Our CFR blog has treated many subjects over the years. The common theme of our blogging has been to explore subjects impacting the consumer finance industry, especially those of interest to traditional installment lenders and credit sellers.
We begin a series this week to review the various federal consumer financial services laws regulating the industry, and offering one or more “practice pointers” along the way. We start off this series with Consumer Cost Disclosure.
The term of art “consumer cost disclosure” refers principally to the federal Truth-in-Lending Act and its enforcing Regulation Z. This law and regulation have been guiding consumer financial services for over two generations now. Congress decided years ago that the best way for consumers to make informed credit decisions was to have clear and conspicuous access to the basic elements of the finance contract—the Amount Financed, the Annual Percentage Rate, the Finance Charge, the Total of Payments, and, if applicable, information about the Late Charge, Prepayment Penalty and Collateral. Also, basic consumer cost disclosures include the Number and Amount of payments to repay the financial obligation. And, the products and services that are ancillary to the credit transaction must also be disclosed. All of this information is presented in a required format so that ideally, consumers can comparison shop for consumer financial products and services.
Over the years, the consumer cost disclosure laws have been expanded to cover more and more detail of the credit transaction. A residential mortgage transaction is a clear example of the impact of the expansion. In today's regulatory climate, a $100,000 home loan is a transaction calling for more complex documentation than a $1,000,000 commercial loan. Some commentators have argued that the consumer is over-exposed to disclosures today, as to make the basic information needed to understand the consumer transaction lost in a sea of information. Regulation Z contains hundreds of pages of very specific disclosure requirements placed upon creditors. The penalties for failure to dot the “I's” and cross the “T's” can be substantial. Adding insult to injury is the fact that the law generally awards attorney's fees to an aggrieved consumer. So, even if the CFPB is not looking over your shoulder, your customer's bankruptcy attorney and your state regulator often are doing so.
After many years of practice, I continue to be surprised by the number of disclosure errors made in the basic consumer notes and installment sales contracts. Often, in the effort to cover so many of the “suggested” notices to the consumer, basic disclosure requirements are being moved out of the way.
So, my first “practice pointer” is to have your form notes and installment sales contracts reviewed on an annual basis to make sure that any changes in the federal and state consumer financial services laws and regulations have been properly addressed in the contract form; and, be certain that in revising the forms from time-to-time, required provisions have not been overlooked or inadvertently dropped.
It is amazingly easy to overlook the basics.