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Consumer Credit Regulation: 8.12.4 Other Claims

In addition to breach of contract and UDAP claims, there are potential claims available under a number of other statutes and common law theories, such as the Racketeer Influenced and Corrupt Organizations Act,762 unconscionability,763 breach of the duty of good faith and fair dealing,764 breach of fiduciary duty,765 unjust enrichment,766 and common law f

Consumer Credit Regulation: 8.12.5.1 General

The problems involved in analyzing an abusive credit card practice for legal violations is always complicated by the complex scheme of federal preemption of state law governing credit, because most credit card lenders are financial institutions who can avail themselves of the benefits of preemption.770 Thus, it is rarely the substantive law of the state where the consumer lives that is applicable.771 Practitioners cannot assume that a creditor has disclosed an illegal term simply by checking the

Consumer Credit Regulation: 8.12.5.2 TILA Preemption

In contrast, the Truth in Lending Act (including the Credit CARD Act provisions) has a narrower scope of preemption.775 Other than state laws relating to disclosures in credit applications, solicitations, or renewal notices, TILA does not preempt state laws governing credit cards (or open-end credit in general) as long as these laws are not inconsistent with TILA requirements.

Consumer Credit Regulation: 8.9.1 General

The federal Military Lending Act (MLA) offers servicemembers and their dependents important protections from abusive credit card practices. Section 2.2.5, supra, examines the MLA in detail. This section focuses on the MLA’s application to credit cards.

Consumer Credit Regulation: 8.9.3 Military Annual Percentage Rate Cap of 36%

The MLA limits the military annual percentage rate (MAPR) that a creditor can charge to 36%.606 While 36% is greater than most credit card interest rates, the MLA includes in its cap a number of fees, so that certain current interest rates on credit cards may exceed this cap after the fees are factored in. Where open-end credit fees will lead to an MAPR over 36%, the creditor has the option of staying within the regulation’s cap by waiving certain fees and charges.607

Consumer Credit Regulation: 8.9.4 MLA Limitations on Arbitration As Applied to Credit Cards

The MLA prohibits creditors from extending consumer credit where the creditor requires the consumer to submit to arbitration or imposes other onerous legal notice provisions in the case of a dispute.622 Furthermore, MLA regulations prohibit waiver of a covered consumer’s right to legal recourse under any applicable provision of federal or state law, including the Servicemembers Civil Relief Act.623

Consumer Credit Regulation: 8.10.2 Problems Created by Unilateral Changes in Terms

There are at least two problems with these notices. First, these expansive change-in-terms provisions deprive consumers of any “benefit of bargain.” They make a mockery of contract law because the terms of the “bargain” are illusory. They also undermine the Truth in Lending Act’s purpose of ensuring effective disclosure. One court has described change-in-terms provisions as “an Orwellian nightmare, trapped in agreements that can be amended unilaterally in ways [a consumer] never envisioned.”639

Consumer Credit Regulation: 8.10.3.1 Change-in-Terms Notices

The Credit CARD Act specifically requires credit card lenders to provide forty-five days’ notice for any increases in the APR649 and any significant changes in terms for credit card accounts.650 Lenders are required to disclose a summary of the changes using a table format similar to credit card application/solicitation table and account-opening table.651

Consumer Credit Regulation: 8.10.3.2 Limited Right to Reject Changes

The Credit CARD Act requires lenders to provide, in any notice of a change in account terms or an increase in APR, a brief statement of the consumer’s right to cancel the account before the changes take effect.660 Regulation Z interprets this Credit CARD Act provision to substantively provide consumers with a right to reject changes to a credit card account.661

Consumer Credit Regulation: 8.13 Assisting Consumers Overwhelmed by Credit Card Debt

In many cases, consumers who come forward with problems concerning their credit card accounts are financially overwhelmed. Identifying state law or Truth in Lending Act violations may only partially resolve the consumers’ needs. Consumers may be able to obtain relief by the use of strategies such as debt prioritization, bankruptcy, and aggressive foreclosure defense. At the same time, practitioners should also consider educating consumers about the careful use of available credit to avoid new problems in the future.

Consumer Credit Regulation: 1.3.1 Early Attitudes Toward Interest

The lending of money or commodities such as grain in return for interest has been documented as early as 3000 B.C.17 From its inception, the practice seems to have caused controversy in many societies. In part, the charging of interest was condemned on moral and religious grounds; it was considered ungodly and uncharitable for one man to profit from the need of another. In hard times, a borrower could lose all his property and be sold into slavery to pay his debts.

Consumer Credit Regulation: 1.3.2 General Usury Statutes in the United States

English usury statutes were adopted by the American colonies prior to independence.27 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. With very few exceptions, general usury laws were the only statutes regulating credit costs in the United States prior to the twentieth century.

Consumer Credit Regulation: 1.3.4 The Treatment of Sales

Under English common law, usury restrictions did not apply to the price that a merchant could charge for goods. A seller could charge one price for the goods if the buyer paid immediately, and another, higher price if the buyer chose to pay over some agreed time. The difference between the “time price” and the “cash price” was not counted against the usury ceiling. This so-called “time-price doctrine” was adopted by American courts interpreting American general usury laws.

Consumer Credit Regulation: 1.3.5 Deregulation of Usury Law

The late 1970s and early 1980s were watershed years for usury law. As a result of anti-inflation federal monetary policy, short-term commercial market interest rates rose above twenty percent, far above general usury ceilings and many special usury law ceilings. Because lenders themselves borrow the money they lend, lenders’ profits were squeezed as their interest expenses rose.

Consumer Credit Regulation: 1.3.6 Steps Toward Reregulation to Address the Resurgence of Abusive Lending

By the mid-1990s, the growth of abusive home equity lending prompted Congress to take a small step toward reregulation. The Home Ownership and Equity Protection Act of 1994 forbade a few particularly abusive terms and practices in a small subset of very high-cost home equity loans.63 Irresponsible mortgage lending continued to grow, however, ultimately leading to the 2007 market collapse and the failure or near-failure of most of the nation’s largest lenders, including many banks and savings associations.

Consumer Credit Regulation: 1.4.1.1 Introduction

As indicated by the history of credit regulation, discussed in § 1.3, supra, there is a constant tension between those favoring efforts to prevent credit abuses and those who favor the unfettered working of a free market. What is clear, though, is that an unfettered consumer credit marketplace leads to massive fraud, abuse, overcharges, and oppressive credit terms.

Consumer Credit Regulation: 1.4.1.3 Borrowers’ Inability to Understand Credit Terms

This complexity of a credit transaction exacerbates the inability of many Americans to understand credit terms. Roughly 40% of the U.S. population lacks the literacy to fill out job applications or a bank deposit slip correctly.103 The overwhelming majority of the U.S. population does not understand how to calculate interest, given the amount borrowed on a loan; the number and amount of payments.

Federal Deception Law: 1.1.2 The Treatise’s Subject Matter

Federal Deception Law, with some exceptions, focuses on federal (and parallel state) requirements and remedies that apply broadly to many different forms of marketplace abuse. Examples are the federal and state RICO statutes that apply to any form of consumer transaction and the federal False Claims Act that also provides strong remedies as long as the government is also victimized by a practice. The Telephone Consumer Protection Act applies to robocalls in a number of different contexts.

Federal Deception Law: 1.2 Relation to NCLC’s Unfair and Deceptive Acts and Practices

Federal Deception Law is a companion treatise to NCLC’s Unfair and Deceptive Acts and Practices. Unfair and Deceptive Acts and Practices focuses on practices that are prohibited by state UDAP statutes2 and on private and state attorney general UDAP litigation to challenge those practices. Federal Deception Law concentrates on federal and state statutes and regulations that also broadly regulate the marketplace.