VI. Loans

A.  Massachusetts Credit Laws

Businesses that prey on low-income consumers often impose unconscionable finance charges. The first step in analyzing such a transaction is to determine whether Massachusetts credit law applies to the transaction. Below is a list of Massachusetts credit laws that are applicable to credit transactions:

• Legal Interest Rate: G.L. c. 107, § 3

• Contract: G.L. c. 107, § 3

• Judgment: G.L. c. 231, §§ 6B and C

• Criminal Usury Cap: G.L. c. 271, § 49

• Small Loans: G.L. c. 140, §§ 90 and 96

• Industrial Banks: G.L. c. 172A, §§ 1 to 15 (§9), Banking Company Act

• Insurance Premium Finance: G.L. c. 255C, § 14

• Second Mortgages: G.L. c. 140, § 90A

• Auto Finance: G.L. c. 255B, § 1 to 25 (§ 14), Motor Vehicle Retail Installment Sales

• Other Goods Finance: G.L. c. 255D, §§ 1 to 32 (§11), Retail Installment Sales and Services

• Open-End Credit Loans: G.L. c.140, § 11B

• Life Insurance and Annuity Policy Loans: G.L. c.175, § 142

• Check Cashing: M.G.L. c. 169A, § 1 et seq.

Determining whether a particular Massachusetts statute applies to a transaction is sometimes surprisingly difficult, as the creditor may attempt to disguise one type of transaction as another in order to avoid regulation.

When Massachusetts credit law applies, it will govern the cost of credit, including the finance charge, authorized additional charges, and delinquency and deferral charges. These statutes often place limitations on other credit terms, such as security interests, prepayment rights, and creditors' enforcement rights. Specific remedies available to the consumer are often prescribed.

After determining that Massachusetts credit law applies to the transaction, the advocate has another hurdle to overcome. Several federal statutes, including the Depository Institutions Deregulation and Monetary Control Act of 1980, 12 U.S.C. § 1737f-7 note, 183 1(d), 1730g note, 1735f-7n note; the Alternative Mortgage Transactions Parity Act, 12 U.S.C. §§ 3801-3805; and the National Bank Act, 12 U.S.C. § 85, preempt state usury laws as to interest rates, charges, or certain types of loan terms, at least with respect to certain types of lenders or certain types of transactions. Under some of the preemption statutes, states have the right to opt out of the effects of the federal preemption. Practitioners should always determine whether federal preemption applies to the transaction under analysis. If a creditor invokes federal preemption, the consumer's advocate should make sure that it has complied with all the federal statute's preconditions.

B.  Credit Practices Rule

The FTC's Credit Practices Rule places limitations on certain credit contract terms. Among other things, the rule prohibits nonpurchase money security interests in household goods, pyramiding late charges, confessions of judgment, wage assignments, and waivers of exemption. 16 C.F.R. Part 444. It also requires specific disclosures to cosigners of the risks they are undertaking. 16 C.F.R. § 444.3. As is true for other FTC rules, there is no private cause of action to enforce this rule, but most courts have held that terms that violate the rule are unenforceable and that inclusion of such terms is a UDAP violation. See National Consumer Law Center, Unfair and Deceptive Acts and Practices § 5.1.3.1.10 (5th ed. 2001 and Supp.).

C.  Disclosure requirements of the federal Truth in Lending Act

The Truth in Lending Act (TILA), passed in 1968, was Congress' first foray into consumer protection since it had broadened the FTC Act in 1938 to cover consumer fraud. 15 U.S.C. §§ 1601-1667e. The Federal Reserve Board has promulgated Regulation Z, 12 C.F.R. Part 226, and Regulation M, 12 C.F.R. Part 213 (consumer leasing), and issued an Official Staff Commentary to provide greater specificity as to disclosure requirements. The Act, the appropriate regulation, and the Commentary should all be consulted when analyzing a transaction.

The thrust of the Truth in Lending Act is not to regulate credit terms, but to require accurate, uniform disclosure of those terms. Actual damages, statutory damages, and attorney fees are available for certain violations. For certain nonpurchase money residential mortgage credit, the borrower may rescind the transaction for up to three years in some circumstances.

For closed-end credit, TILA requires disclosure of the finance charge, annual percentage rate, amount financed, and the total number of payments. These disclosures must be made in a clear and conspicuous manner.

For open-ended credit (typically credit cards), TILA requires disclosure of the finance charge accrual date; the periodic rate; the method of determining balances on which the finance charge is computed; how the dollar amount of any finance charge will be determined; other charges imposed on the account which are not finance charges; any security interest, if any, and the consumer's and creditor's billing error responsibilities.

To be covered by TILA the transaction must based on "consumer credit" extended by a "creditor" as these terms are defined under TILA. See National Consumer Law Center, Truth in Lending, Ch. 2 (4th ed. 1999 & Supp.). The transaction must also not fall within any of the exemptions from TILA coverage. For example, transactions that involve business, commercial, agricultural or organizational credit; relate to credit over $25,000 unless it is secured by real estate or a dwelling; or in certain circumstances public utility credit, are exempt.

D.  Home Ownership and Equity Protection Act (HOEPA)

The Home Ownership and Equity Protection Act (HOEPA) is Congress' primary response to the predatory lending crisis. HOEPA singles out certain high-rate mortgage loans, and subjects them to special disclosure requirements and restrictions on terms. 15 U.S.C. §§ 1602(aa), 1639; Regulation Z, 12 C.F.R. §§ 226.31 - 226.34. Note that the Federal Reserve Board has issued a revised version of the HOEPA provisions of Regulation Z, effective October 1, 2002. 66 Fed. Reg. 65604 (Dec. 20, 2001).

HOPEA has set up two triggers for special protections under the law. The HOPEA protections apply if either one of the triggers is met. A high-rate loan is defined under HOPEA as one in which: 1) the annual percentage rate exceeds the interest rate for U.S. Treasury bonds by a certain number of percentage points, or 2) the total dollar amount of points and fees paid by the borrower at or before closing exceeds a certain percentage of the total loan amount. The calculations for determining whether a loan meets either of these two triggers are discussed in detail in National Consumer Law Center, STOP Predatory Lending: A Guide for Legal Advocates (2002) and National Consumer Law Center, Truth in Lending ch. 10 (4th ed. 1999 and Supp.). Purchase-money loans and open-end credit are not covered.

HOPEA limits the ability of certain high-cost mortgage lenders to impose certain terms that Congress has found to be abusive. Absolute bans exist for terms that include interest rate increases upon default and negative amortization. Prepayment penalties are prohibited unless the creditor can meet a five-part test, which includes not causing the consumer to pay more than 50% of their income toward "monthly indebtedness payments." As of October 2, 2002, "due on demand" clauses are also prohibited unless there is fraud by the consumer in connection with the loan, the consumer fails to meet repayment terms of the agreement for any outstanding balance, or where the consumer, by act or omission, adversely affects the creditor's security of the loan.

HOPEA also contains other prohibitions applicable to the lender. For example payments from proceeds payable only to home improvement contractors or making an open-ended loan to evade HOPEA are prohibited.

HOPEA is a part of TILA and violations of HOPEA will allow for the usual TILA monetary damages. Where the violations are material (under a common law standard, not the TIL standard), enhanced damages of the sum of all finance charges and fees paid by the consumer are available to the consumer. There is a one-year statute of limitations for affirmative suits, however HOPEA claims can be raised defensively at any time. 15 U.S.C. § 1640(c).

Massachusetts Division of Banks has also promulgated regulations aimed at high cost loans, similar to HOPEA. 209 C.M.R. 32.00 et. seq. These regulations include general disclosure requirements for credit transactions, and more specific disclosures applicable to credit cards and open-ended home equity plans. 209 C.M.R. 32.05-16. For closed-end credit, the regulations include clear and conspicuous disclosure of the annual percentage rate and the finance charge. 209 C.M.R. 32.17-24. These regulations should be carefully reviewed by advocates representing clients in any consumer credit mortgage transaction.