Credit, Collection and Billing Methods

The Equal Credit Opportunity Act (ECOA) was passed in order to make sure that consumer credit was awarded based on an applicant’s credit worthiness rather than the applicant’s age, sex, color, religion, or national origin.  For example, a lender cannot consider the following when making a loan: race; marital status; receipt of public assistance income; receipt of alimony or child support; or future plans for children. Spouses have rights to individual credit application and consideration. The other spouses income does not have to be disclosed unless the applicant is relying on that income to qualify for credit.

The penalties for violating the ECOA are the actual damages and the possibility of punitive damages of up to $10,000.  If there is a pattern or practice of violations, a class action may be filed which can result in damages up to $500,000 or 1% of the net assets of the defendant, whichever is less.

The Truth-in-Lending Act (TILA) is part of the Federal Consumer Credit Protection Act.  The purpose of the TILA is to make full disclosure to debtors of what they are being charged for the credit they are receiving. The Act merely asks lenders to be honest to the debtors and not cover up what they are paying for the credit.  Regulation Z is a federal regulation prepared by the Federal Reserve Board to carry out the details of the Act.

TILA applies to consumer credit transactions.  Consumer credit is credit for personal or household use and not commercial use.  TILA applies to both open end and closed end transactions.  Examples of open -end transactions are credit cards, lines of credit, and revolving charge accounts.  Closed-end transactions involve a fixed amount to be paid back over a period of time such as a note or a retail installment contract.  Open-end disclosure requirements include: finance charges (including interest), the dates that bills will be sent and what, if any, security interest is being taken.  Bills must contain the following information:

  • balance from last statement;
  • payments and credits;
  • new charges made since last statement;
  • finance charges on unpaid balance;
  • the billing period covered by the bill;
  • the time period in which payment can be made in order to avoid a finance charge (e.g., 30 days); and
  • information regarding billing errors — what to do and where to inquire about billing errors.

When an organization solicits consumer to use its credit card, the solicitation must include the following disclosures:

  • fees for issuing the card;
  • APR for the card;
  • minimum or fixed finance charges;
  • any transaction charges;
  • grace periods (if any);
  • how the daily balance is computed;
  • when payments will be due;
  • what the late payment will be; and
  • any charges that will be assessed for going over the credit limit.

Disclosures regarding closed-end credit must include:

  • amount being financed;
  • finance charges
  • annual percentage rate;
  • number of payments and when due;
  • total cost of financing (price of goods plus all finance charges);
  • any penalties for prepayment or late payment;
  • any security interest or lien in the goods sold or used as collateral; and
  • any credit insurance cost.

In advertisements that include part of the credit terms, all the credit terms must be disclosed.  If payments are disclosed, the creditor must disclose the annual percentage rate (APR), the down payment, and the number of payments.

Regulation Z gives a three-day cooling-off period for certain credit contracts.  This cooling-off period applies in a credit situation when the debtor’s home is given as security for the loan or a home solicitation sale is involved. The Home Equity Loan Consumer Protection Act of 1988 applies to home equity loans and provides for additional disclosures, e.g., that the debtor can lose his home in the event of a default.

The penalties for violation of the TILA include an amount equal to two times the amount of the finance charges with a minimum recovery of $100 and a maximum recovery of $1000 plus any punitive damages.  In a class action law suit the maximum amount of damages is $500,000 or 1% of the creditor’s net worth, whichever is less.

The Fair Credit Billing Act requires monthly statements on open-end credit transactions.  The bill must contain an address for the debtor to write in order to report errors in the bill.  Any such notification must be sent within 60 days of the bill’s receipt. The creditor then has thirty days in which to acknowledge the notification and ninety days to take action.  The debtor does not have to pay the protested amount during this period of time.  Once the matter is resolved, the debtor must pay the correct amount owed.  If the creditor does not comply with the time limits of the Act the debtor does not have to pay the disputed amount, even if it is correct.

The Fair Credit Reporting Act regulates the use of information on a consumer’s personal and financial condition.  The most typical transaction which this Act would cover would be where a person applies for a personal loan or other consumer credit.  Consumer credit is credit for personal, family, or household use, and not for business or commercial transactions.  Also, this Act can apply when a person applies for a job or even a policy of insurance when certain investigations are made of the applicant.

The purpose of the Act is to insure that consumer information obtained and used is done in such a way as to insure its confidentiality, accuracy, relevancy and proper utilization.  Under the Act, consumer reports are communications in any form by which furnishes informa­tion on consumers to potential creditors, insurers or employers.

Upon request, a credit bureau must tell a consumer the names and addresses of persons to whom it has made a credit report on that consumer during the previous six months.  It also must tell, when requested, what employers were given such a report during the previous two years.

Some information obtained by credit reporting bureaus is based on statements made by persons, such as neighbors who were interviewed by the bureau’s investigator.  Needless to say, these statements are not always correct and are sometimes the result of gossip.  In any event, such statements may go on the records of the bureau without further verification and may be furnished to a client of the bureau who will regard the statements as accurate.  A person has the limited right to request an agency to disclose the nature and substance of the information possessed by the bureau to see if the information is accurate.  If the person claims that the information of the bureau is erroneous, the bureau must take steps within a reasonable time to determine the accuracy of the disputed items.  If no correction is made, the debtor can write a 100 word statement of clarification which will be included in future credit reports, even it the agency disagrees with clarification.

The FCRA requires that a credit reporting agency follow reasonable procedures to assure accuracy of the information it gathers.  Adverse information obtained by investigation cannot be given to a client after three months unless it is verified to determine that it is still valid.

Credit reporting bureaus are not permitted to disclose information to persons not having a legitimate use for this information.  It is a federal crime to obtain or to furnish a credit report for an improper purpose. Under the FCRA, agencies can only disclose information to the following:

  • a debtor who asks for his own report;
  • a creditor who has the debtor’s signed application for credit;
  • a potential employer; and
  • a court pursuant to a subpoena.

The Consumer Leasing Act is an amendment to TILA and provides disclosure protection for consumers who lease goods.  Basically, these disclosures fall into three categories:

  • how much is paid by the consumer over the life of the lease;
  • how much, if any, is owed by the consumer at the end of the lease; and
  • whether or not the lease can be terminated.

The Fair Debt Collection Practices Act (FDCPA) prohibits harassment or abuse in collecting a debt such as threatening violence, use of obscene or profane language, publishing lists of debtors who refuse to pay debts, or even harassing a debtor by repeatedly calling the debtor on the phone.  Also, certain false or misleading representa­tions are forbidden, such as representing that the debt collector is associated with the state or federal government, or stating that the debtor will go to jail if he does not pay the debt. This Act also sets out strict rules regarding communicating with the debtor.

The FDCPA applies only to those who regularly engage in the business of collecting debts for others — primarily to collection agencies.  The Act does not apply when a creditor attempts to collect debts owed to it by directly contacting the debtors.  It applies only to the collection of consumer debts and does not apply to the collection of commercial debts.  Consumer debts are debts for personal, home, or family purposes.

When a collector contacts a debtor, if the debtor asks for verification of the debt, the collector must provide this verification in writing.  The debtor must include the amount of the debt, the name of the creditor, and the debtor’s right to dispute the debt.

The collector is restricted in the type of contact he can make with the debtor.  He can’t contact the debtor before 8:00 a.m. or after 9:00 p.m.  He can contact the debtor at home, but cannot contact the debtor at the debtor’s club or church or at a school meeting of some sort.  The debtor cannot be contacted at work if his employer objects.  If the debtor tells the creditor the name of his attorney, any future contacts must be made with the attorney and not with the debtor.  The debtor can call off the collection contacts at any time.  The collector would then have to use other collection means like filing suit.

The Act prohibits contacting other people about the debtors debts, with the exception of the debtor’s spouse and parents.  Another exception is that third parties can be contacted in order to get the debtor’s address, phone number and place of employment.  Contact with the debtor by postcard is prohibited because someone other than the debtor may see the contents of the postcard.

When a collection agency violates the Act, it is liable to the debtor for damages, and it is no defense that the debtor in fact owed the money that the agency was seeking to collect.  Debtors can collect up to $1,000 in actual damages in addition to actual damages.  Also the Federal Trade Commission can get a cease and desist order to stop any unlawful practices.

If a creditor files a civil suit for the debt and gets a judgment, he will have to execute on that judgment unless the defendant voluntarily pays the judgment.  One way of execution is garnishment where a judgment creditor serves a writ of garnishment on the debtor’s employer.  The employer is then required to withhold part of the debtor’s wages for payment to the creditor in satisfaction of the judgment.  The Consumer Credit Protection Act limits the amount that can be garnished to 25% of the debtor’s net wages.  A judgment creditor can also garnish a debtor’s bank account or an account receivable due to the debtor.  Basically, any debt due to the debtor can be garnished.