The use of credit is part of everyday life for the majority of Americans. Consumers are extended credit by retailers and lending institutions to purchase goods, services, appliances, automobiles and residential real property through credit cards, installment loans, home mortgages, and home equity lines of credit. Both federal and New Hampshire laws provide important safeguards and remedies for consumers in their credit transactions and consumer leases. Some of these laws require that certain information be given to the consumer before or during the credit transaction. Others relate to problems which can occur later in the process. Consumer credit transactions are complex and technical, and the laws that apply to them can be rather technically daunting as well. Nevertheless, these laws do provide some powerful remedies to consumers who may find themselves in difficulties either through unfair lending or leasing practices or through their own financial mismanagement. This section provides a brief summary of the federal Truth-in-Lending Act (TILA). The other sections on credit deal with specific issues and the relevant state and federal statutes.
Consumer credit transactions fall into two categories: closed-ended credit and open-ended or revolving credit. Closed-ended credit occurs when the consumer borrows a specific amount of money and repays it over a stipulated period of time. Installment contracts, car loans, and mortgages are typical closed-ended credit transactions. A credit transaction is open-ended if the consumer is issued a line of credit that can be used at the consumer's discretion and repaid within the terms of the contract. A credit card is an example of open-ended credit. A credit card typically has a "credit limit" meaning the consumer can charge up to that amount on the card. The "loan" is paid off either in full or partially upon receipt of the monthly statement. A home equity line of credit is another form of open-ended credit. The information presented in this section, while applicable to both open- and closed-ended forms of credit, is primarily focused upon closed-ended credit. For more information about credit cards, refer to the section on Credit Cards.
In recent years, sellers of appliances, furniture and automobiles have introduced the long term lease as a method of financing these high-ticket items. For more information, see Auto Leasing And Consumer Leasing. Another way for consumers to obtain household appliances, furniture and the like is through rent-to-own agreements. The rent-to-own furniture or appliance contract where the consumer "rents" goods for a specified period of time with an option to purchase the good at the end of the "lease" term is not covered by TILA. For further information on this type of transaction see Rent-To-Own.
Note: New Hampshire has no specific statutory limits on how much interest can be charged on either credit card balances or any other type of debt. Interest rates are not regulated by federal law either. Consumers may be shocked to learn that there is nothing illegal about a New Hampshire retailer or lending institution charging 20% or 30% interest on a consumer debt. All that is required by both federal and state laws is that information about the interest rate be given as described below. Although the general rule is that there is no limit on interest rates, an exorbitant rate of interest may under some circumstances be usurious and violate New Hampshire's Consumer Protection Act as legally "unfair."
The primary source of consumer protection in consumer credit transactions is the federal Truth in Lending Act (TILA) (15 U.S.C. §1601 et seq.). The New Hampshire Regulation of Consumer Credit Transactions Act (RSA 358-K) imposes some technical requirements on lenders regarding the timing and method for computing interest on consumer debts which essentially parallel federal law and will not be discussed. The New Hampshire Consumer Protection and Antitrust Bureau takes the position that a violation of any part of either state or federal law regarding consumer credit may also violate the New Hampshire Consumer Protection Act.
Typical consumer credit transactions subject to TILA include store credit purchases, credit card agreements, installment loans, automobile financing plans, and some real property transactions secured by a consumer's principal dwelling place, such as mortgages, home equity or home improvements loans. TILA applies to loans or other extension of credit by creditors (banks, retailers, finance companies, etc.) or individuals if:
Note: This limit does not apply to credit transactions secured by real property or by personal property used as a consumer's principal dwelling, such as a mobile home.
A few consumer transactions are NOT covered by TILA. Those that are exempt from coverage are: student loans (GSL, PLUS, NDSL), public utility payment plans, and home fuel budget plans.
The Federal Reserve Board (FRB) is authorized to administer and interpret TILA. FRB's Regulation Z (12 C.F.R. 226 et seq.) explains and defines the scope and workings of TILA. This discussion is largely drawn from Regulation Z.
Check cashing businesses and others are exploiting some workers by offering so-called "pay-day loans." These kinds of loans are sometimes called "cash advances," "check advance loans," "post-dated check loans," or "delayed deposit loans." The borrower/worker is getting an advance on his or her wages. The problem is that the interest rates on these types of loans tend to be exorbitant!
For example, a worker writes a check to the so-called lender for $115 on the 7th of the month, dating the check for the 21st when he or she gets paid. The worker is given $100 in cash from the so-called lender. On the 21st of the month, the lender cashes or deposits the worker's check for $115. The worker has paid $15 in interest charges for a 14-day loan on $100 at an Annual Percentage Rate (APR) of 391%!
While high interest rates loans are not illegal in New Hampshire, several courts across the country have said that these pay day loans are credit transactions and therefore must follow the TILA requirements. The attorneys at the NH Consumer Protection and Anti-Trust Bureau believe this also. These requirements include:
Creditors and lenders are required to furnish a clear description of all the important terms and requirements relating to any credit transaction. Creditors and lenders must furnish the detailed information to consumers before extending credit. This requirement extends to all credit transactions covered by Truth-in-Lending, including installment loans, credit cards, and home equity lines of credit.
The following information must be given to the consumer prior to entering into an installment credit contract or closed-ended credit transaction.
EXAMPLE: Hilda Homeowner enters into a 5-year home improvement mortgage with First Bank for $10,000 at 10% interest, payable monthly. (This translates to approximately $4,000 in interest over the life of the loan.) First Bank charges Hilda two "points" or $200 for the loan and Hilda buys the so-called "credit life insurance" from the Bank for another $500. Hilda's "amount financed" is $10,000. Her "finance charge" is $4,700. Her APR is 16.35%.
Note: Special rules apply to mortgage transactions which exclude many of these "other charges," such as title examination fees, credit report fees, escrow payments for taxes and insurance, and reasonable attorneys' fees, from the finance charge.
Note: A different APR calculation applies to open-ended transactions such as credit cards. The details on that are covered in Credit Cards.
EXAMPLE: In Hilda's case from the previous example, the "total of payments" would be the $10,000 amount financed plus the $4,700 finance charge, for a total of $14,700.
EXAMPLE: In Hilda's case, the loan may have been structured to be repaid in 60 monthly installments of $245 ($14,700 divided by 60) due on the 5th of each month. This schedule must be disclosed.
In addition, lenders are required to disclose the following general information about any credit transaction:
Watch out for … Credit Card Payments
Credit card companies have been reducing the "Grace Period" on credit card statements, and increasing the late-fee charges. High "penalty interest rates" may also be charged when the bill is paid late. In some cases, the credit card holder has paid the bill well in advance of the due date, but the account has not been credited in a timely fashion, resulting in the late fees and penalties.
What you can do:
If a Lender Fails to Make Required Disclosures
TILA allows the consumer to bring a lawsuit if a creditor fails to correctly provide the required information. Generally you would be entitled to any actual damages (any monetary loss) suffered as a result of a violation of the TILA disclosure rules. You may also ask for "statutory" damages (TILA has set limits) and if you win the lawsuit, you would also be entitled to court costs and attorneys' fees. Under some circumstances, you may also be able to include "consequential" damages, such as emotional distress or harm resulting from the violation of TILA.
If a consumer is delinquent in repaying his or her loan and discovers a violation of TILA in his or her credit documents, reporting the violation to the lender may serve to forestall any collection or foreclosure actions. In some cases, the total of the monetary damages in a lawsuit due to a TILA violation may be equal to or exceed the amount still owed on the delinquent loan, allowing the consumer to, in effect, cancel the debt.
From time to time you may find a lender offering a particularly attractive loan with very low monthly payments. This could be a "balloon loan," one which has a very large final payment (a "balloon" payment is generally thought of as any payment that is more than twice the amount of any other payment). With these types of loans, little or none of the monthly payment goes to reduce the principal (the amount borrowed); only the interest is repaid during the term of the loan. The principal is mostly or entirely paid off in the final payment.
Balloon loans can be difficult for consumers who are unprepared for the large final payment. Borrowers who are "surprised" by final balloon payments, thinking they were going to be all paid up, may find themselves needing to refinance their loans because they do not have the financial resources to pay the balloon.
The information about the final balloon payment must be given to the borrower during the loan application process. Balloon loans are prohibited by federal law when the length of the loan is less than 5 years.
Since July 1998, the Homeowners Protection Act requires that private mortgage insurance (PMI) be terminated automatically when a homeowner's equity reaches 22% of the proper value at the time the mortgage was signed. Homeowners can ask that the PMI be canceled earlier if they can provide proof that their home's equity is 20% greater than current market value. PMI protects the lender against default when a down payment of less than 20% is made on a home.
The rules differ slightly depending on when your mortgage was signed:
There are three reasons that the private mortgage insurance coverage would not be automatically canceled when you reach 22% equity:
If your mortgage was signed before July 29, 1999, you have the right to ask your lender to cancel the private mortgage insurance once you reach 20% equity in your home. The law does not require the lender to automatically terminate the insurance.
A new borrower must be told about the cancellation provision at the closing, and once a year thereafter.
Mortgage lenders must provide a telephone number for borrowers to call for information about canceling their private mortgage insurance.
Mortgage lenders are required to tell borrowers not covered under the law about their right to cancel the private mortgage insurance.
So… if you are currently paying for private mortgage insurance, and have more than 20% equity in your home, you might want to contact your mortgage lender to find out about terminating your private mortgage insurance.
Many loans, including most home mortgage loans, are sold by the initial lender into what is called the "secondary market." Consumers may discover problems with their credit documents only to find that their loans are now owned by an institution other than the one which originally extended the credit or made the loan. This problem is addressed by requiring that all actions for violating TILA disclosure rules are valid against so-called "assignees" (or the company now holding the loan or credit contract). In other words, all TILA disclosure requirements also apply to businesses and financial institutions which buy loans from other lenders. This would also include, for example, a car dealership which provided a consumer with third-party financing for a new car purchase but failed to disclose the correct finance charge or APR.
One of the newest types of transactions related to credit and debit cards are no signature (or PIN) transactions. Consumers are able to make small purchases, typically less than $25, with no signature or PIN number required. The purpose of these types of transactions is to reduce the time for a transaction and to reduce the amount of paper. No-signature transactions are limited to a small number of retailers, such as video stores, parking lots and casual restaurants. Many fast food restaurants have been reluctant to accept credit cards because of the cost. This will change with no-signature transactions.
The downside for consumers is that we tend to spend more when we put purchases on our credit or debit cards than when we pay cash.
Credit card companies believe that the amount of fraud (unauthorized transactions) will be minimal since most credit card thieves tend to buy big-ticket items, not Big Macs or a coffee from Starbucks.
E-Money and E-Banking
More and more of us are forsaking cold hard cash, folding money, even checks that come in every color and design for electronic transactions. Making purchases with electronic transfers, using cash cards, and paying bills and banking online are incredibly convenient, fast, and increasingly secure. Consumers do need to be careful and cautious, however, because electronic money and banking have pitfalls.
Internet banks are governed by the same laws and regulations that regulate brick and mortar banks. Banking on the Internet, however, does pose some risk if the consumer is not cautious about choice of Internet banks. Fraudulent Web sites seek to confuse new customers by using a bank name that is similar to a legitimate financial institution. The intent is to lure the unsuspecting consumer into accepting the bogus financial institution as real and get the consumer to provide personal and financial information so the con artist can get access to the consumer's money.
Many traditional banks and credit unions also offer online banking as a service to customers. New online financial institutions have no physical offices, but offer many of the same services that traditional banks offer. The consumer who is interested in banking electronically can do several things to ensure that the financial institution is legitimate and that his or her money is safe:
Not all Internet banks are insured by the FDIC. Many of those that are not, are chartered overseas. Those banks that are not FDIC-insured, do not have the protections offered to customers of FDIC-insured banks, primarily, insuring the total of all accounts up to $100,000 against bank failure.
Make sure that your transactions are secure. Look on your bank's Web site for information about security practices.
Universal default is a fine-print item that is part of many credit card contracts. The universal default clause is triggered when a credit card customer who has otherwise had a good credit rating, has a negative show up on his/her credit report (such as a late payment). One late or missed payment may trigger not only late fees for that account, but may trigger increased interest rates on other credit accounts. In essence, the universal default clause means that if you are in default on one account, you are in default with other accounts too.
The universal default clause typically appears in credit cards agreements under the section titled "Other APRs" as the default rate. One credit card agreement states: "Your APRs may increase if you default under any Card member Agreement you have with us for any of the following reasons: we do not receive at least the minimum payment due by the date and time due as shown on your billing statement for any billing cycle for which a payment is owed, you exceed your credit line on the Account, you fail to make payment to another creditor when due, you make a payment to us that is not honored by your bank."
In order for payments to be processed on time, you should mail in your monthly obligations at least a week prior to the due date so that the payment can be processed by the due date.
The Office of the Comptroller of the Currency, a federal agency that regulates banks, has labeled the practice of universal default to be "unacceptable."
One of the fastest growing products in the financial industry is the stored value card. These are prepaid debit cards, gift cards, telephone cards, EBT cards, and payroll cards. The magnetic strip on the back of the card stores information about the amount of money that has been prepaid to the card. There are two types of stored value cards.
Reloadable multipurpose cards are fast becoming seen as an alternative to the traditional checking account. Since they operate in a similar fashion to a debit card, this type of card can meet the needs of those who do not have, or do not like, traditional checking accounts. Some cards requite the cardholder to enter a PIN at the point of sale, while others require the cardholders' signature like a credit card.
The drawbacks to the stored value cards are the fees. Stored value cards may have activation fees of up to $40.00; may have an annual or monthly fee; and/or may have a point of sale fee with each transaction or purchase made using the card. Other fees that may be associated with using a stored value card are: transaction limit fee, bill payment fee, phone or online transaction fee, reload fee, money transfer fee, out-of-network domestic ATM fee, international ATM transaction fee, inactivity fee, overdraft fee, overdraft protection fee, payday advance fee, credit-reporting fee, and dispute fee.
Stored value cards do not offer the user all the protections offered by a traditional checking account. The value of the card is not insured against loss should the issuing bank fail. Furthermore, the laws that protect the consumer regarding debit and credit cards against unauthorized use do not cover stored value cards.
It is not unusual to be asked by a relative or friend to co-sign a loan for him or her. You need to know what you are getting into before you agree to be a co-signer on a loan, however.
Federal law requires that a lender give you a notice that explains your responsibilities as a co-signer before you sign the credit agreement. As a co-signer:
Studies have shown that about 3 out of every 4 co-signers are asked to repay some portion of the loan. So … before you co-sign a loan, even for a close relative, consider the following:
If you decide to be a co-signer you might considering doing the following:
Points To Remember
Where To Go If You Have A Problem
Attempt to resolve any TILA problem with the creditor first. If you feel you need further assistance, contact the creditor's primary regulator.
Contact the Federal Deposit Insurance Corporation (FDIC) if the problem is with a FDIC-insured bank or savings-and-loan institution:
The FDIC has an office in the Boston area:
Braintree Hill Office Park
Braintree, MA 02184-8701
1-866-728-9953 (toll free)
Contact the Comptroller of the Currency if the problem is with a federally chartered bank (one that has "national" in its name):
Comptroller of the Currency, US Department of the Treasury
Consumer Assistance Group
1301 McKinney Street, Suite 3450
Houston, TX 77010
1-800-613-6743 (toll free)
E-mail: [email protected]
Contact the Federal Reserve System if the problem is with a state-chartered bank that is a member of the Federal Reserve System:
Federal Reserve, Division of Consumer and Community Affairs
20th and C Streets., NW, Stop 801
Washington, DC 20551
Contact the NH Bank Commissioner if the problem is with a New Hampshire bank:
NH Bank Commissioner
53 Regional Drive, Suite 200
Concord, NH 03301
Contact the Federal Trade Commission if the problem is with a loan company or a retailer:
Federal Trade Commission
600 Pennsylvania Ave., NW
Washington, DC 20580
1-877-FTC-HELP or 1-877-382-4357 (toll-free)
Contact the NH Consumer Protection and Antitrust Bureau:
NH Consumer Protection and Antitrust Bureau
33 Capitol Street
Concord, NH 03301-6397
A federal law that went into effect in October 2004 is reducing the time that it takes for a check to be processed. For some check-writing consumers, this will cause them to bounce a few checks.
The Check Clearing for the 21st Century Act, or Check 21, allows banks to process more checks electronically, and therefore faster. This means several things for the check-writing consumer.
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New Hampshire Department of Justice | 33 Capitol Street | Concord, NH | 03301