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Consumer Credit Regulation: 10.9.4.5 Interpreting Caps on Fees
States that cap fees for open-end credit typically set forth a closed list of permissible fees and their amounts. Any fee that does not fit into one of the permitted categories should be treated as an illegal fee even if it is in an amount that would be authorized for some other type of fee. The legislature did not give lenders permission to add a certain amount of charges to loans without regard to their purposes. Instead, it carved out specific types of fees that it considered legitimate and specified the amounts that could be charged for them.
Mortgage Lending: 6.2.7.1 Effect on Interpretive Principles and Pre-Dodd-Frank Circuit Decisions
The Dodd-Frank Act’s changes to preemption law are substantial and far-reaching. Many of the circuit court decisions that held state laws preempted are so undermined by the Dodd-Frank Act that they no longer have any significant precedential value.
Consumer Credit Regulation: 10.9.5 Ability-to-Repay Requirements
The federal Truth in Lending Act imposes ability-to-pay requirements on credit card transactions, but not on other forms of open-end credit. Lenders may not open a credit card account or increase a credit limit without considering the consumer’s ability to make the required minimum payments.330 Furthermore, there are specific underwriting requirements when the lender is issuing a credit card to a consumer under the age of twenty-one.331
Consumer Credit Regulation: 7.1 Introduction
This chapter addresses litigation issues: principles for construing usury statutes; whether there is a right to a jury trial; whether creditors can impose mandatory arbitration; what elements are necessary to establish a prima facie case for the borrower; establishing usury in a state that has eliminated the relevant interest rate ceiling; typical creditor defenses; typical remedies available upon a finding of usury or other types of illegal overcharges; and two jurisdictional issues—whether the doctrine of complete preemption allows a creditor to remove a state lawsuit against a federally
Consumer Credit Regulation: 7.2.1.1 Introduction
Usury is a statutory offense rather than an infraction of common law, and principles of statutory construction come into play in the many cases where the controlling usury statutes are vague or ambiguous. Unfortunately, the misunderstood history of usury has created confusion as to how one important principle of statutory construction applies—that statutes in derogation of common law are to be strictly construed.
Consumer Credit Regulation: 7.2.1.2 Invoking the History and Purpose of Usury Statutes
The fact that specific usury ceilings did not exist at common law can be misleading: to some it suggests that the interest restrictions contained in modern usury statutes are novel restrictions on previously unregulated lending and thus these restrictions should be narrowly construed because they would be in derogation of common law.4 In fact, at early common law it was forbidden to charge any interest at all, and common law recognized an action to recover usury (i.e., interest) paid.5 The firs
Consumer Credit Regulation: 7.2.1.3 Remedial vs. Penal Purposes
The conflict between the broad construction of remedial statutes and the narrow construction of penal statutes also may cloud statutory construction issues. Specifically, usury statutes seek to protect impoverished debtors from the exploitation of avaricious lenders7 and to compensate debtors for the damages they have incurred through the payment of usurious interest. These remedial purposes are a reason to construe ambiguous provisions broadly to protect consumers.8
Consumer Credit Regulation: 7.2.1.4 The Purpose of Special Usury Laws
Regardless of the nature of usury laws in general, there are sound reasons to argue that the particular usury statutes most often involved in consumer cases—small loan laws, installment sales acts, second mortgage acts, and consumer credit codes—are distinguishable from general usury statutes and should be more liberally construed.13 General usury statutes were, for the most part, adopted prior to the twentieth century at a time when consumer credit was limited, almost to the point of non-existence.14
Consumer Credit Regulation: 7.2.2 Expressio Unius Est Exclusio Alterius: Limiting the Creditor’s Ability to Add Extra Charges Not Specifically Authorized
Creditors may try to increase their return by adding non-interest fees to a loan.23 The statutory construction principle expressio unius est exclusio alterius24 is especially useful in challenging these fees as hidden interest, particularly under special usury statutes with roots in Small Loan Acts.
Consumer Credit Regulation: 7.2.3 Deference to Administrative Interpretations
Another principle of statutory construction that arises in usury cases is that courts will defer to the interpretation of a statute by an agency that is charged with administering it.27 This principle sometimes helps consumers but sometimes hurts them. If the state agency that regulates financial institutions is overly friendly to the industry, its interpretations may be unhelpful to consumers.
Consumer Credit Regulation: 7.3 Right to Jury Trial
Assuming that a case is not forced into arbitration,34 the question arises whether trial by jury is available.
Truth in Lending: 12.7.2.3 Who Decides Whether TILA Limit on Arbitration Applies?
Courts determine the enforceability of an arbitration clause unless there is a clear and unmistakable delegation to the arbitrator of the determination of arbitrability. Courts will decide whether the delegation clause is enforceable, but, if it is, then the arbitrator determines arbitrability.1066
Consumer Credit Regulation: 7.4.2.1 No Arbitration Requirement for Manufactured Home Loans
The Truth in Lending Act (TILA) requires that no manufactured home loan include an arbitration requirement.50 The provision applies to “residential mortgage loans,” which are defined to include a consumer credit transaction that includes a security interest in a consumer’s dwelling.51 The term “dwelling” is defined to include a manufactured home.52 This TILA provision also provides that no other agreement between the consumer and the creditor
Consumer Credit Regulation: 7.4.2.2 State Insurance Law Can Prohibit Arbitration
Although the general rule is that the Federal Arbitration Act (FAA) preempts state laws limiting the enforceability of an arbitration agreement,60 state insurance laws are an exception.
Consumer Credit Regulation: 7.4.2.3 Limits on Arbitration Involving Military Personnel
Federal law prohibits arbitration clauses in consumer credit agreements with military personnel or their dependents, or the enforcement of such a consumer credit agreement.63 An arbitration requirement though is unenforceable even after the consumer is no longer a servicemember or a dependent of a servicemember, as long as the consumer was covered by the Act when the credit was originated.64
Consumer Credit Regulation: 7.4.2.4 Congress Overrides CFPB Rule Restricting Arbitration of Class Actions
The Consumer Financial Protection Bureau (CFPB) has authority to issue a rule limiting consumer arbitration agreements involving consumer financial products and services after conducting a study of arbitration agreements.76 The CFPB completed its study in 2015 and submitted a lengthy report to Congress.77
Consumer Credit Regulation: 7.4.2.6 Arbitration When Consumer Files Bankruptcy
When a consumer, as part of their bankruptcy proceeding, litigates core bankruptcy matters, the bankruptcy court has discretion over whether to require the matter to be removed to arbitration or be heard before the bankruptcy judge.85
Consumer Credit Regulation: 7.4.2.7 When Arbitration Requirement Conflicts with Federal Statutory Rights
An arbitration requirement that prevents effective vindication of federal statutory remedies or rights is likely to be found unenforceable,86 with the exception of limits on class relief, that are still enforceable.87 Also subject to challenge are high arbitration fees, high arbitrator costs, and other arbitration costs that make it impractical for consumers to vindicate their federal statutory rights.
Consumer Credit Regulation: 7.4.3.1 Defendant Must Produce the Arbitration Agreement
Arbitration is a matter of agreement between the parties. If there is no agreement, then there is no arbitration requirement. With the exception of some smaller creditors, arbitration agreements are almost universal in contracts involving mobile wireless, private student loans, payday loans, and prepaid cards. On the other hand, as of 2015 only somewhat more than half of credit card agreements contained arbitration requirements.90
Consumer Credit Regulation: 7.4.3.2 Was the Agreement Properly Formed?
An arbitration requirement is a matter of contract, and like any contract, it is not binding on the parties unless the contract is properly formed. This requires assent from both parties, usually by valid signatures. The consumer must have the capacity to assent, and any amendment to the consumer credit contract adding the arbitration agreement (such as in a bill stuffer) must be shown to be binding on the parties.91 Agreements cannot be reached unilaterally.
Consumer Credit Regulation: 7.4.3.3 Where the Sole Designated Arbitration Forum Is Unavailable or Non-Existent
Arbitration agreements typically specify one or more arbitration forums that will administer the arbitration, such as the American Arbitration Association (AAA) or JAMS. These two organizations have consumer protocols and AAA requires creditors to register their arbitration agreements with the AAA. AAA and JAMS may refuse to administer the arbitration if the creditor’s arbitration agreement does not meet the forum’s consumer protocols or, in the case of the AAA, if the creditor is not currently registered.
Consumer Credit Regulation: 7.4.3.4 Has the Arbitration Agreement Been Superseded by Another Contract?
Since arbitration is a matter of agreement between the parties, an arbitration requirement is not effective if found in an agreement that is superseded by a later agreement that does not contain the arbitration requirement. This may occur where the buyer’s order contains the arbitration requirement, but an arbitration agreement is not present in the installment sales agreement.
Consumer Credit Regulation: 7.4.3.5 Where Usury Voids the Contract
One might think that a usurious or illegal contract that is unenforceable under state law would also mean that the arbitration requirement is unenforceable. But the Supreme Court has stated that this is not the case. Rather, the arbitration clause must be looked at independently from the rest of the contract.96