prohibition of unconscionability in a state deceptive practices statute to a high-cost installment loan. In that case, a suit brought by the state attorney general, the New Mexico Supreme Court in 2014 held that a subprime lender’s unsecured loans were procedurally and substantively unconscionable. The lender had formerly made payday loans in the state, but moved into unsecured installment lending when the state enacted payday loan reforms.

Consumer Credit Regulation: 10.2.6.2.3 The absence of a rate cap does not prevent the application of an unconscionability standard

The fact that a state does not cap interest rates and charges does not mean that those charges cannot be found unconscionable. Stressing the differences between an unconscionability standard and a numerical rate cap, the California Supreme Court held in De La Torre v. CashCall, Inc.154 that the fact that the legislature had not chosen to place a numerical cap on interest for loans of $2,500 or more did not prevent the court from applying the unconscionability standard to such loans.

Consumer Credit Regulation: 10.4.1 Payment Schedules

A manageable periodic payment is a key feature of affordable lending. For example, loans with balloon payments are often inherently unaffordable and may be designed to encourage long-term indebtedness through reborrowing.178

Consumer Credit Regulation: 10.4.3 Rebates

Federal law prohibits calculation of rebates using a formula less favorable to the consumer than an actuarial rebate, but this law applies only to loans of more than sixty-one months.190 For loans of less than sixty-one months, many states still allow lenders to calculate rebates using formulas based on the archaic Rule of 78s—an accounting shortcut that was prevalent when calculations were done by hand.191 The Rule of 78s favors the lender by producing a rebate smaller than the more accurate ac

Consumer Credit Regulation: 10.5.1 State Statutory Requirements

Few states require creditors to evaluate a borrower’s ability to repay an installment loan, and the states that have such a requirement vary widely in specificity and, as a result, enforceability. In several states, the ability-to-repay requirement appears to do no more than serve as window dressing for a lending law that allows abusively high rates.

Consumer Credit Regulation: 10.5.2 Other Approaches

In addition to state ability-to-repay requirements (or in the absence of one), borrowers may be able to obtain relief through other statutes and the common law. The structure of a loan or the lender’s practice of knowingly making unaffordable loans may violate a state law prohibiting unfair or deceptive acts or practices (a UDAP statute).220 Not all state UDAP statutes apply to extensions of credit, however.

Consumer Credit Regulation: 10.6.2 Wage Assignments

A wage assignment is an agreement by the debtor for his or her employer to deduct payments for a debt from the debtor’s wages and pay them directly to the creditor. Unlike wage garnishment, a wage assignment does not require a court order. The creditor simply sends the wage assignment to the employer, who pays a portion of the debtor’s wages to the creditor on each payday. A lender who is guaranteed repayment by the right to skim a worker’s wages before they are paid has less incentive to determine whether the borrower can afford to repay the loan while meeting basic living expenses.

Mortgage Lending: 10.7.1 In General

Reverse mortgages are complicated and seniors can, at times, be easy targets for financial crimes. This combination makes reverse mortgage origination ripe for unfair and fraudulent conduct on the part of lenders, brokers, and sometimes unscrupulous family members.

Consumer Credit Regulation: 10.7.1 Late Fees

State installment loan laws typically limit late fees, often by limiting the late fee to a dollar amount specified in the statute or a percentage of the missed payment, whichever is less. They also typically specify how quickly a creditor can impose the late fee, for example ten days after the payment was due.

Consumer Credit Regulation: 10.7.2 Post-Maturity Interest Rates

An important related protection is limiting the interest rate after loan maturity—i.e., after the original due date of the final payment—to the legal interest rate or some other low rate. If a creditor can continue to earn a high interest rate after a consumer defaults, the creditor has less incentive to ensure that the loan is repayable when made. The consequences of an unaffordable loan also escalate dramatically for a borrower who defaults if the lender can continue to impose a high contract interest rate.277

Consumer Credit Regulation: 10.8 Licensure

Licensure is an important way for states to control which lenders operate in the state and to determine whether they are complying with state law. All states except Arkansas (which does not allow high-rate lending) require non-bank installment lenders to be licensed or registered.

Consumer Credit Regulation: 10.9.3 Can Open-End Loans Evade Closed-End Regulation?

Even if a lender has authority to make open-end loans, the loans it extends must in fact be open-end. Sometimes a lender will portray an extension of credit as open-end credit, but upon closer examination it is really closed-end credit in disguise. The state open-end credit statute may set forth criteria that the extension of credit must meet in order to be considered open-end, such as a requirement that the plan allow the consumer to obtain further extensions of credit from time to time.

Consumer Credit Regulation: 10.9.4.1 Federal Law Limits

The federal Truth in Lending Act (TILA) requires disclosure of interest rates, fees, and other terms in open-end credit. It also offers limited rate regulation for credit cards, but not for other forms of open-end credit.

Consumer Credit Regulation: 10.9.4.2 States That Cap Both Open-End Interest and Fees

As of 2022, about 30% of the states have statutes that cap both the interest rate and associated fees and charges for open-end credit extended by non-bank lenders.310 However, these caps vary and, in some states, are outrageously high. Tennessee is the prime example. Its 2014 “Flexible Credit Act” allows fee-inclusive APRs of 279% on open-end cash advances up to $4,000.311

Consumer Credit Regulation: 10.9.4.3 Where State Law Only Caps the Interest Rate, Not Fees

About a quarter of the states have statutes that cap interest rates for open-end credit extended by non-banks, but do not have numerical caps on at least one loan fee—for example, an origination fee or an annual fee—that lenders charge as a condition of an extension of open-end credit.314 These states may give the appearance of protecting consumers but, depending on how they are interpreted, the lack of an explicit cap on fees may still allow extremely high rate loans.