Consumer Credit Laws: The Basics
Understand the laws governing offers of credit and collection of debts from customers.
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If your business is dealing with credit, whether by seeking money or equipment on credit from commercial lenders or other businesses, or by extending credit to your customers, you should be familiar with the laws governing offers of credit and collection of debts. This article covers four of the most basic federal laws in these areas, most of which deal specifically with consumer, as opposed to business, credit. Individual states also have their own laws, which are not covered here.
The Truth in Lending Act
The Truth in Lending Act (TILA) covers advertising of, and disclosure of terms for, offers of credit specifically to consumers. More particularly, the Act will only apply to a lender when:
- the lender offers or extends credit to consumers
- the lender makes those offers on a regular basis
- the credit offered is subject to a finance charge or is payable by a written agreement in more than four installments; and
- the credit offered is primarily for personal, family, or household purposes.
Extensions of credit primarily for business or commercial purposes are not covered by the Act.
The credit that terms a lender covered by the Act must disclose include:
- annual percentage rates
- finance charges
- amount financed; and
- total number of payments the customer will make in paying off a debt.
A common example of a transaction covered by the Truth in Lending Act is a family’s purchase of a new car on credit. Under TILA, the car dealership would be required to disclose the terms listed above; the dealership would also be required to provide the buyers with a TIL Disclosure Statement, which would lay out those same terms in writing. If your business involves making this kind of big-ticket, credit-based sale to consumers, you definitely should be familiar with the Truth in Lending Act.
The Equal Credit Opportunity Act
The purpose of the Equal Credit Opportunity Act (ECOA) is to prevent creditors from discriminating against certain people or businesses when they make credit decisions. Under the Act, a lender cannot discriminate on the basis of:
- national origin
- marital status
- age; or
- the receiving of public assistance.
Under the ECOA, creditors are prohibited from asking credit applicants about being widowed or divorced, and they are limited in what questions they can ask about an applicant’s spouse. A creditor also cannot impose different terms on different people based on any of the listed factors. And, when considering a credit applicant’s income, a creditor cannot “discount” income because of the applicant’s sex, or because income comes from, for example, part-time employment or social security.
Under the ECOA, if an application for credit is denied, and the applicant requests an explanation within 60 days of being notified of the denial, the creditor must provide “specific reasons” for the rejection. According to the Federal Trade Commission (FTC), a creditor’s statement that “your income was too low” or “you haven’t been employed long enough” is sufficient; however, a statement such as “you didn’t meet our minimum standards” is not sufficient.
In contrast to other important federal credit laws, the ECOA, covers not only consumer credit transactions, but also business credit transactions, at least to the extent that the latter transactions involve business or commercial loans by financial institutions.
The Fair Credit Reporting Act
The Fair Credit Reporting Act (FCRA) provides consumers with certain rights related to credit reports. Specific rights include:
- the right to be informed if your credit report has been used against you, such as to deny you credit or employment; whoever takes the adverse action is required to give you contact information for the agency providing the report
- the right to know everything that is in your credit report; a free copy of your report is available once per year from each major credit reporting service, but you are also entitled to a free report in certain specific situations, such as identity theft, inaccurate information due to fraud, or adverse action taken against you on the basis of the report
- the right to ask for your credit score; however, this is often available only for a fee
- the right to dispute inaccurate information on your report—and, if the reporting agency agrees that the information is inaccurate, the right to have the information corrected
- the right to have out-of-date information removed from your record; credit agencies generally must remove most negative data after seven years, and information regarding bankruptcies after ten years; and
- the right to limit access to your file; more specifically, the credit agency must have a valid reason for providing your credit information to a third party, such as a creditor, insurer, employer, or landlord—and an agency cannot provide your information to a current or potential employer without your written consent.
The FCRA also provides for damages in the case of violations. While the FCRA generally limits so-called “actual damages” to a maximum of $1,000, it also allows for punitive damages. Lawsuits against violators may be brought in either state or federal courts.
The Fair Debt Collection Practices Act
The Fair Debt Collection Practices Act (FDCPA) places specific limits on what steps collection agencies can take to collect on an unpaid debt. It applies to personal, family, and household debts, but not to business debts. If your business is trying on its own to collect an unpaid debt, without the involvement of a collection agency, the FDCPA should not apply to you. State laws, however, may be a different matter.
The Act has several sections covering key issues, such as acquisition of debtor location information, communication with the consumer, harassment and abuse, and false or misleading representations. Here are a few more specific examples:
- if a debt collector is contacting a person other than the consumer in an attempt to obtain the consumer’s location, the debt collector is generally prohibited from giving any indication that the inquiry is related to collecting a debt; for example, the debtor collector must not state that the consumer owes any debt and must not use language, or a symbol on an envelope, that indicates that the debt collector is in the debt-collection business
- a debt collector cannot contact a consumer before 8 a.m. or after 9 p.m., and must stop contacting the consumer if the consumer sends a written request to the collector to cease contact
- a debt collector cannot threaten a consumer with violence or harm, cannot use obscene or profane language, cannot repeatedly call a consumer in order to annoy or harass the consumer, and cannot publish the consumer’s name as part of a list of people who refuse to pay their debts
- debt collectors cannot make false statements, such as misrepresenting to the consumer the amount owed, stating that the consumer has committed a crime, or stating the debt collector works for a credit reporting agency, nor may debt collectors threaten consumers with arrest, or with taking legal action if such action would be illegal or there is no actual intention to take such action.
The FDCPA lays out quite a few other prohibited activities not mentioned here. For more details, consult the Act itself, or check out the FAQ page published by the FTC.
While not covered here, keep in mind that many states have their own laws regarding credit and collection. For example, some states have laws which, like the FDCPA, will prohibit debt collectors from using lies, threats, abuse, or harassment. If your business is doing its own collection work, or, alternatively, if your business is a debtor from whom a creditor is currently trying to collect, make sure to consult not just the federal laws but also the relevant laws in your state.