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Consumer Credit Regulation: 2.2.7.3.2 General standards

The Dodd-Frank Act’s definition of “unfair” incorporates the definition found in the Federal Trade Commission (FTC) Act:

(A) the act or practice causes, or is likely to cause, substantial injury to consumers, which is not reasonably avoidable by consumers; and

(B) such substantial injury is not outweighed by countervailing benefits to consumers or to competition.239

Consumer Credit Regulation: 2.2.7.3.3 Covered creditors

The CFPB’s rulemaking authority extends to virtually everyone in the financial services area, including banks, credit unions, mortgage lenders, credit bureaus, auto finance companies, debt collectors, student lenders, and payday lenders.

Consumer Credit Regulation: 2.2.7.3.4 UDAAP enforcement

While the CFPB, federal banking regulators, state attorneys general, and state banking regulators share enforcement authority for the UDAAP standard and the CFPB’s UDAAP rules,265 the Dodd-Frank Act does not provide a private cause of action for violations of the CFPB’s UDAAP standard or rules.266 But state UDAP statutes or other state causes of action may be available to challenge practices that violate CFPB rules or the CFPB UDAAP standard.267 Th

Consumer Credit Regulation: 2.3.1 Introduction

Until the 1980s, state law was the primary source of regulation of non-mortgage consumer credit. The wave of deregulation that began in the 1980s, coupled with the expansion of federal preemption, significantly reduced the impact of state law. Nonetheless, state law is still the primary source of regulation of non-mortgage credit that is not extended by a federally related lender. State law is particularly important in its application to motor vehicle finance and predatory fringe lenders.286

Consumer Credit Regulation: 2.3.2 General and Criminal Usury Laws

English usury statutes were adopted by the American colonies prior to independence.292 Variations on these statutes remain in effect to this day in many states, and are commonly referred to as “general” usury laws because they purport to set a ceiling for all loans of money in a jurisdiction, not just for particular types of lenders or credit transactions. In a few states, the state constitution contains a general usury cap.

Consumer Credit Regulation: 2.3.3 Small Loan Laws and Their Progeny

Small loan laws were first adopted in the early twentieth century in response to the widespread problem of loan sharking. They were largely the product of the research and promotional efforts of the Russell Sage Foundation. Between 1916 and 1942, the Russell Sage Foundation published seven drafts of a Uniform Small Loan Law. This uniform law was widely adopted by the states, and language from the uniform statute appears in numerous consumer finance statutes today.296

Consumer Credit Regulation: 2.3.5 Installment Loan Laws

Installment loan laws are a diverse collection of statutes that authorize banks, and frequently other lenders, to issue standard installment loans at interest rates higher than those authorized by general usury statutes.314 Installment loan laws have usually been constructed to allow banks to make loans similar to those made by small loan lenders, industrial banks, credit unions, or other lenders with statutory authority to lend at rates above the general usury ceiling.

Consumer Credit Regulation: 2.3.6 Retail Installment Sales Acts

Retail installment sales acts (RISAs) were adopted by most states in the 1940s and 1950s.316 These statutes regulate traditional fixed-term credit sales of consumer goods, which, prior to the adoption of these statutes, had generally been free from interest ceilings due to the time-price doctrine.317 In general, these statutes only cover financing extended by sellers and do not cover loans made directly by third-party lenders.318

Consumer Credit Regulation: 2.3.7 Insurance Premium Finance Statutes

The credit sale of insurance is regulated by insurance premium financing statutes in many jurisdictions.324 Most premium financing is initiated by insurance agents, who assign the contracts to specialized finance companies. The financing of automobile insurance premiums is particularly common when the consumer cannot afford to pay the entire annual premium in one installment.

Consumer Credit Regulation: 2.3.8 Open-End Credit Laws

Open-end or “revolving” credit is regulated separately from fixed-term credit in most states. Within the open-end category, open-end loan accounts, typically offered by banks, may fall under a different statute from open-end credit sales accounts, such as the charge accounts available at many department stores.327 Most open-end accounts, whether constituting loans or credit sales, are associated with plastic “credit cards.”328

Consumer Credit Regulation: 2.3.9 Pawnbroker Statutes

Pawnbroking is a form of secured lending that usually involves a small principal, a short term, and a high interest rate.333 It differs from small loan lending in that the pawnbroker takes physical possession of the security pledged by the borrower at the time the loan is made.334 When the loan is repaid, usually in a lump sum, but occasionally in installments, the collateral is returned to the borrower.

Consumer Credit Regulation: 2.3.10 Comprehensive Consumer Credit Codes

Several states have rewritten and consolidated all or parts of their various special usury statutes in the form of consumer credit codes. Among these jurisdictions are Alabama, Colorado, Idaho, Iowa, Indiana, Kansas, Maine, Oklahoma, South Carolina, Texas, Utah, West Virginia, Wisconsin, and Wyoming. Some of these states have adopted statutes that are unique to the adopting state. However, most of these jurisdictions have enacted comprehensive consumer codes adapted from some form of the Uniform Consumer Credit Code (UCCC).

Consumer Credit Regulation: 2.3.11.1 Overview

In recent years, many state legislatures have adopted laws aimed at specific types of fringe lending: payday lending, auto title pawns, and rent-to-own transactions. These statutes have typically been promoted by fringe lenders and place few limits on these high-rate transactions. However, some have been vehicles for reform, and have been amended over the years to rein in at least some of the abusive aspects of these transactions.

Consumer Credit Regulation: 2.3.11.2 Payday Loan Laws

A number of states have laws addressing payday lending. Most of these laws legalize triple-digit interest rates for these loans, and impose few meaningful restrictions. In response to abuses, however, some state legislatures have tightened their payday loan laws, for example, by reducing the allowable interest rate.

Payday lenders typically respond to a tighter cap by seeking ways to restructure their loans to avoid it. Failing that, they may leave the state or go underground, maintaining a concealed presence in the state while purporting to be operating from another state.

Consumer Credit Regulation: 2.3.11.3 Auto Title Loan Laws

About twenty-one states have special auto title loan laws. Most of these statutes legalize high-rate lending, secured by a borrower’s vehicle, and were enacted in response to industry pressure, but a few of them have effective limits on auto title lending.

Consumer Credit Regulation: 2.3.11.4 Rent-to-Own Laws

All but a few states have laws directed at rent-to-own transactions. These laws typically carve out rent-to-own transactions from state RISAs. As a result, the RISA interest rate cap does not apply to rent-to-own transactions, and a consumer’s interest in the property is not treated as a security interest that is entitled to certain protections under bankruptcy law and Article 9 of the Uniform Commercial Code. “Lease-to-own” transactions, which oblige the consumer to make payments for more than four months, are also entering the market and are governed by a different suite of laws.

Consumer Credit Regulation: 2.3.13 “Sandbox” Laws

In 2018 and 2019, four states enacted “sandbox” laws.388 These laws allow financial services providers to apply for a waiver of state financial services statutes, including licensure requirements and in some cases substantive protections, in order to offer an “innovative” product or service for a trial period on an experimental basis. While enacted in the name of experimentation and innovation, these laws typically require little in the way of ongoing data reporting by the provider or oversight by the state.

Consumer Credit Regulation: 2.4.1.1 Introduction

Overreaching consumer credit transactions can often be challenged under state unfair and deceptive acts and practices (UDAP) statutes, which are the subject of a separate treatise in this series.391 UDAP statutes have many advantages for consumers, as they often include broad, flexible prohibitions and offer strong remedies such as actual damages, treble damages, statutory damages, and attorney fees.

Consumer Credit Regulation: 2.4.1.2 Does the State UDAP Statute Cover Credit Transactions and Creditors?

An initial question that must be addressed in any UDAP challenge is whether the statute covers credit transactions and creditors. There are a number of different ways in which this issue presents itself.

The statute may explicitly exclude certain types of financial institutions, such as banks. In addition, some statutes exempt other actors who may be involved in deceptive loan schemes, such as real estate agents, attorneys, and insurers.

Consumer Credit Regulation: 2.4.1.3.1 Overview

The typical state UDAP statute prohibits unfair (or unconscionable) and deceptive acts and practices in broad terms, and includes a non-exhaustive list of specific prohibitions. Some, however, include a broad prohibition only of deceptive, not unfair acts, and a few prohibit only a closed list of specific practices, without any broad, general prohibitions that are enforceable by consumers.

Consumer Credit Regulation: 2.4.1.3.2 Overreaching, unfairness

The broad prohibitions against unfairness or unconscionability found in many UDAP statutes are particularly well-suited to challenging overreaching credit terms.398 Most state UDAP statutes prohibit unfairness, a broad and flexible concept that takes the extent of consumer injury into account.399 Excessive credit charges and fees can be challenged as unfair under these statutes.400 Lending without regard to the consumer’s ability to repay the oblig

Consumer Credit Regulation: 2.4.1.3.3 Loan padding and similar manipulations

An allegation of “loan padding”—structuring a loan to increase its size without advancing additional funds to borrowers, thereby increasing lender profit or enabling the creditor to reach more collateral—states a cause of action under a state UDAP statute.410 Similarly, packing a loan with worthless products states a UDAP claim.411 Falsely representing that credit insurance is required is a UDAP violation.412 A lender may commit an unfair and decep

Consumer Credit Regulation: 2.4.1.3.4 Violation of state or federal credit statute as UDAP violation

Although there are some contrary opinions, many courts have held that violation of the federal Truth in Lending Act is a UDAP violation.416 A UDAP claim can also be based on violation of a state usury statute417 or on the imposition of a fee or a credit term that is prohibited by federal law.418 For example, charging a prepayment penalty in violation of state law419 or violating a state credit statute