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Consumer Credit Regulation: 8.7.1 Deceptive Marketing

Some credit card lenders have engaged in questionable marketing practices when soliciting consumers. “Bait and switch” tactics had been common before the Credit CARD Act. For example, some credit card lenders marketed “no annual fee” credit cards, then imposed an annual fee six months later using a change-in-terms notice.492 They heavily advertised low “fixed” rates, but subsequently raised rates through change-in-terms notices and penalty pricing.493

Consumer Credit Regulation: 8.7.2.1 Background

During the past few decades, there has been a massive increase in credit card debt, as described in § 8.1.2.3, supra. The credit card industry bears a significant portion of the responsibility for this phenomenon. Credit card lenders aggressively solicited consumers at the beginning of this century.

Consumer Credit Regulation: 8.12.1 Introduction

Even with the scope of federal preemption, there is still room to bring state law claims against credit card lenders. If an abusive practice is outside of the scope of the Credit CARD Act or violates a provision without a private remedy, practitioners may want to consider claims for breach of contract or the duty of good faith and fair dealing, or under state laws prohibiting unfair or deceptive acts or practices (UDAP statutes).

Consumer Credit Regulation: 8.12.2 Breach of Contract

A breach-of-contract claim is probably one of the first theories that comes to mind when analyzing an abusive credit card practice for legal violations.729 Obtaining and understanding the underlying contract, however, may not be as easy as it sounds—and not just because the contractual language is obscure. Many consumers do not keep their credit card contracts.

Consumer Credit Regulation: 8.12.3 State UDAP Statutes

Consumers may have claims against credit card lenders under their state’s unfair and deceptive acts and practices (UDAP) statute.738 Private class actions have asserted UDAP claims against credit card lenders for deceptive and unfair practices.739

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.