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Truth in Lending: 2.7.6 Public Utility Credit

Public utilities have a limited exemption from the application of TILA. An extension of credit for public utility services (e.g., gas, water, or electricity)447 is not covered by TILA if the charges for service or delayed payment or any discounts for prompt payment are filed with or regulated by any governmental unit.448 Because public utilities traditionally have been heavily regulated by a state public utility commission, the exemption will usually apply.

Truth in Lending: 2.7.8 Home Fuel Budget Plans

Under a typical home fuel budget plan, the fuel dealer estimates the total cost of fuel for the season, bills the customer for an average monthly payment, and makes an adjustment in the final payment for any difference between the estimated cost of fuel and the actual cost of fuel. The dealer delivers the fuel as needed and the customer may withdraw from the plan at any time.

Truth in Lending: 2.7.9.2 Layaway Plans

The official interpretations state that layaway plans are not credit unless the consumer is contractually obligated to continue making payments.465 This is true even if amounts paid towards the cash price of the merchandise are not refunded.466 However, if the consumer is contractually obligated (under applicable law) to continue making payments, then the layaway plan is not excluded from the definition of credit.

Truth in Lending: 2.7.9.3.1 Exclusion history

Neither the original Act nor its accompanying Regulation Z contained an exemption from TILA or an exclusion from any of the definitional prerequisites for tax liens, tax assessments, and court judgments.467 The Federal Reserve Board (FRB) staff issued two letters in 1969 that addressed questions related to the payment of taxes and the scope of the definition of “credit” for TILA purposes. The first discussed whether the payment of delinquent taxes in monthly installments bearing interest was credit.

Truth in Lending: 2.7.9.3.2 Transfers of tax liens and tax assessments

A question not directly addressed in the official interpretations is whether a sale, transfer, or assignment of an involuntary tax obligation accompanied by the right to enforce the tax lien to a third party that collects on the obligation and allows repayment through installments is covered by the exclusion.

Truth in Lending: 2.7.9.3.3.1 Introduction

Property Assessed Clean Energy (PACE) programs are approved by local authorities under state legislation. These programs provide a financing option for energy efficiency improvements to residential and commercial properties that serves as an alternative to traditional loan structures.490 PACE allows a property owner to finance specific improvements by voluntarily contracting to allow the addition of an assessment to the property’s tax bill secured by a lien against the property.

Truth in Lending: 2.7.9.3.3.2 Example: HERO—a California PACE program

The Home Energy Renovation Opportunity (HERO) program in California was the most widely adopted residential PACE program in the United States. It was offered in forty-eight counties in California.511 The HERO program ceased operation when its program administrator, Renovate America filed bankruptcy.512 The following discussion remains relevant as many of the PACE programs in California have similar guidelines and transactional documents as the HERO program.

Truth in Lending: 2.7.9.3.3.3 Relevant contractual provisions

A HERO transaction involves several documents.522 A review of these documents and the program handbook reveal the following characteristics of HERO transactions. These documents have been revised over time.523 The discussion below notes relevant differences between two versions of the handbook and of the transaction papers.

Truth in Lending: 2.7.9.5.1 Insurance premium payment plans

Insurance premium installment payment plans are exempt if each installment represents the payment for insurance coverage for a certain future period, unless the consumer is contractually obligated to continue making payments.586 This exclusion makes some sense, because such a payment plan is really a “pay-as-you-go” arrangement rather than an extension of credit. While exempt from TILA, insurance premium installment payment plans may be regulated under state law.587

Truth in Lending: 2.7.9.5.2 Insurance premium financing contracts

Insurance premium financing contracts are covered by TILA. In these transactions, a finance company pays the insurance premium directly to the insurer, and the consumer repays the money to the finance company in installments.588 If the consumer fails to pay the finance company, it has the authority to ask the insurer to cancel the insurance.

Truth in Lending: 2.7.9.8 Borrowing Against a Pension Account

Borrowing against a pension account is exempted, if there is no independent obligation to pay, i.e., if the creditor can only collect from the pension account and not directly from the borrower, if the borrower defaults.604 This exemption may be significant, as some consumers borrow against retirement accounts for other consumer purposes, such as financing home purchases or college tuition.

Truth in Lending: 2.8.1 Introduction

Substance rather than form or labels dictates whether a transaction is subject to TILA.627 Many common transactions involving low-income consumers present the possibility of disguised credit subject to TILA.628

Truth in Lending: 2.8.3.1 Liability of the Buyer/Lender

Sale-and-repurchase or sale-and-leaseback transactions are often thinly disguised loans. They may involve personal property,643 but are particularly insidious where real property is at issue, as the creditor may try to deprive the homeowner of rescission rights as well as the TILA disclosures.644 Foreclosure rescue scams often employ sale-and-repurchase or sale-and-leaseback agreements.645

Truth in Lending: 2.8.3.3 Liability of Third-Party Lenders

In many sale-and-leaseback or sale-and-repurchase schemes, the buyer/lender takes out another mortgage on the property from a bank or other mortgage lender. Sometimes the payments on this mortgage are made directly by the original homeowner, even though the mortgage is not in his or her name.

Truth in Lending: 2.8.4 Rent to Own (RTO)

Rent-to-own (RTO) transactions are the method by which (unfortunately) a significant number of low-income consumers purchase consumer goods such as appliances. Purchasing items via RTO usually boosts the cost of the acquisition tremendously.661 The effective APR on RTO contracts is most likely to be a triple-digit number.

Truth in Lending: 2.8.6 Payday Loans, Check Advancement Loans

“Payday” or “check advancement” loans are extremely high-interest, short-term loans. Typically, the consumer gives the payday loan outlet a post-dated check (dated for the consumer’s next payday) and receives an amount of cash that is less than the face value of the check.

Truth in Lending: 2.8.7 Refund Anticipation Loans

Tax refund schemes are another means of disguising an extension of credit.705 Most tax refund lenders acknowledge that their transactions are loans and that TILA disclosures must be made,706 but a few fringe operators attempt to cast their transactions in a format that will enable them to avoid complying with TILA and other credit legislation.