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Consumer Credit Regulation: 7.8.4.4.1 Requirement of no adequate remedy at law

Many jurisdictions require a plaintiff who seeks restitution in equity for unjust enrichment to demonstrate that no adequate remedy at law exists. This is a tenet of the law of equity in general,863 though it may be fading as time passes. Claims for unjust enrichment, restitution, or money had and received based on illegitimate fees have fallen afoul of this rule in some jurisdictions.864

Consumer Credit Regulation: 7.8.4.4.2 Existence of an express contract

An express contract between the parties may also bar a plaintiff from obtaining an equitable remedy like restitution. This is another ancient rule retained by some jurisdictions, apparently on the grounds that plaintiffs who are parties to a contract should be restricted to contract actions at law.870 Courts adhering to this rule may find that any contract between the parties that relates to the substance underlying the collected charge will bar any unjust enrichment action to recover it.

Consumer Credit Regulation: 7.8.4.4.3 The voluntary payment defense

A third obstacle to an equitable action for unjust enrichment is the voluntary payment defense. Many jurisdictions recognize this defense to an action for restitution of funds paid, whether framed as an action in equity or one at law for breach of contract.878 Where recognized, the defense almost completely eradicates the equitable claim.

Consumer Credit Regulation: 5.8.7.1.5 Bankruptcy law

Bankruptcy law is an overlay upon federal and state rebate law. Section 502(b) of the Bankruptcy Code requires the bankruptcy court to determine the amount of each claim filed by a creditor that will be allowed.

Consumer Credit Regulation: 5.8.7.1.6 State rebate law

For transactions consummated prior to the effective date of these federal statutes, and for transactions not subject to them, the appropriate rebate formula remains a matter of state law491 or a matter of contract law, in the absence of applicable state law.492 State credit statutes often authorize the use of the Rule of 78s, also known as the “sum of the digits” formula, because it maximizes the amount of interest and other charges that the creditor can claim to be earned, and can therefore exc

Consumer Credit Regulation: 5.8.7.2 Pro Rata Rebates

The simplest but least used rebate formula is the pro rata method. This formula assumes that interest is earned in direct proportion to the time that a loan or credit has been outstanding. If a prepayment occurs four months into the term of a precomputed loan that was scheduled to be repaid in twelve months, the pro rata method provides that 4/12 of the interest has been earned. Consequently, the remaining 8/12 of the interest is unearned and must be rebated.

Consumer Credit Regulation: 5.8.7.3.1 Background and legal status

As the reader who has been introduced to the Rule of 78s in other parts of this treatise may have gathered,510 this method of calculating rebates is a bane to consumers and a boon to creditors. It is also an anachronism; since the advent of widely available computers, there is no reason for it other than to maximize income for creditors.511

Consumer Credit Regulation: 5.8.7.3.2 Calculating a Rule of 78s rebate: a simplified step-by-step guide for mathphobes

When Congress enacted the federal rebate law in 1992,521 it did not prohibit use of the rule for transactions with terms up to sixty-one months, so it is still necessary to know how to calculate a Rule of 78s rebate. Fortunately, as you may recall from high school, if you know the formula, you can get the right answer even if you do not know how the formula was derived.522 So, herewith, the formula:

Consumer Credit Regulation: 5.8.7.3.3 The explanation of the Rule of 78s for those who care (optional reading for the practitioner)

So how does the Rule of 78s work? Like the pro rata method, the Rule of 78s calculates the fraction or percentage of the finance charge that has been earned at any point in the loan. Unlike the pro rata method, however, the Rule of 78s does not assume that the interest earned in each month (or other interval) of the loan is equal. Instead, it weights the earliest months in the loan term most heavily and attributes progressively less interest to later months.

Consumer Credit Regulation: 5.8.7.4.1 Legal status

The most accurate and the fairest way to balance creditor and debtor interests in a rebate calculation is to determine the actuarial interest that the creditor has earned at the time of prepayment and to refund to the borrower the difference between the total contract interest and this actuarially earned amount. Generally accepted accounting principles consider this the economic reality.541

Consumer Credit Regulation: 5.8.7.4.2 Calculation of actuarial rebates

The computation of an actuarial rebate requires the construction of an amortization schedule. There is no easy formula to calculate the rebate. At the time each payment is made from the beginning of the loan to the point of prepayment, the interest earned during the preceding period or fractional period must be computed by multiplying the outstanding principal balance by the periodic interest rate, and the payments received must be used, first to pay off the accrued interest and, second, to reduce the outstanding principal balance.

Consumer Credit Regulation: 5.8.7.4.3 Actuarial rebates under actuarial split rate statutes

A special rebate calculation issue arises under actuarial “split rate” usury statutes, which apply one interest rate to part of the outstanding balance and another rate, to the rest.553 Such statutes do not produce a simple interest amortization pattern. Yet, when calculating rebates for precomputed transactions under actuarial split rate statutes,554 creditors frequently assume simple interest amortization, using one twelfth of the APR as the monthly interest rate.

Consumer Credit Regulation: 5.8.8.1 Failure to Give a Required Rebate As a Usury Violation

A number of decisions recognize that failure to give a required rebate, or to calculate the rebate correctly, gives rise to a usury or overcharge claim557 and entitles the borrower to the remedies the usury law provides.558 As discussed in the next subsection, older decisions holding that a contract cannot be made usurious by a “contingency” have largely been rendered irrelevant to rebate issues by the incorporation of rebate requirements into consumer credit laws.

Consumer Credit Regulation: 5.8.8.3.1 Whether intent is required

Under some consumer credit statutes, specific remedies are authorized wherever finance charges (or simply charges) in excess of those allowed are charged, or more generally where provisions of the act are violated.567 Any time the statute provides for a specific remedy for imposing charges in excess of those allowed, a provision requiring rebates should be considered to be encompassed by that language.

Consumer Credit Regulation: 5.8.8.3.2 Does the contract show the creditor’s intent to charge unearned interest?

There are two ways in which a creditor may violate usury law rebate requirements: either the creditor can provide a contract that on its face fails to provide for the appropriate rebate, or it can neglect in actual practice to give a rebate that it is both contractually and statutorily required to give. Where intent is required, demonstrating a usury violation in the first situation may be considerably easier than in the second because the contract itself can show the creditor’s intent. In many jurisdictions, it is usurious merely to “contract for” usurious payments.

Consumer Credit Regulation: 5.8.8.3.3 Has the creditor failed to give the rebate the contract requires?

If a credit contract properly provides for a rebate upon the early termination of a precomputed debt, the next question is whether, when the prepayment or acceleration finally occurs, the creditor actually gives the rebate properly. Often the issue will be whether the creditor’s acts violate a statutory prohibition against “charging,” “collecting,” or “receiving” usurious interest.579

Mortgage Lending: 8.10 Liability of Other Third Parties

Mortgage transactions may also involve other third parties who can have a significant impact on the borrower’s finances—for good or bad.667 Much of the work these third parties perform will fall within the broad definition of “settlement services” under the Real Estate Settlement Procedures Act (RESPA)’s Regulation X.668 And, consequently, charges for these services will typically be subject to RESPA’s disclosure and anti-kickback rules.669 T

Consumer Credit Regulation: 5.9.1 Overview

Refinancing, in the right circumstances, and with the right lender, is a good deal for both parties. For example, many consumers replaced the 10% to 11% purchase money mortgages written in the 1980s with 7% to 8% mortgages when interest rates dipped to surprising lows in the early 1990s.

Consumer Credit Regulation: 5.9.2 Refinancing, Consolidation, and Flipping Defined

At the outset, it may be helpful to define some of the terms used to describe different kinds of credit renewals. While “refinancing” is seldom statutorily defined, it means to “finance something new,” usually after a renegotiation of credit terms.612 On paper, a “refinancing” is a new loan, generally between an existing creditor and debtor, the proceeds of which are used to pay off the preexisting debt.

Consumer Credit Regulation: 5.9.3 The Elements of the Price Escalator

In assessing a series of refinancings, it is useful to keep both a micro and macro viewpoint. Illegal overcharges can occur even if the transaction as a whole does not breach standards of ethical dealing. Conversely, the creditor’s dealings may well violate community standards even if no specific illegal overcharge was imposed. This subsection discusses the charges to evaluate for scrutiny in a series of refinancings. But do so keeping in mind the true value the consumer received out of the transactions.