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Consumer Credit Regulation: 1.4.3.1 Introduction

Proponents of deregulation assert that regulation deprives needy borrowers of credit. This assumption, too, appears faulty. Dire predictions that over-regulation will deprive consumers of access to credit are not new. Virtually every existing consumer credit protection, when enacted, was criticized as limiting the supply of credit.126 These predictions almost invariably lack credible empirical support and fail to materialize once the legislation is adopted.127

Consumer Credit Regulation: 1.4.3.2.1 General

Creditors often argue that interest rate caps limit consumers’ access to credit because higher risk consumers can only obtain credit at rates above the cap. The reality though is that many borrowers paying high interest rates in fact qualify for lower rate credit. It is a myth that high credit pricing is closely related to a consumer’s high credit risk. More often than not, limiting the cost of credit means that the consumer will obtain credit elsewhere at a lower cost.

Consumer Credit Regulation: 1.4.3.2.4 High interest rates cause high default rates

A high risk of default is frequently cited as the reason for high rates. Yet borrowers who could successfully repay fairly priced credit may default simply because high interest rates and charges make the credit unaffordable. Low-income consumers may be particularly unable to withstand the effect of increased pricing, and yet low-income consumers are particularly likely to be subjected to increased pricing.144 Thus usury ceilings can help to reduce credit losses.

Consumer Credit Regulation: 1.5.1 Distinctions Between Depository and Non-Depository Creditors

The most basic division between types of creditors is the distinction between depository lenders, such as banks and savings and loan associations, which accept deposits, usually interest-bearing, and non-depository creditors, such as finance companies, which do not accept demand deposits from the public. Both depository and non-depository creditors act as intermediaries in the sense that they obtain funds from others (depositors and investors) and lend the funds at a profit to those who want money.

Consumer Credit Regulation: 1.5.2 Banks

Commercial banks, by far the oldest form of depository institutions, significantly predate the founding of the United States. For example, the Bank of England, itself preceded by major Italian and Dutch international banking enterprises, was founded in 1694.

Consumer Credit Regulation: 1.5.4 Credit Unions

The third major type of depository creditor is the credit union. Credit unions are generally nonprofit cooperatives with membership open to a limited group of people who have some common bond. For example, employees of a single employer, members of a union, or residents of a specific region might be eligible to join a credit union organized for one of these groups. Depositors in a credit union are technically shareholders, and the funds deposited in the credit union are used to provide credit to the credit union’s members.

Consumer Credit Regulation: 1.5.5 Finance Companies and Other Licensed Lenders

Licensed lenders are corporations or individuals who have received a state license to issue consumer credit, frequently at high interest rates, under one or more of the numerous state special usury statutes. For example, small loan laws, industrial bank laws, and pawnbroker statutes generally require that a creditor receive a state license and comply with state regulations in order to lend at the generous rates that these statutes usually authorize.

Consumer Credit Regulation: 1.5.6 Retail Sellers

Another major class of non-depository creditor consists of retailers of consumer durable goods. Many consumers cannot afford to purchase big-ticket goods such as automobiles, furniture, refrigerators, and other appliances in cash. Retailers offer credit plans to boost sales and sometimes as an independent profit center.

Consumer Credit Regulation: 1.5.7 Convenience Creditors

Convenience creditors, a third category of non-depository creditors, are sellers who forbear the collection of existing debts in return for installment payments with interest. Such creditors include doctors, lawyers, hospitals, utilities, oil companies, farm supply companies, and other businesses that have no formal charge account plan but are willing to finance debts either to increase their volume of business or in order to avoid the collection process as long as their customers are making payments.

Consumer Credit Regulation: 1.6.1 Loans vs. Credit Sales

The distinction between loans and credit sales has a long history and is embedded in most states’ laws even though it has little theoretical basis.194 Many courts, often using the fiction of the time-price doctrine, have interpreted general usury statutes to regulate only loans or forbearances of debt and not sales of goods on credit.195 Consequently, consumer credit sales were largely unregulated by state legislatures, and were governed only by regular contract law.

Consumer Credit Regulation: 1.6.2 Open-End vs. Closed-End Credit

The consumer credit laws of most states distinguish closed-end or installment credit from open-end or revolving credit.200 Generally, closed-end credit statutes address a single extension of credit between a creditor and a debtor that the debtor agrees to pay off in a fixed number of periodic installments of a specified amount. The credit sale of an automobile is a good example of such a transaction because any one sale will almost invariably represent the entire debt outstanding between the two parties.

Consumer Credit Regulation: 1.6.3 Security Taken in Credit Transactions

The law commonly distinguishes between secured and unsecured credit and among secured credit by the type of collateral. Collateral may be either the debtor’s real or personal property. The security interest, given by contract, grants the creditor the right to seize the collateral to satisfy the remaining debt if the debtor defaults. For example, credit sales contracts usually give the seller and its assignees a security interest in the goods purchased.

Credit Discrimination: 1.1.1 Credit Discrimination Is a Widespread Problem

Credit discrimination permeates American society. Protected class members face difficulties obtaining market-rate first and second mortgages. Many banks do not maintain branches in communities of color. The disparity in mortgage approval rates between White applicants and applicants of color, as well as disparities in the terms on which mortgage credit is offered, are evidence that discrimination in the marketplace persists.1

Credit Discrimination: 1.1.2 Laws Against Credit Discrimination Provide Far-Reaching Remedies

A series of federal and state statutes provides significant remedies to victims of credit discrimination. Violations of the Equal Credit Opportunity Act (ECOA), the Fair Housing Act (FHA), and 42 U.S.C. §§ 1981 and 1982 (hereinafter referred to as the federal Civil Rights Acts) can result not only in recovery of out-of-pocket damages but in recovery for such intangible injuries as humiliation, deprivation of rights, and damage to credit rating. These statutes also provide for punitive damages, equitable relief, and attorney fees.

Credit Discrimination: 1.1.3 Growth in the Utilization of Credit Discrimination Laws

Despite the far-reaching remedies available, credit discrimination laws were not utilized significantly until the 1990s and may not yet be fully utilized. Throughout the 1980s only a small number of Equal Credit Opportunity Act (ECOA) cases were brought each year. The Fair Housing Act (FHA), the federal Civil Rights Acts, and state anti-discrimination statutes were rarely applied to credit discrimination.

Credit Discrimination: 1.1.4 Effective Uses of Credit Discrimination Statutes

Listed below are some practices that may be attacked through the use of credit discrimination statutes. These statutes may be used to attack common discriminatory practices and to challenge many different types of creditor practices. They may be used by individuals, groups, or in class actions. Some of the statutes also include procedural requirements that apply even when discrimination cannot be established.

Credit Discrimination: 1.2.3 Overview of the Chapters

The first three chapters of this book cover preliminary issues in credit discrimination cases. This chapter introduces the reader to the issue of credit discrimination and to the various statutes that can be used to address it. It contains an overview and history of the ECOA and the FHA, as well as descriptions of other statutes that are useful in challenging credit discrimination.