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Retail Installment Sales (Part 3)

Consumer Law Tutorial for Judges in New Mexico

D. Provisions Prohibited in Retail Installment Contracts and Retail Charge Agreements

There are a number of restrictions on the types of provisions that are allowed in a retail installment contract or retail charge agreement:

  • The holder of the contract or agreement may not demand payment before the agreed-upon payment dates if the buyer has not defaulted;
  • The holder of the contract or agreement cannot demand an assignment of wages;
  • The seller or holder of the contract or agreement may not have authority to enter upon the buyer’s premises unlawfully or to commit any breach of the peace in order to repossess goods;
  • The buyer may not waive any right of action against the seller or holder of the contract or agreement for any illegal act committed in the collection of payments or in repossession of goods;
  • The buyer cannot execute a power of attorney appointing the seller as the buyer’s agent in collection of payments under the contract or agreement; and
  • The buyer cannot agree to refrain from asserting a claim or defense arising out of the sale. §§56-1-5; -7.

E. Penalties/Remedies

1. Retail Installment Sales Act
Any person who willfully and intentionally violates the Retail Installment Sales Act is guilty of a misdemeanor. §56-1-8. A seller who enters into a contract or agreement that violates the Retail Installment Sales Act (except by bona fide error) shall not be able to recover any time price differential, official fees, or any delinquency or collection charges under the contract or agreement. The seller may, however, still collect an amount equal to the cash price of the goods or services sold, as well as the cost of any insurance included in the transaction. §56-1-9. The buyer who prevails on a claim that the contract or agreement violates the Retail Installment Sales Act is not entitled to damages, only a waiver of the fees and costs noted above.

2. Federal Truth in Lending Act

a. Consumer Remedies
Various remedies are available for violations of the Truth in Lending Act, including actual damages, statutory damages, attorney fees and costs, and rescission. Which remedy is available in a given case depends on the nature of the violations.

(i) Rescission
Consumers have the right to rescind—or cancel—a credit transaction involving a lien on “any property which is used as [the consumer’s] principal dwelling,” including mobile homes and trailers. 15 U.S.C. §1635
(a). The consumer has the right to rescind the transaction until midnight of the third business day following consummation of the transaction or delivery of the information, disclosures, and rescission forms required by the Truth in Lending Act, whichever is later. 15 U.S.C. §1635(f). Once the consumer rescinds, the creditor must return any money or property paid by the consumer within twenty days. 15 U.S.C. §1635
(b). Rescission cancels all finance and other charges that would have been owed by the consumer. 15 U.S.C. §1635(b). When considered together, Sections 1635(g) and 1640(a) allow a consumer to do all of the following: rescind a credit transaction; recover actual and statutory damages flowing from a disclosure violation; and recover attorney fees and costs.

(ii) Actual Damages
Whenever a creditor violates any of the Truth in Lending Act disclosure requirements, including disclosure of the consumer’s right to rescind, the consumer is entitled to collect actual damages. 15 U.S.C. §§1640
(a)(1). Actual damages include consequential damages, such as damages for emotional distress. Prejudgment interest on actual damages may also be available. There is no cap on the amount of actual damages that can be recovered for violations of the Truth in Lending Act.

(iii) Statutory Damages
Where available, statutory damages are awarded in addition to actual damages, costs, attorney fees, and rescission. 15 U.S.C. §1640
(a)(2)(A) & (a)(3). Statutory damages are awarded when certain violations of the Truth in Lending Act are proved, without regard to the existence of actual damages, detrimental reliance by the consumer, or creditor intent to deceive the consumer.

In closed-end transactions (retail installment contracts), statutory damages are available for failure to disclose accurately the amount financed; the aggregate (unitemized) finance charge; the annual percentage rate; the total of payments; the number, amount, and due dates or periods of payments; and that a security interest has been retained. 15 U.S.C. §1638(a).

In open-end transactions (retail charge agreements), a consumer may recover statutory damages for failure to disclose any of the information required in the initial disclosure, for untimely disclosure of required information, and for failure to disclose the following information in the periodic statement: the amount of the finance charge, itemized if required; periodic rates; the annual percentage rate, the balance upon which the finance charge is computed; the new balance; the free-ride period; and the address for billing errors. 15 U.S.C §1637.

Statutory damages are also available for failing to make the disclosures conspicuous, for failing to segregate closed-end disclosures from other information, and for making the disclosures in an untimely fashion. 15 U.S.C. §1640(a).

When a creditor violates the Truth in Lending Act, the creditor’s statutory damages are twice the amount of the finance charge. 15 U.S.C. §1640(a)(2)(A)(i). However, in transactions secured by real property or a dwelling, the consumer will recover a minimum of $200 and a maximum of $2000 in statutory damages, even if twice the amount of the finance charge falls below $200 or above $2,000. 15 U.S.C. §1640(a)(2)(A)(iii). Similarly, in consumer lease transactions, the consumer will recover a minimum of $100 and a maximum of $1000 in statutory damages, even if twice the amount of the finance charge falls outside these figures. 15 U.S.C. §1640(a)(2)(A)(ii). A consumer may recover only one statutory award regardless of the number of disclosure violations in the transaction, unless a creditor continues to violate the Truth in Lending Act after a consumer has recovered damages. 15 U.S.C. §1640(g).

(iv) Costs and Attorney Fees
A consumer who succeeds in a Truth in Lending suit is entitled to the costs of the litigation and reasonable attorney fees. The consumer is entitled to these awards whether the consumer is the plaintiff or the defendant in a collection action. 15 U.S.C. §1640(a)(3). Costs include filing fees, transcripts, witness fees and other costs not included in attorney’s fees, such as costs for copying, computer research, long distance telephone calls, postage, parking, and travel.

By comparison, a creditor who prevails in a Truth in Lending suit is not entitled to attorney’s fees, even if the consumer’s case was frivolous or in bad faith, unless the credit agreement, state law, or court rules provide for creditor attorney fees.

b. Creditor Defenses

(i) Statute of Limitations
Section 1640(e) allows consumers to bring claims for Truth in Lending Act disclosure violations “within one year from the date of the occurrence of the violation.” In closed-end transactions, the date of the occurrence of the violation (the date that triggers the statute of limitations) is either the date the contract is entered into between the parties or the date the required disclosures are actually made if they are made after the contract is entered into.

In open-end transactions, the statute of limitations is triggered on the date that an erroneous finance charge has been imposed and appears on a billing statement. Because open-end credit involves repeated, periodic billing, “a new statutory period begins each time the defective statement is given, thereby extending the time for bringing an action to a year from receipt of the last billing.” National Consumer Law Center, Truth in Lending § at 417 (4th ed. 1999).

With regard to rescission violations, when a consumer rescinds and the creditor fails to respond within twenty days to the notice of rescission, the one-year statute of limitations will run from the twenty-first day after the notice of rescission. This is true whether the consumer issues the notice of rescission within three days of the transaction or within the three-year extended period for rescission when a creditor fails to make material disclosures properly or fails to provide proper notice of the right to rescind.

The statute of limitations does not prevent a debtor from asserting a Truth in Lending Act violation as a defense in a debt collection action brought more than one year from the date of the occurrence of the violation, except if prohibited by State law. 15 U.S.C. §1640(e).

(ii) Bona Fide Error
A bona fide error is a complete defense to liability if the error was unintentional and the creditor maintained “procedures reasonably adapted to avoid any such errors.” 15 U.S.C. §1640(c). “Examples of a bona fide error include, but are not limited to, clerical, calculation, computer malfunction and program[m]ing, and printing errors, except that an error of legal judgment with respect to a person’s obligations under this subchapter is not a bona fide error.” 15 U.S.C. §1640(c).

(iii) Timely Correction of Error
A creditor is not liable for any Truth in Lending Act violations if the creditor corrects the violation within sixty days after its discovery, as long as the consumer has not given the creditor notice of the violation or filed suit alleging a violation. 15 U.S.C. §1640(b).

(iv) Good Faith Compliance “No provision of this section, section 1607 (b) of this title, section 1607 (c) of this title, section 1607 (e) of this title, or section 1611 of this title imposing any liability shall apply to any act done or omitted in good faith in conformity with any rule, regulation, or interpretation thereof by the Board or in conformity with any interpretation or approval by an official or employee of the Federal Reserve System duly authorized by the Board to issue such interpretations or approvals under such procedures as the Board may prescribe therefore, notwithstanding that after such act or omission has occurred, such rule, regulation, interpretation, or approval is amended, rescinded, or determined by judicial or other authority to be invalid for any reason."