Consumer Credit Regulation: 11.8.3.4 Where Notice Improperly Omitted
If the notice is not in the contract, then the FTC Holder Rule does not directly create derivative liability for the assignee.
If the notice is not in the contract, then the FTC Holder Rule does not directly create derivative liability for the assignee.
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
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
Since liability under the FTC Holder Rule is capped at the amount paid by the consumer and cancellation of the remaining indebtedness, there are advantages to finding ways to hold the assignee liable more broadly for the dealer’s actions.
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.
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.
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.
The Truth in Lending Act (TILA)1 is a cornerstone of consumer credit legislation.
The explosive growth of consumer credit after World War II was marked by an almost exclusive reliance on installment credit7 and by a bewildering array of methods to calculate consumer installment interest.
N.B.: The following discussion of actuarial interest must be mastered in order to understand the rest of this section. This section should not be difficult to comprehend, and it is particularly important for credit math novices.
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.
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.
Creditors, particularly before the widespread use of computers, were troubled by the complexities of calculating simple or actuarial interest for installment transactions, as demonstrated by the discussion in § 5.3.1.2, supra.
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?
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.
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%.
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 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.
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
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
An important issue regarding the interpretation of caps is what happens when interest rates decline after the rate cap or the monthly maximum payment has been reached. Some credit contracts authorize the creditor to recapture or “carry over” any interest that it would have earned or collected but for the cap, by refusing to lower the borrower’s payments when market interest rates decline. The precise recapture mechanism will depend on the type of cap in the contract.
The preceding discussions of interest calculation methods focused on closed-end credit: a single advance of credit, repayable in fixed payments over a fixed term. Interest may be calculated at the outset because all three variables in our formula—principal (P), rate (R) and time (T)—are known at the outset.
In a traditional consumer loan, a borrower contracts to pay a fixed interest rate and/or a specified amount of interest. Assuming that the credit calculations are correctly made, and that all installments are paid on time,84 then the size of the borrower’s payments can be predicted with absolute certainty before credit is extended.