CONSUMER CREDIT
Short-term loans made to enable people to purchase goods or services primarily for personal, family, or household purposes.
Consumer credit transactions can be classified into several different classes.
Installment credit involves credit that is
repaid by the borrower in several periodic payments;
loans repaid in one lump sum are classified
as noninstallment credit. Installment credit
has expanded in popularity, with an increasing
number of consumers buying goods on credit in
order to spread repayment of the purchase price
and the interest owed on the principal borrowed
over an extended time.
Originator and Holder
The originator of credit is the person or
company who originally extended the credit,
while the holder is the individual or business
who obtained the debt at a discounted price in
order to collect payments at a subsequent time.
Auto dealers are credit originators at the time a
consumer purchases an auto on credit, but many
loans are subsequently assigned by them to
banks or sales finance companies, which become
credit holders.
Commercial banks buy many consumer
installment loans from car dealers and department
stores and also participate in all aspects of
consumer credit transactions both as originators
and holders. The portion of the consumer credit
market attributable to banks has greatly
increased due in large part to widespread use of
bank credit cards.
In addition, two types of finance companies
are active in the consumer credit industry. The
first type is the small loan company, which has
contact with consumers as originators and
makes loans to them directly. The other type is
the sales finance company, which does not deal
directly with consumers; it purchases and holds
consumer installment debts related to the sale of
durable goods on time. The distinction between
the two decreases in importance as consumer
finance companies diversify and engage in business
on both levels.
Vendor and Lender
The law might regard credit differently,
depending on whether it is offered by a vendor
(seller).When an appliance store gives credit to
customers who buy such items as washing
machines and refrigerators and pay for them
over a certain period of time, this action is
known as vendor credit. When a consumer borrows
funds from a finance company to pay for
appliances, this action is known as lender credit,
since the finance company lends but does not
sell.
Some states exempt vendor credit transactions
from the provisions of state USURY laws. A
vendor or a lender can charge the consumer
interest (a fee for the use over time of borrowed
money). In the past, usury statutes restricting the
legal interest rate have ordinarily been applied
only to lender credit. The difference in the treatment
of lender credit and vendor credit is based
upon the assumption made by law that vendors
are able to adjust their prices to allow for the
period during which they await payment. If, for
example, the vendor’s time price was excessive in
that it allowed for a high interest rate, then the
consumer could opt for payment of the cash
price. Courts believe that competitive pricing will
prevent vendors from charging too much interest
when they extend credit. It is the seller’s right
to determine how to reduce the time price to
encourage consumers to pay cash for goods.
Some courts have found since 1970, however,
that these principles have no application to
revolving charge accounts because department
stores do not charge consumers less for paying
for items in cash. There is one uniform purchase
price, regardless of whether the sale is a credit or
cash transaction. Both finance charges and tax
are computed on the basis of the cash price.
In cases where courts have indicated that
state usury laws must necessarily be applied in
the vendor credit extended through revolving
charge account customers, state legislatures have
enacted statutes to increase the legal rate of
interest that may be charged on such accounts.
Most consumer credit cannot exist within the
usury law limits; therefore, the pattern has been
to enact laws that permit special higher finance
rates for vendor credit to consumers.
Licensing Creditors
Banks, savings and loan associations, and
finance companies ordinarily must be licensed
under state or federal statute. Credit companies
that purchase retail installment debts from sellers
are also subject to governmental licensing
regulations.
When the licensing requirement is primarily
a revenue-raising device, potential licensees
often need only file the appropriate forms and
pay the required fee to obtain a license. However,
when the licensing provisions require the
applicant to be reputable and reliable, the public
is protected only if the licensing agency has the
energy and resources to investigate the applicant’s
qualifications.
Credit Reports
When a consumer makes an application for
credit, the creditor must decide whether he or
she is a good risk.Most creditors regularly order
a credit report on an applicant rather than
undertake a costly investigation on their own.
Files are retained by two types of credit agencies.
Credit Bureaus Credit bureaus publish
reports which are primarily used by merchants
who are attempting to decide whether to allow
consumers to purchase merchandise financed by
credit that will be repaid on time. Such reports
ordinarily disclose financial information, such
as the location and size of an individual’s bank
accounts, charge accounts, and other debts and
the person’s bill-paying habits, income, occupation,
marital status, and lawsuits.
Credit bureaus supply such information to a
group of subscribers who, in exchange, provide
them with information for their files. All the
information obtained is filed in case it is
requested by someone in the future. Nonsubscribers
can ordinarily obtain information
through the payment of a fee.
A majority of credit bureaus are members of
the Associated Credit Bureaus of America,
which regulates public information for them. It
keeps members apprised of financial transactions
that might cause people to be unable to
meet their obligations.
Credit Reporting Bureaus Credit reporting
bureaus formulate financial reports on individuals
for purposes not directly related to the
extension of credit. Such reports are used by
employers to evaluate job applicants, by insurance
companies to assess the risk in relation to a
prospective policy buyer, and by landlords to
avoid renting to tenants likely to cause damage
to the property or disturb other tenants. Bureaus
of this type compile data and provide it upon
request to interested parties.
These reports contain personal information
about the subjects and their families that is
obtained from interviews with neighbors, associates,
and co-workers. Information is kept for
possible future investigation requests.
Problems In the late 1960s, Congress investigated
abuses in the collection and dissemination
of information by credit bureaus and
determined that such bureaus compiled files on
more than 50 percent of the people in the
United States. These information files, however,
frequently contain inaccurate, misleading, or
irrelevant facts and were not kept confidential.
The most frequent error was to confuse two
individuals having the same name or similar
names. The possibility of committing this error
increased as the area covered by the bureau
became larger.
Supervision Many states have enacted
statutes to regulate the business practices of
credit bureaus. However, the need for national
uniformity led to the enactment of federal laws
dealing with consumer credit information.
The FAIR CREDIT REPORTING ACT, which is
title VI of the CONSUMER CREDIT PROTECTION
ACT (15 U.S.C.A. § 1601 et seq.), was enacted in
1970. This congressional enactment affects and
regulates businesses that regularly obtain consumer
credit information for other businesses,
either for payment or in a cooperative exchange.
The law covers any report by an agency if it
is related to a consumer’s creditworthiness,
credit standing or capacity, character, general
reputation, personal characteristics, or mode of
living. Further, the law applies to any such report
when employed or expected to be used for evaluating
a consumer for one of four purposes:
credit or insurance for personal, family, or
household use; employment; licenses to operate
particular businesses or practice a profession;
and any other legitimate business need.
The requirements of the Fair Credit Reporting
Act affect (1) the credit bureau; (2) the businesses
that use the credit reports compiled by
credit bureaus; (3) the rights of consumers who
are the subjects of such reports; and (4) how the
consumer can enforce his or her rights when
errors are discovered in such reports.
Credit bureaus are required to have standard
procedures for determining and updating the
accuracy of the information in their files. There
is a seven-year limit on the information on file,
except where the file discloses that the party was
bankrupt within a period of ten years. Data
relating to an individual’s character, reputation,
or lifestyle that are obtained through personal
interviews with neighbors and friends cannot
remain in a file unless it is verified every three
months.
While the Fair Credit Reporting Act does
not prohibit the collection and compilation of
information unrelated to finance—such as
appearance, political tenets, and sexual orientation—
such information must be accurate and
not obsolete. The law does, however, restrict credit bureaus to furnishing reports for reasons
of credit, insurance, employment, obtaining a
government license or other benefit, or other
legitimate business needs related to business
transactions with the consumer. Credit bureaus
are required to investigate new clients to ascertain
that they are using reports solely for one of
these five permitted purposes. In addition,
prospective clients are required to file a statement
with bureaus certifying the purpose for
which the reports will be used and agreeing not
to use them for any other purposes.
Consumers are legally entitled to ascertain
that no inaccurate or obsolete information is
kept in files on them and to be notified when a
creditor relies upon a report issued by a credit
bureau, so the consumer can see the type of
information kept on file and correct all mistakes
in it.
A consumer, however, has no right to examine
the actual file kept on him or her by a credit
reporting agency. Anyone who has been refused
credit on the basis of a report can discover the
nature and substance of all but medical information
contained therein, as well as the source
of the information, except investigations based
on comment from neighbors and associates. The
consumer can also find out the identity of anyone
who has received the report for employment
purposes during the last two years or any other
purpose during the last six months.
A consumer who discovers inaccurate or
misleading information in his or her file can
request that the agency reinvestigate his or her
credit background and submit a brief statement
which either explains or corrects the information.
The agency must include such information
in the consumer’s file and notify recent users of
the changes in the consumer’s file upon the consumer’s
request.
Federal agencies, such as the FEDERAL TRADE
COMMISSION (FTC), can issue orders for the
enforcement of this law. Officers and employees
of the credit bureau who willfully or intentionally
violate this law are subject to criminal prosecution.
Both a fine and imprisonment for each
violation can be imposed upon conviction.
A credit bureau that fails to treat a consumer
in the manner required by this law can be sued
by the consumer who must prove that the credit
bureau or the business that used the report did
not properly maintain reasonable procedures to
ensure compliance with the law. The consumer
must also show that such failure to maintain was
negligent or careless and that he or she incurred
personal or financial injury from this failure.
Credit Discrimination
Discriminatory practices in the granting of
credit led to the enactment of legislation to
ensure that all qualified applicants have the
same opportunity to receive credit.
Sex In the past, women were systematically
denied credit regardless of whether they would
be able to repay their loans. It was not uncommon
for bankers to refuse to consider a married
woman’s income when a couple applied for a
loan or a mortgage. Banks made the assumption
that a woman of childbearing age was an automatic
credit risk.
Single women had greater difficulty than
single men in obtaining credit, particularly
home mortgages. Creditors were also reluctant
to extend credit to married women in their own
names and refused to count a woman’s income
when calculating the creditworthiness of a married
couple. Women also had a difficult time
reestablishing credit upon DIVORCE or widowhood.
In 1974, Congress enacted the Federal Equal
Credit Opportunity Act (15 U.S.C.A. § 1691 et
seq.), which prohibits credit discrimination
based not only upon sex and marital status, but
also upon race, religion, and national origin. It
has, however, very detailed prohibitions against
discrimination based upon sex and marital status.
Creditors are not permitted to (1) assign a
value to sex or marital status in calculating an
applicant’s creditworthiness; (2) assign a value
to having a telephone in the name of the applicant;
(3) question a married couple’s childbearing
plan; (4) alter the terms of credit or require
a reapplication when there is a change in an
individual’s marital status; (5) refuse to consider
the total income of the couple who are making
the application; (6) delay action on an application
or refuse to consider it; or (7) discourage an
individual from making an application for
credit.
Federal agencies such as the FTC can guard
against violations of this law through the
issuance of restraining orders. In addition, consumers
can commence an action against creditors
who have denied them an equal
opportunity to acquire credit.Where credit discrimination
is prohibited by a state law also, the
consumer can choose whether to pursue the
state or the federal remedy.
Other Types of Discrimination Subsequent
amendments to the Equal Credit Opportunity
Act were concerned with race and age discrimination.
The act provides that a creditor can take
an applicant’s age into consideration only in a
situation where older people are given a preference
or where a specific type of credit is allowed
someone because that person is elderly. The law
also requires that public assistance benefits be
counted by creditors as a portion of an applicant’s
income. The race of an applicant cannot
be used as a ground for the denial of credit.
Disclosure of Terms Until the late 1960s,
there was considerable variety as to the information
given consumers about their credit arrangements.
The greatest lack of uniformity was in
the statement of the rate of interest charged.
Some creditors did not disclose the rate of interest,
telling consumers only the number and
amount of monthly payments. Those creditors
that did state the rate of interest stated it in a
variety of ways.
In response, Congress enacted the TRUTH IN
LENDING ACT as Title I of the Consumer Credit
Protection Act of 1968. The law is essentially a
disclosure statute, offering little substantive protection
to consumers. A creditor is free to
impose any charges for credit permitted by state
law. In addition, the statute does not restrict or
confine the terms and conditions of the extension
of credit. All that the Truth-in-Lending Act
requires is that the consumer be informed of the
terms and conditions of the credit transaction.
Under the statute and FTC regulations, the
creditor must describe the credit terms clearly
and conspicuously in a disclosure statement. At
the time of disclosure, the creditor must furnish
the customer with a copy of the statement. The
disclosure requirements of the act are detailed
and complex, because they deal with many types
of credit transactions. In general, the creditor
must disclose the amount financed, the annual
percentage rate, and any finance charges associated
with the extension of credit to the consumer.
Any charges payable in the event of late
payment must also be disclosed.
FURTHER READINGS
Bangert, Sharon J., Robert A. Cook, and Joseph D. Looney.
2002. “Unfair and Deceptive Advertising of Consumer
Credit.” The Maryland Bar Journal 35 (March-April): 8–
13.
Hammond, Bob. 1996. Life after Debt: How to Repair Your
Credit and Get Out of Debt Once and For All. Franklin
Lakes, NJ: Career.
Hynes, Richard, and Eric A. Posner. 2002. “The Law and Economics
of Consumer Finance.” American Law and Economics
Review 4 (spring): 168–207.
Leonard, Robin, and Deanne Loonin. Kathleen Michon, ed.
2002. Credit Repair. 6th ed. Berkeley, Calif.: Nolo.
Medoff, James C. 1996. Indebted Society: Anatomy of an
Ongoing Disaster. New York: Little, Brown.
Paris, James L. 1995. Living Financially Free. Eugene, Oreg.:
Harvest House.
Suit, Christopher. 2001.How to Stop Telemarketers, Junk Mail,
and Fix Your Credit. Vancouver,Wash.: Streetlight Pub.
CROSS-REFERENCES
Restraining Order; Truth in Lending Act.
