Class action against Affordable Auto settled

This office, along with  Attorney Kenneth D. Quat of Framingham, recently settled a consumer class action against Affordable Auto Leasing, Inc., of Fall River. We sued Affordable Auto on behalf of consumers who signed contracts with them that were in effect anytime since August 2015.   Compared to sales, leases of used vehicles have serous costs and financial risks, making disclosure especially important before you decide to enter into such a transaction.

Our lawsuit claims that these leases did not fully and properly disclose the terms of the deal.  We also claim that certain clauses on the back of the contract, which were designed to make it harder for consumers to sue Affordable for lemon cars or any other problem, were unfair and should not be enforced.

Affordable denies that it did anything wrong, but it agreed to settle the case by not enforcing the disputed clauses of the lease and by changing its leases so as not to include these unfair terms in the future. As an alternative to a tiny payment to each of more than 500 class members, Affordable also agreed to pay $500 to South Coastal Counties Legal Services, Inc.; to pay a service award of $500 to the class representative; and to pay up to $25,000 in legal fees and costs involved in bringing and concluding this case.

A notice has been mailed to every identified member of the class.  The notice explains the lawsuit, the terms of settlement, and the rights of class members to object if they think the settlement is unfair.  

Being a class member does not affect any other rights or liabilities that any class member may have with regard to Affordable Auto.

On the top right bar of this site,  you will see the heading:  “Class action settlement: Valley v. Affordable Auto Leasing, Inc.”  Click on it for links to the important court documents about this case.

You are welcome to contact me by phone or by e-mail if you have any questions about the lawsuit, the settlement, or any other aspect of your transaction with Affordable Auto.

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Class action against State Road Auto Sales settled

This office, along with  Attorney Kenneth D. Quat of Framingham, recently settled a consumer class action against State Road Auto Sales, Inc., of Westport.   We sued State Road on behalf of consumers who signed contracts with them that were in effect anytime since October 2013, but signed before January 2016.    Although State Road advertises that it sells cars to credit-impaired customers, in fact its contracts are not installment sales, but leases.   Compared to sales, leases of used vehicles have serous drawbacks for consumers.

Our lawsuit claims that these leases did not fully and properly disclose the terms of the deal: for example, HOW MUCH OF AN ADDITIONAL PAYMENT YOU HAVE TO MAKE  after the lease ends in order to become the owner of the car.  We also claim that certain clauses on the back of the contract, which were designed to make it harder for consumers to sue State Road for lemon cars or any other problem, were unfair and should not be enforced.

State Road denies that it did anything wrong, but it agreed to settle the case by paying a total of $30,000 to all the members of the affected class (together with fees for the class’s attorneys) AND not enforcing the disputed clauses of the lease.

A notice has been mailed to every identified member of the class.  There are about 2200 members.  The notice explains the lawsuit, the terms of settlement, and the rights of class members to participate in the settlement and/or  to object if they think the settlement is unfair.   TO GET A SHARE OF THE SETTLEMENT MONEY, YOU MUST MAIL OR FAX A FORM confirming your current address, no later than July 13,  to Coastal Legal Affiliates, P.C., the law firm that is administering the settlement.

Sharing in the settlement does not affect any other rights or liabilities that any class member may have with regard to State Road Auto Sales.

On the top right bar of this site,  you will see the heading:  “Class action settlement: Grant vs. State Road Auto Sales, Inc.”  Click on it for links to the important court documents about this case.

You are welcome to contact me by phone or by e-mail if you have any questions about the lawsuit, the settlement, or any other aspect of your transaction with State Road Auto Sales.

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Target shoppers, don’t panic!

So, maybe you are among the 40,000,000 Target shoppers whose credit and debit card accounts have been compromised by a security breach that took place over the three weeks after Thanksgiving.  In response, consumers are being warned to do everything from close their accounts to pay for credit card “monitoring” services.  Some of this advice seems a bit extreme to me.

This is a good time to get reacquainted with the legal protections that exist for consumer (i.e., non-business) credit and debit accounts.  Thanks to the National Consumer Law Center (NCLC), U.S Public Interest Research Group (PIRG), and Consumer Action for publishing a summary of the rules.

Credit cards:  Under our friend the Truth-in-Lending Act (TILA), previously discussed in this space,  your responsibility for unauthorized credit card charges is
limited to $50 or amounts charged before you notify the card issuer of the unauthorized use, whichever is less.   And VISA and MasterCard have voluntary “zero liability” policies, at least as to one security breach within a year.

Debit cards:  Debit cards are covered by a wholly different law, the Electronic Funds Transfer Act (EFTA).  Your responsibility for debit card fraud charges is a bit more:
• up to $50 if you notify the bank within 2 days of the loss or theft of a card, and up to $500 afterwards.  But if the physical debit card itself has not been lost or stolen, you are not liable for any unauthorized charges if you report them within 60  days after your bank sends out its statement showing an unauthorized transaction.

(Another problem with debit card fraud is that when your account is debited without authorization,  you can’t use that money until the issue is resolved and the debit is  reversed.)

The most important thing to do if your account has been compromised by a seller’s security breach is to check your statements carefully for several months.  Chances are, no unauthorized charges will appear, but if they do, you will know to challenge them promptly and to close the account if the card issuer doesn’t do so spontaneously.

Be especially vigilant for “micro-charges” — unfamiliar charges so small that you might not normally trouble yourself to complain about them.  Crime rings trying to show that cards are still active, in order to boost their value on the black market, sometimes do this by initiating a charge of a dollar or two because normally the card user would overlook it.  Larger unauthorized charges then follow.

If the card you used at Target was a debit card, changing your PIN is also a good precaution and not an intolerable convenience  — though personally, blessed with an ancient four-digit telephone number, I would hate, hate to have to change that PIN!

What about credit report monitoring?   Simply put, it is not likely to be useful in this circumstance.  It won’t tell you anything about misuse of a debit card.  As for a credit card, consider that the worst consequence of ID theft, which a credit report would reveal —  the opening and use of new credit accounts based on your personal information — is unlikely to result from a point-of-sale security breach because your Social Security number is not part of the information that was passed to the seller’s network.   So do not pay money for credit card monitoring.  The Attorney General’s Office is trying to get Target to agree to provide this service free for affected customers.  It’s always a good idea to obtain your free report annually ( and review it just to make sure there are no errors on it.  But paying for this service as a result of the Target mess-up strikes me as allowing yourself to be victimized  twice.

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CFPB: Our government at its best

I recently returned from the annual training event at which over 900 consumer lawyers shared their successes and challenges and were brought up to date on the latest rules, court cases, and public policy issues in the world of consumer protection.

One thing that stood out for me at this year’s conference was the prominent mention of the activities of the Consumer Financial Protection Bureau.  The CFPB, of course, was created by the Dodd-Frank financial reform law in the wake of the mortgage foreclosure crisis back in 2010.  From the popular media, most of what I remember hearing about it was the knock-down-drag-out fight to get the Senate to stop filibustering the appointment of its executive director, Richard Cordray.   Mr. Cordray was finally confirmed just four months ago.

So I was somewhat surprised to learn that while that high-profile fight was going on, the CFPB hit the ground running, and has already achieved major successes on behalf of consumers.   Here are just a few of them:

Rule-making:  There is no higher calling than to stop the predatory lending and oppressive servicing practices affecting home mortgage lending.  New rules take effect in January that will, among other things, require mortgage servicers to explore modification and other loss mitigation options before beginning to foreclose; make monthly mortgage statements more informative to customers; and require prompter payoff statements.  Another set of rules strengthens lenders’ obligation to document that they are not writing mortgages that the borrower will obviously be unable to repay.

Enforcement:  The CFPB has made lenders refund $750 million in overcharges to almost 8 million consumers in mortgage settlements. Other settlements have returned overcharges in credit card payments and payday loans.   All  lenders are now on notice that inspection of their operations may also lead to disgorgement of ill-gotten gains.

Education:  The CFPB set up special units for populations targeted for specific kinds of fraud and abuse, including older Americans, members of the armed forces, immigrants, and college students.  One area of emphasis is consumer education.  The Office of Military Affairs, headed by Holly Petraeus, has visited 66 military bases and completely reorganized the training given to young enlistees so that they can avoid high-cost car loans and payday loans.  The Office of Older Americans publishes easy-to-read fact sheets on such topics as the responsibilities of representative payees and other fiduciaries.  The student financial aid “shopping sheet” adopted by many colleges enables students to make intelligent comparisons of actual costs to attend these institutions.  A recent fact sheet targeted at immigrants summarizes the rules on remittances or wire transfers abroad and notes that there is a special CFPB phone line offering translation into more than 180 languages.

Investigations:  The CFPB holds hearings around the country at which all stakeholders can testify.  One issue under investigation now is whether car dealers discriminate against  customers on the basis or race or national origin in marking up the interest rate for dealer-arranged financing.  Another pending investigation explores whether disclosure rules are needed for credit card “rewards” programs to prevent confusing and misleading customers.

Web site:  While the talking heads fume over the woes of the launch of, the CFPB’s site is a roaring success.  According to Melissa Threadgill, a student at the Harvard Kennedy School of Government,  the CFPB solved the problem of recruiting top-notch IT staff on a government salary by offering two-year fellowships to talented private-sector web developers.  The results can be seen at  a visually inviting,  easy-to-navigate site (active in English and Spanish),  with links to post a complaint, offer a personal story, view infographics summarizing the data accumulated by the Bureau, and participate in rule-making proceedings.   A separate drop-down menu leads to the technical information needed for industry lawyers for compliance with the rules.  And the logo, a stylized searchlight, symbolizing the bureau’s mission, is downright lovely.

Check out your federal government doing its job at


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The self-image of a voter

It’s now a truism that the recent election was won by armies of grass-roots staffers and volunteers approaching voters one-on-one to make the case for President Obama and supportive House and Senate candidates.  I was one of those canvassers.  I talked to several hundred voters in working-class city precincts.  Because these neighborhoods are transient, canvassers would start by determining whether the target voter still lived at the indicated address. And where the listed voter had moved on, we inquired whether the new residents were registered to vote, and if not, offered them the opportunity to register on the spot.

For a canvasser, finding an unregistered citizen who is eager to register is the day’s high point; conversely, arguing with an eligible voter who won’t register can be a real downer.   Dogged non-voters fall into a couple of categories.  Some are too immature, addled, or  overwhelmed to contemplate adding another duty to their list of obligations.   Some display an aggressive blend of ignorance and cynicism,  insisting that it doesn’t matter who gets elected or their individual vote doesn’t matter.   You learn to recognize these types and not spend a lot of time arguing with them.  You move on.

But there are others, and part of the canvasser’s art is to recognize the unspoken concerns of potential voters and tactfully address them.  Alienation from civic activity is hardly a fringe phenomenon:  year after year, barely half of the eligible American electorate votes, even in high-profile national elections.  Political partisans find it easy to disparage non-voters.  But feeling superior doesn’t get us anywhere.  As campaigners, our job is to get inside the head of the reluctant voter and tease out what the barriers may be.

We find people who wrongly think they are ineligible to vote because of a criminal background — and maybe claim to have been given that misinformation by their probation officer.   We find people who don’t want to expose their low literacy to the scrutiny of a stranger at the door or at a polling place.  We still find people who think that being unregistered to vote makes them immune from being called for jury service.

Beyond all of that, I’ve concluded that an awful lot of people are inhibited by the sheer mechanics of voting.  This can be hard to relate to if you grew up in an environment where everyone votes.  Whether you see it as a duty, a privilege, or an adventure, if you’ve always voted you may find it hard to believe that anyone could have a mental block about the process, or that anyone would allow such reservations to trump their motivation to improve their circumstances and their community by voting.

On my most memorable day,  I spent 20 minutes persuading a woman to register.   I worked on her for that long because I could see from the TV show she was watching and from her conversation that she actually had well-developed political opinions.  But she had never voted.  She was 71 years old.

When we canvass, we answer all kinds of questions — perfectly reasonable questions, many with simple answers,  but which the prospective voter never had a chance to ask before.   What time are the polls open?  Do I have to bring an ID?  How long will it take?  What if I can’t read the ballot because I’m legally blind?  Who can I call if I need a ride?  Can I bring my children in with me?  Do I have to cast a vote for every office or can I just vote for President?   What if I make a mistake marking the ballot?  What if I can’t get there during voting hours?

And some take the responsibility so seriously that they feel  unequal to the task, and ask,   How do I know who I should vote for?   As a partisan,  of course, I could just tell them.    But in truth, I sympathize with anyone trying to make sense of a political race on the basis of unrelenting reciprocal attack ads on television.  Voters need tools to cut through the fog to exercise their franchise intelligently.  So I prefer to say, well, I am going to leave you this voter guide that talks about some national issues and what the candidates think about them.  But isn’t there someone you respect and who shares your values? You could talk with them about how they plan to vote and why.  That’s what voters do.

We live in a world chock-full of diverse subcultures and experiences.  On some level we constantly define ourselves by what we incorporate into our self-image and what we choose not to incorporate.  If I got a flyer in the mail urging me to take up martial arts or calligraphy or rooting for the lacrosse team, I might well think:  well, that’s interesting, but I don’t know anything about that, it would be embarrassing to be the only ignorant person there,  and it would take time and effort to learn about it.  I’m okay with being a person who does not do that sort of thing.   And whereas at age 20 my excitement at learning something new might overcome my trepidation,  at 40 or 50 the learning curve looks more forbidding.   Learn how to program an iPad?  Maybe not.  Learn how to use an optical scan voting machine?  Maybe I’ll pass.   Additionally, the “horse race” mentality that pervades media coverage of elections contributes to the impression that politics is just another pastime that some people follow and some don’t.  Consciously or not,  potential voters get a pass to define themselves among the “nots.”

But with a tutor, the learning curve can be surmounted.  So a good canvasser is, among other things,  a tutor in the arts of democracy.  Civic engagement results from hard- and well-fought election campaigns.  Ultimately, canvassers don’t just win elections.  They do the vital work of democracy,  helping our fellow citizens, one by one, formulate their self-image to that of a voter.


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A new year resolution: question “doc fees”

The end of the year …  time to review, cull, and shred old case files.  A veritable trip down memory lane, reminding me of all the clients I helped and those I was unable to help.

Some of those old files contain purchase orders and financing contracts for cars.  Just on a whim, I pull them out and start perusing the columns itemizing the elements of the car purchase.  Down towards the bottom is an item usually labeled “Documentary Preparation” or “Documentation Fee.”   The amount of the so-called “doc fee” is usually pre-printed on the dealer’s paperwork.  That’s done to suggest that it is a government-required and non-negotiable charge.  It isn’t.

Here’s one from 2001 from Dartmouth Dodge.  The doc fee is $195.  Here’s a real nostalgia item,  from an Abington used car lot in 2004  — just $50.   Another small used car lot in Somerset in 2008: $99.  Route 6 KIA, 2011:  $289  — printed in red, nice touch.  McGee Chevrolet, 2010:  $390.  But the king of the doc fees, hands down, is Empire Hyundai, which since at least 2008 has been charging $495.  It’s printed in bold type right above the $29 Inspection fee, which really makes it look like a required third-party payment.

What is a “doc fee”? It depends whom you ask.  McGee Chevrolet’s invoice uses the alternate term “customer service fee” to describe the $390 charge, while Route 6 KIA uses “Seller’s administration fee.”  Sometimes dealers claim that it’s for filing required documents with the Registry of Motor Vehicles.  But that can’t be,  because those charges are itemized separately.  Sometimes they say it’s a fee charged to the dealer by the lender who buys the installment sale contract.  That is inconsistent with the fact that the dealer charges the fee whether or not it is arranging financing.  Sometimes they say it’s for the convenience of taking care of the registration paperwork rather than making you go to the Registry yourself.    How much is that convenience worth to you?   In a case brought by the Ohio Attorney General’s Office, charging that a dealer’s “delivery and handling” fee was unfair and deceptive, the defendant dealer was claiming that the fee covered everything from key duplication, file folders, inspecting and detailing the car, and paying property taxes and insurance on vehicles in the dealer’s inventory.  So it depends whom you ask, but the problem is, most buyers never ask at all.

The bottom line is that the “doc fee” is an additional charge for the dealer’s overhead.  That’s deceptive.   In the American marketplace, it’s generally understood that a quoted price includes the seller’s administrative overhead and profit margin.  If carrots are $1.99 a pound, you don’t expect the cashier to add on 30 cents for the store’s refrigeration system!   If blue jeans are labeled $40, you wouldn’t pay an extra dollar to the clerk for cutting off the security tag!  Adding a “doc fee” to the agreed-upon price of a car amounts to the same thing.  And as this practice has gone on unchallenged for years, the money involved has grown from a nuisance to a substantial burden.  No one I know would suggest that a $495 bump-up in the price of a car is trivial.

Why doesn’t someone sue to stop this?

Well, to be worthwhile, a case would need a plaintiff buyer who was misled as to some aspect of the charge:  that it wasn’t advertised, was slipped in after a bottom line was negotiated, was falsely misrepresented as being mandatory, or whatever.   But often, in the fog of car buying, juggling the trade-in value, trade-in payoff, manufacturer’s rebates, GAP, VSI, and other unfamiliar acronyms, customers just don’t see, don’t ask, and don’t try to negotiate the fees proposed by the dealer.  Sometimes they don’t even try to read through the finance contract, beyond the disclosure of the monthly payment.  If you don’t appear to care about the price, it’s hard to complain you were overcharged.

In 2012, resolve to be a smart car buyer.  Read the contract and question the fees, especially the big ones, starting with the “doc prep” fee.

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Dealer won’t pay the two (thousand) dollars… ordered to pay $37,881.38

Representing victims of bad car deals often brings to mind that old vaudeville routine with the punch line,  “Just pay the $2!” *

These cases often start out as disputes over relatively little money.  The customer typically learns that the car won’t pass inspection or has serious problems that weren’t evident during a short test drive.  The customer asks — begs–  the dealer to just cancel the deal and give back her deposit.  The dealer won’t do it.

The dealer will insist that you don’t have the right to cancel a car sale just because you realize afterwards that it was a bad deal.  That’s true.  That’s the law. Contrary to what many people think, there is no three-day “cooling off period” in car sales.

But it’s also the law that you do have the right to cancel the deal under a variety of circumstances:  if the dealer lied about something seriously wrong with the car,  if the car wasn’t fit to drive or lacked clear title at the time of sale, or if the car fails its state inspection right after being sold.  And in such cases, if a dealer ignores your entreaty to cancel the deal and refund your money, he acts at his peril.

I recently concluded a case with just this set of facts.  When the car failed inspection, the dealer insisted, over the customer’s objections, that he had the right to repair it so that it would pass.  As a judge later found, he plugged up the muffler with putty so it would pass.   He then left the car in a parking lot of a nearby Chinese restaurant and threatened that if the customer didn’t retrieve it, it would be towed away, but she would still be responsible for making the payments.

The customer had to put more than $2000 of her own money into repairing the car while continuing to make weekly payments.  Eventually she got fed up and filed a case in small claims court, hoping to get her $2,000 back.  Then, in a true illustration of the state of mind of the guy who won’t pay the two dollars, the dealer and his lawyer removed the case from small claims to regular court.  Evidently they bet that the consumer, who didn’t have a lawyer, would be unable to represent herself in the more complex environment of regular court sessions, and would either give up or lose on a procedural technicality.

Instead, the customer redoubled her effort to get a lawyer…. and found me.  I found, in addition to the defects in the car itself, some illegality in the financing — violations of the Truth-in-Lending law, and a usurious finance charge.

Two years later, after a bench trial, the car dealer was ordered to pay my client $37,881.13, which included a fee for my services.  After briefly considering an appeal, the dealer relented and we settled for a prompt payment of something less than the judgment amount.   You can read the decision and judgment here.

I’d like to think that next time a customer complains that her car has serious issues, or even failed inspection, and asks for her money back, this dealer will remember what happened to him and “pay the two dollars.”   We shall see.


* One version appears here:

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The APR: apples to apples

Now let’s discuss what was innovative about the APR back when it became a mandated disclosure, and why it’s so important in allowing you to shop for the best credit deal.

Before you ever heard of the APR, you knew about interest rates.   A lower interest rate is a better deal than a higher rate, right?  So why couldn’t you just compare interest rates and not worry about that APR stuff?

Well, it turns out that “interest rate” is not a precise legal term.  Over the centuries that our commercial system evolved,  different kinds of transactions got in the custom of calculating interest rates in different ways, which eventually got written into the laws that regulated different kinds of sellers and lenders.

The interest rate becomes especially slippery when applied to the most common form of consumer credit — making periodic, or installment, payments to retire a debt or pay off a sale.   To understand this, we will have to do some math.  Bear with me.

Let’s start from the deal we discussed in the last post:  I lend you $100 and you have to pay it back at the end of a year, with a simple interest rate of 6%.  Using the formula  I = P x R x T, where I is interest, P is principal, R is the interest rate, and T is the time expressed in years, you can see that if R is 6%, then I = $6. If you pay me back $106 at the end of the year, everyone would agree that you paid interest at a rate of 6%.

But what if, instead of repaying $106 at the end of the year,  I ask you to repay in monthly installments of $8.83, so that at the end of 12 months I have received my $106.   A bank might call that 6% add-on interest.  Is it the same transaction?  You know that it isn’t, because instead of getting the use of the whole $100 for a whole year, you are giving me part of it back month by month.  This may be advertised as 6% interest, but you can intuit that this is more expensive credit.  But how much more expensive?

Consider a further wrinkle.  What if a loan company offered to lend you $100 at 6% interest,  but deducted the interest up front so that you only got $94 in your hands which you then paid back in monthly installments of $7.83?  That is what used to be called “discount interest.”  As you can intuit, it is even more expensive than add-on interest.

The truest measure of interest is what is called actuarial interest.  This is the measure that takes into account how much you pay for credit relative to the amount of credit you have for the length of time you have it.  The interest rate for APR purposes is the actuarial interest rate.

If you know the rate, you can derive the dollar amount of interest by going step by step, applying the rate to the remaining unpaid principal balance in every payment period,  then adding up the interest paid over the whole life of the contract.   Deriving the rate from the dollar amount is more difficult.  And really, the disadvantage of using an actuarial rate is that no one can do the math in their head.  In the days before calculators and computers, you can see where merchants didn’t want to be bothered by computing interest rates in the most honest and meaningful way.  But nowadays, there is no excuse.

In case you are curious, in the example above, the 6% add-0n interest works out to an APR of 10.9%.  And the 6% discount interest for the same loan represents an APR of 12.2%.

Before the APR, if you wanted to shop for credit, you could consult a bank, a credit union, a small-loan company, and a car dealer.  They would quote you their interest rates, but it would be like trying to compare hotel rates in Toronto, New York, and Sydney without realizing that the “dollars” in question were three different currencies.   Thanks to the APR, everyone now can have an apples-to-apples comparison of finance costs,  no matter who is extending the credit.




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The Annual Percentage Rate: the real cost of credit

The other conspicuous disclosure on every Truth-in-Lending disclosure form is the Annual Percentage Rate, or APR.  Expressed as a percentage (%), the APR is defined as “the cost of your credit as a yearly rate.”

Behind this seemingly simple definition lie several different ideas.

One:  the APR is based on the Finance Charge, which I discussed in my last post.  That is, every cost imposed in connection with using credit rather than cash, unless it’s specifically excluded from the Finance Charge by law, also contributes to the stated APR.

Two:  The APR, unlike the Finance Charge, reflects the length of time that the credit is being extended for.  You can intuit, through a simple example, that duration is an important element of a credit transaction.

Suppose I offer to lend you $100 today and charge you $6 for the privilege.  Would you rather have to pay me back $106 at the end of a year, or at the end of six months?   Of course, you benefit by having the use of my money for the full year.  I, on the other hand, benefit by having it back after six months, for then I could lend it out again to someone else and make another $6!  Your intuition is correct.   The first deal carries an APR of 6%.  The latter deal carries an APR of 12%.

In the real world, unlike this example, finance charges are usually not flat,  but are proportional to the length of the contract.  But some fees are flat, such as the application fee for a loan, or the service charge for a “rapid refund” of your income taxes.   All things being equal, keep in mind that the shorter the duration of the transaction, the more expensive this charge is.  Indeed, some of the most abusive lending practices involve extending very short-term credit.  Only when expressed as an APR is its true cost revealed.

“Refund Anticipation Loans”  offered by tax preparation companies are a notorious example of short-term credit that may seem reasonably priced, but when expressed as an APR, is shown to be astronomically expensive.  Tax prep services are required to give TILA disclosures, but often hide them at the back of the folder containing your completed returns and other papers, hoping that you won’t look too closely.

Recently H & R Block, the largest tax preparation chain in the country, announced that will no longer offer RALs.   This announcement was greeted with satisfaction by the National Consumer Law Center and other consumer groups that have criticized these loans as predatory.  Only one national bank is continuing to fund RALs offered through a tax preparation service.

Three:  in my next post, we will look more closely at the math behind the APR, especially in the most common kinds of sales or loans, those in which you pay down the initial extension of credit in monthly or weekly installments.



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The Finance Charge: your “price tag” for credit

On every TILA form two disclosures are especially conspicuous, printed in larger and bolder type than the others:  the Finance Charge and the Annual Percentage Rate (APR).  The Finance Charge, expressed in dollars and cents,  is defined as “the sum of all charges payable directly or indirectly by the consumer, imposed directly or indirectly by the creditor, as an incident to or a condition of the extension of credit.”   On TILA disclosures, every dollar must be accounted for as part of the Amount Financed,  Down Payment, or Finance Charge.

Think of the Finance Charge as the price tag for the privilege of buying on time or receiving a loan.   Before TILA, sellers and lenders informed consumers of the cost of credit in different ways, usually by disclosing an interest rate or “time-price differential,” but these disclosures were not accurate or consistent.  One reason  was that the numbers quoted often omitted some of the charges associated with a credit transaction.

The functions of Finance Charge disclosure are to create a level playing field among different sellers and lenders and to let you see, before you become committed to a transaction, how much the use of credit will cost you so that you can decide whether you want to incur that cost.

Under TILA, the law, not the lender, decides what is included in the disclosed  Finance Charge.   The principle underlying the Finance Charge is:  It doesn’t matter what the dealer calls it; if it’s a cost that you pay when buying on time that you would not pay if you paid cash, it is part of the Finance Charge.   This can be seen most directly in home mortgage loans, where application  or “origination” fees, “points” to buy down a mortgage rate,  and similar charges which are not part of the advertised interest rate must be counted in the Finance Charge.

But as in so many cases, there are exceptions.  Some would say the exceptions swallow the rule.  For example, the seller or lender may take a mortgage or lien on the item being purchased and protect its position by recording this security interest in a government registry.  Logically, the recording fee should be part of the Finance Charge, as there would be no corresponding fee if you paid cash.  But TILA specifically exempts many such fees, to the extent they are actually paid to a third party, from being considered in the Finance Charge.

Similarly, in car sales, dealers often pack a deal with add-0ns such as various types of insurance.  In the old days it was popular to sell credit life and disability insurance; now, not so much.  Sellers may insist on Vendors Single Interest (VSI) insurance, which is like a collision policy but which pays out only to the extent of the amount you owe, and GAP, which, if your car is totaled, pays the lender the difference between its fair market value and your remaining loan balance.  TILA allows these expensive items to be left out of the Finance Charge calculation, provided that your decision to buy them was voluntary.  Legal forms for car dealers always include blanks for you to initial, attesting that your decision was informed and voluntary.  Often, it wasn’t….. but it can be impossible to rebut the presumption created by such paperwork.

Also, most late charges and fees that are not built into the transaction, but which you may incur during the life of the contract, are not part of the Finance Charge.  These, of course, may be very substantial.

In a credit card transaction, which TILA calls “open-end” credit, it is impossible to say at the outset what the Finance Charge will be.  But under a 2010 law known as the CARD Act, monthly credit card statements now have to contain a very useful bit of information related to the Finance Charge: namely, how long it would take you to pay off your existing balance under various assumptions, and what the resulting Finance Charge would be.  Given the high interest rates of credit cards, these results can be eye-opening indeed.  For example,  my latest credit card statement says that if I make only the minimum payment every month on a balance of $1500, it will take me 13 years to pay it off and I will incur Finance Charges of $2,960.  If I pay $53 per month, it will take 3 years and cost $1919.

With computer-generated forms and electronic calculators, most TILA disclosure violations nowadays result from counting as part of the Amount Financed an item that actually should be included in the Finance Charge.  As we will see in the next column, this results in understating the Annual Percentage Rate, giving the lawbreaker an unwarranted competitive advantage in competing for your business by making it seem like he is offering a better deal.   If you have bought a car or made another credit purchase and you question whether TILA disclosures were made correctly, talk to a knowledgeable lawyer as soon as possible.   You may be entitled to some money back, but the time frame for TILA claims is just one year.

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