20.3: Protecting the Debtor

A debtor is someone who owes an obligation to another individual or business, especially the obligation to pay money. Consumers become debtors when they owe a business money for the purchase price of goods and services. If consumers pay the purchase price at the time of the transaction or shortly afterward, then the transaction is completed. If, however, the consumer does not immediately pay but receives the goods or services, then the consumer becomes a debtor under consumer protection laws.

Consumer protection laws that protect debtors generally fall into five categories:

• Obtaining credit;
• Reporting credit information;
• Electronic fund transfers;
• Identity theft; and
• Debt collection.

Obtaining Credit

The process of obtaining credit is regulated by two federal laws. The Truth in Lending Act regulates what information must be provided by creditors who wish to extend credit to consumers. The Equal Credit Opportunity Act prohibit creditors from discriminating against consumers based on their membership in certain protected classes.

Truth in Lending Act

Congress passed the Truth in Lending Act (TILA) in 1968 to help consumers understand and compare various credit options available to them. TILA only applies to consumer credit transactions and leasing. The law does not apply to commercial credit transactions.

TILA applies to all real estate transactions and consumer credit transactions of $25,000 or less. The law also applies to credit transactions involving finance charges or when the loan repayment involves four or more installments.

TILA also regulates credit cards. The law prohibits credit card companies from issuing credit cards unless they were requested by the consumer. Any changes to interest rates or policies to existing credit card accounts must be provided in writing to consumers, who must be allowed to cancel their credit cards without penalty. Consumers are required to pay any outstanding balance accrued to that point, but they cannot be forced to accept altered terms.

TILA requires certain disclosures be made to applicants for credit. These disclosures include:

• Minimum rate of repayment;
• Billing period;
• Interest rate in the form of the annual percentage rate;
• Type of interest (simple or compound);
• Service charges and fees; and
• Prepayment penalties.

All disclosures must be in ordinary language that makes sense to the ordinary customer. Disclosures must also be clear and conspicuous, meaning that the terms cannot be buried in a contract to hide them from consumers.

Equal Credit Opportunity Act

Congress passed the Equal Credit Opportunity Act (ECOA) in 1975 to protect consumers from discrimination when applying for credit. ECOA prohibits creditors from discriminating against creditors based on their:

• Race;
• Color;
• National origin;
• Religion;
• Gender;
• Age;
• Marital status; and
• Welfare status.

The purpose of ECOA is to require creditors to consider only those characteristics of an applicant related to creditworthiness rather than social status or stereotypes. Therefore, creditors may consider an applicant’s marital or welfare status only to the extent that it relates to the applicant’s creditworthiness. For example, an applicant’s marital assets and debts are relevant factors when determining how much credit, if any, should be extended to the applicant. However, denying or granting credit solely on the basis of marital and welfare status is illegal.

ECOA also requires creditors to provide specific reasons for denying credit to applicants. This allows applicants to determine whether the denial was for discriminatory reasons or as pretext to hide the discriminatory reason, in violation of the law.

Reporting Credit Information

Congress passed the Fair Credit Reporting Act (FCRA) in 1970 to regulate the gathering, storage, and reporting of credit-related information. FCRA applies to individual consumer information only. FCRA does not apply to business entities’ credit reports.

A credit bureau is an organization that maintains and distributes information regarding a person’s credit worthiness to potential creditors, insurance companies, and employers. The three main credit bureaus in the United States are Equifax, Experian, and Transunion.

Before releasing consumer information, a credit bureau must confirm the identity of the party making the request and verify the reason for its use. The credit bureau then provides information about a consumer’s credit in the form of a credit report.

In general, consumers do not have to consent to the release of their information. FCRA requires notice to consumers in three specific circumstances:

• A credit report is provided to an employer and includes negative information that could prevent the consumer from being hired;
• When the consumer is denied credit, insurance, or employment based on information contained in the report;
• An investigative report is requested about the consumer’s character, personal attributes, and living arrangements.

Credit bureaus must delete general information that is more than seven years old, and bankruptcies that are more than ten years old. If debts were incurred over seven years ago, or bankruptcies filed more than ten years ago, but are still “open” because the debt has not been paid off, then that information may be reported.

FCRA gives consumers some specific rights regarding their consumer reports. First, consumers are entitled to one free report per year from each of the credit bureaus. Consumers may pay for additional copies of their credit reports.

Second, consumers are entitled to dispute information included in a credit report. If the credit bureau determines that the report contained an error, the erroneous information must be removed. If the credit bureau confirms the information or cannot determine that it was erroneous, then the consumer has the right to add an objection to the information in the report.

Finally, consumers are entitled to place a credit freeze on their credit reports. A credit freeze is when the consumer restricts or prohibits creditors from requesting credit reports about them. In essence, a credit freeze prevents third parties from requesting a consumer’s credit report without the consumer’s permission. If the consumer wants to apply for credit or a new job, then the consumer may lift the credit freeze for a limited period of time or give authority to specific entities to request a credit report.

Electronic Fund Transfers

The Electronic Fund Transfer Act (EFTA) was passed by Congress in 1978 to protect consumers from unauthorized electronic fund transfers from their accounts. EFTA applies to electronic direct deposits and withdrawals, automatic teller machines (ATMs), and point-of-sale transactions with merchants.

EFTA requires banks to investigate errors and reported fraud promptly and to correct any errors within one business day. A consumer’s liability for unauthorized transfers is limited to $50 or the amount of the transfer (whichever is less) for transfers made before the consumer notified the bank of the unauthorized use. After the consumer notifies the bank, the consumer is not liable for any additional unauthorized transfers. However, if the consumer fails to notify the bank within two business days of the unauthorized transfer, then the consumer’s liability rises to $500.

A preauthorized transfer is an electronic fund transfer authorized in advance to recur at regular intervals. For example, a consumer authorizes her monthly mortgage payment to be automatically withdrawn from her banking account on the first of every month. Preauthorized transfers require banks to:

• Receive written instructions from the consumer about the timing, amount, and duration of the transfers; and
• Allow the consumer to stop payment up to three business days before the scheduled transfer date.

Identity Theft

Identity theft is an increasing concern for businesses and consumers. The Federal Trade Commission estimates that at least ten million consumers are victims of identity theft each year.

While consumers cannot completely prevent identity theft, there are some steps that they can take to minimize their risk. First, consumers should monitor their bank accounts and charges on their credit and debit cards. If they notify their banks of unauthorized transactions as soon as possible, then they will minimize their personal liability. Second, consumers should request their credit report at least annually. Parents are entitled to request credit reports for their minor children. Third, consumers can place a credit freeze on their credit report to prevent third parties from accessing their financial and personal information and from obtaining credit under their name.

If a consumer is a victim of identity theft, he or she can post a fraud alert with the credit bureaus to be included in his or her credit report. A fraud alert requires businesses to verify the identity of an applicant for credit before extending any credit to him or her.

Debt Collection

Businesses that are owed money from debtors may seek a court judgment to collect the debt. However, the judicial process is often expensive and time consuming. As a result, many businesses prefer to collect debts outside of the court system.

To prevent abusive practices by debt collectors, Congress passed the Fair Debt Collection Practices Act (FDCPA) in 1978. Under FDCPA, a debt collector must, within five days of contacting a debtor, send a written notice containing:

• The amount of the debt;
• The name of the creditor to whom the debt is owed; and
• A statement that if the debtor disputes the debt in writing, all collection efforts must stop until the creditor receives evidence of the debt.

FDCPA also prohibits certain debt collection practices. Debt collectors cannot:

• Contact a debtor who has notified the collector in writing that he or she wants no further contact;
• Contact a debtor who is represented by an attorney;
• Call a debtor before 8:00 a.m. or after 9:00 p.m.;
• Threaten a debtor or use obscene or abusive language;
• Contact a debtor at work if the employer prohibits such contact;
• Imply or say that they are attorneys or government officials when they are not;
• Use a false name;
• Make any false, deceptive, or misleading statements;
• Contact family and acquaintances of the debtor more than once or for any reason other than to locate the debtor;
• Tell family and acquaintances of the debtor that he or she is in debt;
• Publish the debtor’s name and address on a “bad debt” list on the internet or in the newspaper; or
• Collect charges in addition to the debt unless permitted by state law or contract signed by the debtor.

Filing a collection action in court does not violate any of these rules.