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Consumer Credit Regulation: 5.8.7.1.3 The Truth in Lending Act’s rebate requirements for mortgage loans

For high-cost mortgage loans consummated after October 1, 1995, a rule adopted under the Home Ownership and Equity Protection Act of 1994 (HOEPA) prohibits the use of the Rule of 78s when a creditor calculates a rebate of unearned precomputed interest due to loan acceleration as a result of default.467 The rule requires a refund of interest but not other charges, such as points, that are considered finance charges.468

Consumer Credit Regulation: 3.11.1 Introduction

Once it is determined which state’s law applies to a transaction, the next step is to determine under that state law, which statute in that state is applicable, because most states have a number of different statutes regulating credit. In making that determination, the substance of a transaction controls, not its form.942 A creditor cannot evade usury or other credit regulation by creating a fiction as to the nature of a transaction—the transaction’s true nature controls:

Consumer Credit Regulation: 3.11.2 Opting In

Even though a creditor cannot evade credit laws by characterizing a transaction as something other than an extension of credit, it may be stuck with a characterization of the transaction that benefits the consumer. A creditor may “opt in,” or provide by contract that a specific regulatory statute will apply to the transaction, even though it would, in absence of that contractual provision, fall outside the scope of that statute.

Consumer Credit Regulation: 3.11.3.1 General

Usury laws frequently distinguish business from consumer credit, allowing higher interest rates or completely eliminating usury ceilings for business transactions. The distinction may be accomplished by limiting the scope of a usury law to “consumer” credit. For example, the Uniform Consumer Credit Code (UCCC) applies only to credit extended “primarily for a personal, family, household, or agricultural purpose.”952

Consumer Credit Regulation: 3.11.3.2 Criteria for Business vs. Personal Purpose

Typically, loans used for direct investment or to finance a profit-making enterprise are business loans.963 The absence of any profit-making enterprise suggests personal purposes,964 but even if a borrower is engaged in a business, a loan has a non-business purpose if it is used primarily for medical expenses, household expenses, and other personal expenses.965

Consumer Credit Regulation: 3.11.3.4 Intermediaries

It is unclear whether borrowers who act as intermediaries for the true borrowers (typically for relatives who could not obtain loans) have business purposes just because the true borrowers do.981 However, a debtor who signs a genuine business purpose loan as a surety is bound by the business characterization of the transaction just as the principal is.982

Consumer Credit Regulation: 3.11.3.5 Refinancing

Whether loans refinancing preexisting business debts continue to be treated as business debts may depend upon a combination of the borrower’s motivation in seeking the refinancing and what the lender knows of the borrower’s purpose.

Consumer Credit Regulation: 3.11.4 Open-End vs. Closed-End Credit

Open-end credit is extended under a plan in which repeated transactions are contemplated. Credit cards and lines of credit are common examples of open-end credit. Closed-end credit examples include car loans and other installment sales. Where regulation of open-end credit is more favorable for a lender than closed-end, lenders may label as open-end what is really closed-end credit. This is called “spurious open-end credit.”

Consumer Credit Regulation: 3.11.5 Loans vs. Credit Sales; Body-Dragging

A seller of goods or services offering financing with a sale is governed in most states by a retail installment sales act (RISA), even if the credit seller immediately assigns the obligation to a lender.1003 Where a consumer independently arranges a loan from a bank or other lender, even with the express purpose of purchasing goods or services, the transaction is typically governed by a separate statute applicable to direct consumer loans.1004

Consumer Credit Regulation: 3.11.7.1 General

Credit statutes often apply to specific types of creditors, such as finance companies operating under small loan acts, pawnbrokers, insurance premium finance companies, home improvement sellers, and finance or motor vehicle sales finance companies.

Consumer Credit Regulation: 3.11.7.3 Creditor’s Efforts to Evade Licensing Requirements

Creditors may seek to evade state credit requirements by arguing that they need not be licensed because they are making the type of loans prohibited for licensed lenders. That is, the creditor fails to obtain a license, makes loans of a type prohibited for licensed lenders, and argues that the license requirement does not apply because the creditor is making loans of a type prohibited for licensed lenders.

Consumer Credit Regulation: 3.11.8.1 Loan Splitting

A state’s usury law may have a higher ceiling for small loans than for loans above a specified dollar value. To take advantage of the higher ceiling, lenders may split a large loan into several small ones. This practice of “loan-splitting” may be specifically prohibited by the small loan law.1046

Consumer Credit Regulation: 3.11.8.2 Loan Packing; Lending More Than Requested

In some states, usury restrictions apply only if a loan’s principal is under a certain amount.1049 Under such circumstances, creditors want to increase the size of the loan instead of splitting it into smaller loans. For example, in California until January 1, 2020, a loan under $2,500 was restricted to interest rates under 28%,1050 but there were no restrictions on the interest rate for loans over $2,500.1051

Consumer Credit Regulation: 3.11.10 Criminal Usury Statutes

Some states, even when deregulating their civil usury statutes, retain their criminal usury ceilings.1069 Similarly, even if a civil usury statute exempts business loans1070 or does not apply to defaulted debt,1071 a criminal usury ceiling still may apply. Criminal usury statutes are typically found in the state criminal code.

Consumer Credit Regulation: 3.12.1 General

Legislative amendments may strengthen or weaken existing state usury statutes, and the question arises whether transactions taking place before that amendment are governed by the old or new statute. States can specify whether or not a statute is to be applied retroactively. The U.S.

Consumer Credit Regulation: 3.12.2 Variable or Floating Usury Ceilings Distinguished

A legislative amendment to a usury statute must be distinguished from a mere temporary change in the usury cap found in a floating or variable interest ceiling statute. In a variable or floating interest rate ceiling statute, the usury ceiling goes up or down in relation to a specified market rate, called the index. The index and the margin are set by statute, but the actual numerical ceiling will change without any change in statute.

Consumer Credit Regulation: 10.1.1 Installment Loans Defined

This chapter examines installment loans from non-bank lenders. These loans were a widespread form of subprime credit thirty or more years ago, but in recent years have been overshadowed by other forms of credit. As states and regulators clamp down on payday loans, however, high-rate lenders are beginning to migrate back into installment lending, offering new products with new types of abusive terms and features.

Consumer Credit Regulation: 10.1.2 The Non-Bank Lenders Addressed by This Chapter

This chapter analyzes state laws that allow installment lending by entities other than depository institutions such as banks. The chapter refers to these lenders generically as “non-bank lenders.” The typical state installment loan statute requires these non-bank lenders to obtain state licenses, at which point they are permitted to make loans on the terms and interest rates allowed by the installment loan law.

Consumer Credit Regulation: 10.1.3 The Disappearance and Resurgence of Installment Loans

Installment loans were a common form of consumer credit but have receded over the last few decades. In 1978, the U.S. Supreme Court held that banks issuing credit cards could generally ignore state interest rate caps.5 This decision led to a boom in credit card lending. Today, many consumers use credit cards for small-dollar credit,6 instead of taking out installment loans.