Businesses may extend credit to consumers to increase sales or to attract new customers. All businesses choosing to grant credit to consumers are required to comply with federal and state consumer credit laws and fair debt collection practices.
Before offering a line of credit to a consumer, a business should conduct a credit check. A credit check requires the business to review the consumer's payment history and financial status, and verify the consumer's credit references. The Equal Credit Opportunity Act prohibits a business from refusing to extend credit to an otherwise qualified applicant on the basis of race, color, religion, national origin, age, sex or marital status.
When extending credit to a consumer, the Truth in Lending Act requires a business to disclose to the applicant the terms of the credit offer. Required terms include annual interest rates, monthly finance charges, payment dates, and charges for overdue payments.
Consumer Credit Contracts
The Credit Practices Trade Regulation Rule prohibits creditors from including the following provisions in a consumer credit contract signed after March 1, 1985:
- Confessions of judgment. Confessions of judgment take away certain consumer rights, such as the right to receive a notice of legal action, the right to appear in court, and the right to raise certain defenses.
- Waivers of exemption. Waivers of exemption allow creditors to seize possessions that are exempt from seizure by state law.
- Wage assignments. Wage assignments give creditors the right to garnish a consumer's wages if payments are overdue.
- Security interests in household goods. Security interests in household goods allow creditors to repossess a consumer's household goods. Household goods include clothing, furniture, appliances, photographs, personal papers and pets. Household goods do not include antiques, art, jewelry and electronic entertainment equipment.
Notice to Cosigners
The Credit Practices Trade Regulation Rule also requires that businesses disclose all potential liability to cosigners before the cosigner becomes obligated to repay the debt.
The Fair Credit Billing Act mandates a procedure for credit billing disputes. If a customer disagrees with a billing statement, the customer has 60 days from the date the statement was mailed by the business to notify the business of the error. The business must respond to the customer's notification within 30 days. Within 90 days, the business must amend the bill or explain to the consumer why the bill is correct.
Businesses choosing to extend credit to consumers run the risk that some consumers will be unable or unwilling to repay the debt. In order to recover money owed by a consumer, the business may wish to initiate formal debt collection proceedings. The business may choose to collect the debt itself, or it may hire a debt collection agency to do so. State and federal laws govern both types of debt collection.
Debt collection by original creditors (the business that extended the credit) is governed by state law. Most state laws require the creditor to make phone contact with a consumer before beginning formal debt collection proceedings. If the debt is not resolved, the creditor must inform the consumer in writing that such proceedings have been initiated. State laws typically prohibit the following debt collection practices:
- Making repeated or harassing phone calls.
- Lying about the creditor's name, occupation or purpose for contacting the consumer.
- Threatening to have the consumer arrested.
- Threatening legal action that is not legally possible.
- Sending mail with a reference to debt collection on the exterior.
- Collecting any amount beyond the actual debt.
Debt Collection Agencies
If a business retains a debt collection agency to recover the debt, the business must make sure that the agency complies with state debt collection laws, as well as the Fair Debt Collection Practices Act (FDCPA). The FDCPA sets forth how and when debt collectors may contact consumers, and prohibits all abusive and deceptive debt-collection tactics. Abusive and deceptive tactics under the FDCPA include:
- Contacting consumers early in the morning or late at night.
- Contacting a consumer and failing to identify the creditor's name or purpose for calling.
- Contacting a consumer in a way that is known to be inconvenient to the consumer.
- Publishing the consumer's name on a "bad debt" list.
- Revealing a consumer's debts to third parties.
- Threatening violence.