The Law

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 & 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:

• The credit is offered to a consumer
• The credit is primarily for personal, household or family purpose
• The creditor offers or extends credit regularly to the public (which is defined as 15 or more times in a year, or, for mortgage or home equity lenders, five or more times in a year)
• The credit is either subject to a finance charge (such as interest) or repayable by written agreement in more than four installments
• The credit is for an amount less than $25,000

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.

Watch out for…Pay-Day Loans

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:

• The total amount financed,
• The finance charge
• The Annual Percentage Rate (APR)
• The terms of "repayment."

Initial Disclosure

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.

• The total sales price of the goods purchased. This is the price of the item purchased plus interest and any other charges imposed by the seller as a condition of granting credit to the consumer, including any down payment or trade-in value.
• The amount financed. This is the total amount borrowed plus any other amount advanced by the lender to the consumer. For example, the cost of an extended warranty purchased by the consumer might be included.
• The finance charge. This is the dollar cost of the credit transaction, which includes the dollar cost of all the interest to be paid over the term of the loan and the cost of all other charges imposed by the creditor as a condition of extending credit to the consumer. "Other charges" may include points (prepaid interest), service charges, appraisal fees, credit report fees, and/or charges for any credit insurance purchased. Application fees are not part of the finance charge for any consumer 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.

• The Annual Percentage Rate or APR. This is a complex calculation designed to provide a uniform "true cost of credit" which the consumer can use to comparison shop. Basically, the APR assumes that the total finance charge (which, remember, is equal to total interest on the debt plus other charges, such as points and fees) is paid in equal installments over the term of the loan and then calculates the amount paid each year as a percentage of the amount financed. This number will almost always be higher than the so-called base interest rate on a loan.

Note: A different APR calculation applies to open-ended transactions such as credit cards. The details on that are covered in Credit Cards.

• The total of payments. This is the total of all payments the consumer must make under the agreement, and equals the amount financed plus the finance charge.

  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.

• The payment schedule and amounts of each payment. The schedule of monthly (or periodic) payments must be clearly set out in the contract. This includes the due date for each payment (for example, the 1st of each month), the number of payments required and the size of each payment. If any payment is for a different amount, this must also be clearly indicated (for example, in some credit agreements, the last payment may be larger than the regular monthly payment).

  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:

• Whether the loan agreement grants the lender a security interest in any property of the consumer. A security interest is a priority claim on property, such as a mortgage on real property. If a consumer defaults (fails to repay) on the loan, the lender would have the right to repossess the property (or foreclose the mortgage) without going to court. Retailers that issue their own credit cards often take a "security interest" in merchandise bought from them with the card. Check your fine print.
• Under what circumstances late payment fees are assessed and what the fees are.
• Any penalty for prepayment of the loan must be disclosed.
• If the loan is subject to a "variable rate" of interest, a clear description must be given of the calculation used to vary the rate, including the "index" used to base interest rate changes, such as the Prime Rate or 30-year Treasury Note, as well as the periods when the rate may be adjusted.

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:

• While the US Postal Service indicates that 90% of domestic mail arrives at its destination within three mailing days, the credit issuers may need additional time to process the payments, sometimes up to a week. The best idea may be to pay the bill within days of receiving it.
• If the due date is inconvenient for you (for example, the bill arrives after all your other bills have been paid), call the credit card issuer and have your due date changed.
• While federal law requires that credit card payments be credited to the account on the day it was received, there are loopholes. Any payment does not conform to the requirements set by the issuer (for example, payment by check or money order, inclusion of the payment coupon, posted in the envelope provided, etc.) can be posted late. As of now, federal law does not cover payments made electronically.
• To protect yourself, read those pesky inserts! Notice of changes in fees, interest rates, and other things often go unnoticed by consumers because the announcement is part of a packet of solicitations that comes with the statement.

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.

Watch out for…Balloon Loans

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.

For your information…Private Mortgage Insurance

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:

• If your mortgage was signed on or after July 29, 1999, the private mortgage insurance must be automatically terminated (ended) once you reach 22% equity in your home, based on the original property value. You may, under some circumstances, be able to request cancellation of the private mortgage insurance, after you reach 20% equity.

There are three reasons that the private mortgage insurance coverage would not be automatically canceled when you reach 22% equity:

• If your loan is "high risk."
• If you are delinquent on any of your mortgage payments.
• If you have other liens on your property.

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.

Other Protections

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.

For your information…No Signature Transactions

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 Banking

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 websites 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:

• Verify the bank's insurance status. Most bank websites have an "About us" section that describes the institution. Look for a history of the bank, the names of the officials, the address of the bank's headquarters, and its insurance coverage. Federal banks must be insured by the Federal Deposit Insurance Corporation (FDIC). Look for the FDIC logo or the words "Member FDIC" or "FDIC Insured."
• You can also go online to the FDIC website to find if the bank you are interested in is FDIC insured. Select "Is My Bank Insured?" You will need to enter the official name, city and state of the online bank, and then click on "Find My Institution." If the bank is FDIC insured, the date it became insured, and its insurance certificate number will be displayed.

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 website for information about security practices.

• Your transactions should be encrypted. Encryption is the process of scrambling private information to prevent unauthorized access. Some browsers will show a "key" or a "lock" symbol to indicate when your transactions are being encrypted. Be very wary of sending personal and financial information through email or a website that is not secured.
• You should have password or a PIN (personal identification number) to access your bank account through the Internet. As with all passwords or PINs, the numbers or words should be unique to you and not easily guessed by someone else. For example, birth dates should not be used as a PIN or password since that kind of information is easily accessible. To ensure security, you should change you password or PIN periodically. And never give your password or PIN to anyone else.
• Keep the general security of your computer up-to-date. Install virus protection on your computer, download new up-dates when available, and scan for viruses on a regular basis.

Be Aware of…Universal Default

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."

For your information…Stored Value Cards

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.

1. The single-purpose or "closed loop" card can be used only for a single purpose. A gift card from a particular retailer, or a telephone card for a certain number of minutes of long distance calls are good example of the single-purpose card.
2. The multipurpose or "open-loop" card has no limits on the type of transaction or retailer. These cards can be use for a variety of purposes included receiving direct deposits and making withdrawals at an ATM.

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.

For your information…Co-Signing a Loan

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:

• You are guaranteeing the debt. In other words, if the borrower does not pay the loan as agreed, then you will be obligated to pay it.
• If the borrower defaults on the loan, you may be required to pay off the loan in full. You may also be responsible for paying late charges and possibly collection costs.
• If the borrower defaults on the loan, the lender may come to you for repayment without first trying to collect from the debtor. The creditor can sue you, garnish your wages, and so forth to collect on the debt. This will also become part of your credit record.

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:

• Can you afford to pay off the loan?
• Will your liability for this loan keep you from getting a loan that you need?
• Do you understand the consequences of pledging any of your own property as security for the loan?

If you decide to be a co-signer you might considering doing the following:

• Ask the lender if you can limit your liability to the amount borrowed.
• Ask the lender to agree in writing to notify you if the borrower misses a payment. This way you will be able to deal the problem or make payments right away.

For your information…Check 21

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.

1. The "float" between the times the check is written and when it is processed will be dramatically reduced. Essentially, this means that no one should write a check against his or her checking account now unless funds are in the account to cover the check. Any consumer who tries to use the "float" may find that the float no longer exists, and will be bouncing the check.
2. Because checks will be processed at a faster rate, the consumer will have a much shorter time to place a "stop payment" on a check.
3. Consumers will not get their original cancelled checks returned to them but will receive a "substitute check" which is a digital copy of the original. If for some reason, a consumer needs a copy of their original check, the bank will be able to provide this (for a fee).

Points To Remember

• Late charges can be imposed if your payment arrives after the due date.
• A co-signer is a "contingent obligor," in other words, the cosigner is as equally obligated to repay the loan as the person taking out the loan. For more about co- signers' obligations, see For Your Information...Co-Signing a Loan.
• A "balloon" payment on an installment or loan contract is a final payment that is much larger than the other payments. Be sure to look at the credit contract carefully, making special note if the final payment is not the same (or nearly the same) as the other payments. If a lender is willing to lend you money at what appears to be very low monthly payments, there may very well be a large balloon payment as the final payment. Refer to Watch Out For…Balloon Loans for more information.
• Be suspicious of loans requiring you to pay a fee in advance.
• Be alert and wary of any lender who:
  • Asks you to sign papers with blanks not filled in
  • Requires more than one promissory note to be signed
  • Refuses or is reluctant to give you copies of all papers signed or receipts for payments made
  • Offers loans through the mail, especially from an out-of-state company.

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:

Federal Deposit Insurance Corporation
Division of Compliance and Consumer Affairs
550 17th St., NW
Washington, DC 20429-9990 v1-202-736-0000
email: consumer@fdic.govv

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)
Fax: 1-713-336-4301
E-mail: customer.assistance@occ.treas.gov

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
1-202-452-3693

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
603-271-3561

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)
TDD: 1-202-326-2502

Contact the NH Consumer Protection & Antitrust Bureau:

Consumer Protection & Antitrust Bureau
NH Department of Justice
33 Capitol Street
Concord, NH 03301-6397
603-271-3641