Laws Affecting Debt Collection
I. Overview of Debtor-Creditor Statutes
This chapter discusses some laws of which the debt collection attorney should be aware, including the Truth in Lending Act, the consumer credit sections of the Texas Finance Code, the Servicemembers Civil Relief Act, and the Military Lending Act. Such statutes or authorities ordinarily may not be considered debt collection laws but should be taken into account when evaluating a debt collection matter for possible defenses and counterclaims that may be asserted by the consumer.
Some of the laws were created or impacted by the Dodd-Frank Wall Street Reform Act of 2010 (the “Dodd-Frank Act”), including amendments to Regulation Z, which was promulgated in connection with the Truth in Lending Act. The Dodd-Frank Act also created the Consumer Finance Protective Bureau (“CFPB”) and transferred authority for certain consumer protection laws to the CFPB, although certain lending institutions remain regulated by an agency or entity other than the CFPB. The CFPB republished certain regulations to reflect the transfer of authority to the CFPB and to include certain other changes to the regulations as a result of the Dodd-Frank Act. Regulation Z is one of the regulations that was moved from 12 C.F.R. pt. 226 to 12 C.F.R. pt. 1026.
Many of the statutes discussed in this chapter primarily—if not exclusively—pertain to consumer debts. For example, the federal Fair Debt Collection Practices Act and Truth in Lending Act, the Texas Debt Collection Practices Act, and many of the former Consumer Credit Code provisions are now incorporated into the Texas Finance Code. Generally speaking, consumer debts are debts that are primarily incurred for personal, family, or household purposes. See, e.g., 15 U.S.C. § 1692a(5); Tex. Fin. Code § 392.001. For a more detailed discussion of the definition of consumer debt, see section 2.12:2 below. Because consumer protection laws include hurdles and penalties not always found in other laws, attorneys should confirm whether the debts being collected have been properly classified as primarily consumer or nonconsumer debts and then confirm which laws apply to their collection efforts before proceeding further.
[Sections 2.3 through 2.10 are reserved for expansion.]
II. Federal Fair Debt Collection Practices Act
The abbreviation “FDCPA” is often used by judges, authors, and practitioners when writing about the Fair Debt Collection Practices Act and is so used in this chapter.
§ 2.11Who Is a Debt Collector?
The activities of debt collectors are governed by the FDCPA. A debt collector is any person or organization who either—
1.uses any instrumentality of interstate commerce or the mails in any business whose principal purpose is the collection of any debts; or
2.regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due to another.
Under certain circumstances, the term debt collector may also apply to a business whose principal purpose is the enforcement of security interests. 15 U.S.C. § 1692a(6); see also 15 U.S.C. § 1602(d). See section 2.12:2 below regarding what constitutes a debt for FDCPA purposes.
Creditors who collect their own debts in their own names are generally exempt from the FDCPA. The legislative history indicates that “debt collector” does not include a consumer’s creditors. See S. Rep. No. 95-382, at 3 (1977), reprinted in 1977 U.S.C.C.A.N. 1695, 1698; see also Wadlington v. Credit Acceptance Corp., 76 F.3d 103, 106 (6th Cir. 1996). A creditor conducting business under a registered assumed name is not violating the FDCPA. Dickenson v. Townside T.V. & Appliance, Inc., 770 F. Supp. 1122, 1128–31 (S.D. W. Va. 1990).
§ 2.11:3Original Creditor Representing Itself as Third-Party Debt Collector
A creditor who, in the process of collecting its own debts, uses any name other than its own that would indicate that a third party is collecting or attempting to collect its own debts is a debt collector. 15 U.S.C. § 1692a(6). An employee of a creditor who represents that he is working for a third-party debt collector not only becomes a debt collector himself but renders the creditor a debt collector as well. See Kempf v. Famous Barr Co., 676 F. Supp. 937, 938 (E.D. Mo. 1988).
Assignees of debts are exempt from the FDCPA unless the debt was in default when the debt was assigned. 15 U.S.C. § 1692a(4).
The majority of courts have held that a creditor who acquires a debt already in default is not a creditor but a debt collector. Cirkot v. Diversified Financial Systems, Inc., 839 F. Supp. 941 (D. Conn. 1993); Holmes v. Telecredit Service Corp., 736 F. Supp. 1289 (D. Del. 1990); Kimber v. Federal Financial Corp., 668 F. Supp. 1480 (M.D. Ala. 1987); Commercial Service of Perry v. Fitzgerald, 856 P.2d 58 (Colo. App. 1993). However, the practitioner should exercise caution when pleading the elements of 15 U.S.C. § 1692a(6); see Henson v. Santander Consumer USA, Inc., 817 F.3d 131 (4th Cir. 2016) (debtor’s FDCPA suit failed because complaint did not allege facts demonstrating that defendant was acting as “debt collector”).
Those who are not debt collectors include—
1.any officer or employee of a creditor who, while in the name of the creditor, collects the creditor’s debts (see section 2.11:6 below regarding attorneys as debt collectors);
2.any person or organization who acts as a debt collector for another, both of whom are related by common ownership or affiliated by corporate control, if the debt collector does so only for persons or organizations to whom it is so related or affiliated and if the principal business of each person or organization is not the collection of debts;
3.any officer or employee of the United States or any state to the extent that collecting or attempting to collect any debt is in the performance of his official duties;
4.any person while serving or attempting to serve legal process on any other person in connection with the judicial enforcement of any debt;
5.any nonprofit organization that, at the request of consumers, performs bona fide consumer credit counseling and assists consumers in the liquidation of their debts by receiving payments from those consumers and distributing those payments to creditors; and
6.any person collecting or attempting to collect any debt owed or due or asserted to be owed or due another to the extent such activity—
a.is incidental to a bona fide fiduciary obligation or escrow arrangement;
b.concerns a debt originated by the person or organization;
c.concerns a debt not in default when it was obtained by the person or organization; or
d.concerns a debt obtained by the person or organization as a secured party in a commercial credit transaction involving the creditor.
§ 2.11:6Attorneys as Debt Collectors
Before 1986 attorneys were expressly excluded from the FDCPA, but the exemption was voided by statutory amendment. See Pub. L. No. 99-361, 100 Stat. 768 (July 9, 1986). An attorney is a debt collector if the attorney regularly tries to obtain payment of consumer debts due to another, even if the attorney’s collection activities are limited solely to litigation. Heintz v. Jenkins, 514 U.S. 291 (1995).
An attorney who engages in collection activities “more than a handful of times per year” is a debt collector. Crossley v. Lieberman, 868 F.2d 566, 569 (3d Cir. 1989). It is the volume of the attorney’s debt collection efforts that is dispositive, not the percentage of those efforts in the attorney’s practice. Garrett v. Derbes, 110 F.3d 317, 318 (5th Cir. 1997); Stojanovski v. Strobl & Manoogian, P.C., 783 F. Supp. 319, 322 (E.D. Mich. 1992); Mertes v. Devitt, 734 F. Supp. 872, 874 (W.D. Wis. 1990). See section 2.16:5 below regarding attorney liability for letting another debt collector use the attorney’s name, letterhead, or signature.
In-house attorneys may lose the exemption of 15 U.S.C. § 1692a(6)(A) by sending correspondence leaving the impression that the attorney is acting as independent counsel. See Dorsey v. Morgan, 760 F. Supp. 509 (D. Md. 1991).
A consumer is any natural person obligated or allegedly obligated to pay a debt. 15 U.S.C. § 1692a(3). The nature of the debt determines the distinction between commercial and consumer debts; see section 2.12:2 below. A debt that was created as a consumer debt remains a consumer debt even if the collateral securing the debt is subsequently used for commercial purposes. See, e.g., Miller v. McCalla, Raymer, Padrick, Cobb, Nichols & Clark, L.L.C., 214 F.3d 872 (7th Cir. 2000) (residential mortgage debt remains consumer obligation even if collateral subsequently turned into rental property).
For FDCPA purposes, a debt is any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services that are the subject of the transaction are primarily for personal, family, or household purposes. 15 U.S.C. § 1692a(5).
A dishonored check is generally considered a debt if it was given in a transaction governed by the FDCPA. See, e.g., Snow v. Jesse L. Riddle, P.C., 143 F.3d 1350 (10th Cir. 1998); Bass v. Stolper, Koritzinsky, Brewster & Neider, 111 F.3d 1322 (7th Cir. 1997).
A party seeking restitution for another’s criminal act is not trying to collect a debt under the FDCPA. Zimmerman v. HBO Affiliate Group, 834 F.2d 1163, 1169 (3d Cir. 1987) (theft of cable television signals); Shorts v. Palmer, 155 F.R.D. 172, 175–76 (S.D. Ohio 1994) (shoplifting). Also, tort claims damages and child support payments are debts not subject to FDCPA. See Hawthorne v. Mac Adjustment, Inc., 140 F.3d 1367 (11th Cir. 1998) (tort claims damages); Mabe v. G.C. Services Ltd. Partnership, 32 F.3d 86 (4th Cir. 1994) (child support payments).
§ 2.13Notice to Debtor and Request for Validation
Within five days after the initial communication with a consumer in connection with the collection of a debt, the debt collector must (unless the following information is contained in the initial communication or the consumer has paid the debt) send the consumer a written notice containing—
1.the amount of the debt;
2.the name of the creditor to whom the debt is owed;
3.a statement that unless the consumer, within thirty days after receipt of the notice, disputes the validity of the debt, or any portion of it, the debt will be assumed to be valid by the debt collector;
4.a statement that if the consumer notifies the debt collector in writing within the thirty-day period that the debt, or any portion of it, is disputed, the debt collector will obtain verification of the debt or a copy of a judgment against the consumer and a copy of the verification or judgment will be mailed to the consumer by the debt collector; and
5.a statement that, on the consumer’s written request within the thirty-day period, the debt collector will provide the consumer with the name and address of the original creditor, if different from the current creditor.
15 U.S.C. § 1692g(a). The complete “validation notice” must be given in such a way that “an unsophisticated consumer” would not fail to notice it. Avila v. Rubin, 84 F.3d 222, 225 (7th Cir. 1996). Printing the notice on the back of the letter is not sufficient notice. Riveria v. MAB Collections, Inc., 682 F. Supp. 174, 177 (W.D.N.Y. 1988).
A “mini-Miranda” notice should be included with the validation notice; see section 2.14 below.
In Miller v. McCalla, Raymer, Padrick, Cobb, Nichols & Clark, L.L.C., 214 F.3d 872 (7th Cir. 2000), the court held that the obligation to state the amount of the debt means that the attorney must state the full amount of the debt as of the date of the validation notice. If the debt, such as a mortgage debt, is subject to change, the attorney who sends a demand letter should state the full amount of the debt as of the date the letter is sent and should further notify the debtor that the payoff balance is subject to change and that the debtor should call or verify the correct payoff amount before sending payment. See also Waterfield Mortgage Co., Inc. v. Rodriguez, 929 S.W.2d 641 (Tex. App.—San Antonio 1996, no writ) (if payoff quote has limited duration, demand letter should contain deadline through which payoff amount will be accepted).
The attorney should be extremely careful to accurately state the amount of the debt. In Duffy v. Landberg, 215 F.3d 871 (8th Cir. 2000), an attorney was held to have violated the FDCPA by overstating the amount of the debt by sixty-five cents.
§ 2.13:2Overshadowing, Contradictory, or Deceptive Notices
If a debt collector couples the required thirty-day validation period notice with a demand for action shorter than the thirty-day period, the validation notice is considered to be “overshadowed” by the other demand and is a violation of the FDCPA. Russell v. Equifax A.R.S., 74 F.3d 30, 35 (2d Cir. 1996); Miller v. Payco-General American Credits, Inc., 943 F.2d 482, 485 (4th Cir. 1991); Swanson v. Southern Oregon Credit Service, Inc., 869 F.2d 1222, 1226 (9th Cir. 1988).
§ 2.13:3Continuing Collection Efforts after Request for Verification Made
The debt collector does not need to suspend all collection efforts during the thirty-day period during which the consumer can request verification, but if the consumer does request verification, the debt collector must suspend collection until the verification is obtained and sent to the consumer. 15 U.S.C. § 1692g(b); Trull v. GC Services Limited Partnership, 961 F. Supp. 1199, 1205 (N.D. Ill. 1997).
§ 2.13:4Responding to Request for Verification
If the customer makes a written request for verification, the verification itself must be provided in writing; oral verification is not enough. Johnson v. Statewide Collections, Inc., 778 P.2d 93, 100 (Wyo. 1989). If the debtor requests verification after the thirty-day period after receipt of the validation notice, the debt collector is not obligated to provide it, but it may be more prudent to do so anyway, as it may aid in the collection effort. See Mahon v. Credit Bureau of Placer County, Inc., 171 F.3d 1197, 1202–03 (9th Cir. 1999); Robinson v. Transworld Systems, Inc., 876 F. Supp. 385, 391 (N.D.N.Y. 1995).
The initial written communication to the consumer must state that the attorney is a debt collector and is attempting to collect a debt and that any information obtained will be used for that purpose. If the first communication is oral, the warning must be given in that first oral communication as well. In later communications with the consumer, the debt collector must state that he is a debt collector. In a formal legal pleading, however, the notice need not be given. 15 U.S.C. § 1692e(11). Unfortunately, the FDCPA does not define “formal pleading.” In light of Fed. R. Civ. P. 7, the notice should probably be included in all motions and discovery documents. Note that the warning applies to communications with the consumer only, not communications with any other parties.
§ 2.15Prohibited Practices: Contact with Consumers and Others
§ 2.15:1Contacting Consumer Directly If Consumer Represented by Counsel
Unless the consumer gives prior consent or a court expressly permits it, a debt collector may not communicate directly with the consumer if the debt collector knows the consumer is represented by an attorney and either knows or can readily ascertain that attorney’s name and address. If the consumer’s purported attorney fails to respond to communications from the debt collector within a reasonable time or if the attorney consents to direct communication, the debt collector can then contact the consumer directly. 15 U.S.C. § 1692c(a)(2); see also Graziano v. Harrison, 950 F.2d 107 (3d Cir. 1991); Tex. Disciplinary Rules Prof’l Conduct R. 4.02, reprinted in Tex. Gov’t Code Ann., tit. 2, subtit. G, app. A (West 2013) (Tex. State Bar R. art. X, § 9). For purposes of this rule, the term consumer includes the consumer’s spouse, guardian, executor, administrator, or parent (if the consumer is a minor). 15 U.S.C. § 1692c(d).
The attorney should not send letters to the debtor’s counsel addressed “[name of debtor] in care of [name of attorney].” The letter and the envelope should be addressed to the attorney. Clark’s Jewelers v. Humble, 823 P.2d 818 (Kan. Ct. App. 1991).
§ 2.15:2Inconvenient Time for Communication with Consumer
Unless the consumer gives prior consent or a court expressly permits it, a debt collector may not communicate with the consumer at any unusual time or place or at a time or place known or that should be known to be inconvenient to the consumer. Before 8:00 a.m. or after 9:00 p.m. local time (for the consumer) is presumed to be inconvenient unless contrary circumstances are known. 15 U.S.C. § 1692c(a)(1); see also United States v. Central Adjustment Bureau, Inc., 667 F. Supp. 370 (N.D. Tex. 1986), aff’d as modified on other grounds, 823 F.2d 880 (5th Cir. 1987). For purposes of this rule, the term consumer includes the consumer’s spouse, guardian, executor, administrator, or parent (if the consumer is a minor). 15 U.S.C. § 1692c(d).
§ 2.15:3Communication with Consumer at Consumer’s Place of Business
A debt collector who knows or has reason to know that a consumer’s employer prohibits the consumer from receiving communications at work in connection with the collection of debt may not make such communications unless the consumer has given prior consent or a court expressly permits it. 15 U.S.C. § 1692c(a)(3). For purposes of this rule, the term consumer includes the consumer’s spouse, guardian, executor, administrator, or parent (if the consumer is a minor). 15 U.S.C. § 1692c(d). Written notice is not required to trigger this provision.
Debt collectors may not—
1.cause the phone to ring or engage any person in a conversation repeatedly or continuously with intent to annoy, abuse, or harass any person at the called number;
2.place phone calls without giving meaningful disclosure of the caller’s identity, unless the call is to another person to acquire location information for the debtor; or
3.cause charges to be made to any person for communications (such as collect phone calls or telegrams) by concealing the true purpose of the communication.
15 U.S.C. §§ 1692d(5), (6), 1692f(5).
If a consumer notifies the debt collector in writing that the consumer refuses to pay the debt or wants the debt collector to cease further communication, the debt collector must cease the communications. The exceptions to the no-contact rule are—
1.to advise the consumer that the debt collector is ceasing its efforts;
2.to notify the consumer that the debt collector or creditor may invoke certain specified remedies that are ordinarily invoked by the debt collector or creditor; or
3.if applicable, to notify the consumer that the debt collector or creditor intends to invoke a specified remedy.
For purposes of this rule, the term consumer includes the consumer’s spouse, guardian, executor, administrator, or parent (if the consumer is a minor). 15 U.S.C. § 1692c(d). Section 1692c(c) will enable a consumer to shut down presuit collection efforts, but it cannot be used to stop an attorney from prosecuting a suit. Heintz v. Jenkins, 514 U.S. 291 (1995).
§ 2.15:6Obscene or Profane Language
The debt collector may not use obscene or profane language, the natural consequence of which is to abuse the reader or hearer. 15 U.S.C. § 1692d(2).
§ 2.15:7Language or Symbol on Envelope
Debt collectors may not use language or symbols on the envelope, other than the debt collector’s address, when communicating with the consumer by mail or telegram, but the debt collector may use his own business name if the name does not indicate that he is in the debt collection business. 15 U.S.C. § 1692f(8); see also Douglass v. Convergent Outsourcing, 765 F.3d 299, 305–06 (3d Cir. 2014) (barcode and QR code containing consumer’s account number and monetary amount of debtor’s debt that was visible through window envelope was violation of statute); Peter v. GC Services, L.P., 310 F.3d 344 (5th Cir. 2002) (collection agency violated FDCPA by sending collection letter in envelope that displayed name and address of U.S. Department of Education and “penalty for private use” message).
A debt collector may not communicate with a consumer by postcard. 15 U.S.C. § 1692f(7).
§ 2.15:9Communication with Third Parties
Except for lawful communications with reporting credit agencies, the debt collector may not contact third parties for any reason other than ascertaining the consumer’s location, unless the consumer gives prior consent or a court expressly authorizes the contact. 15 U.S.C. § 1692c(b); see also Evankavitch v. Green Tree Servicing, LLC, 793 F.3d 355, 360 (3d Cir. 2015) (violation for calling third parties more than once); Masuda v. Thomas Richards & Co., 759 F. Supp. 1456 (C.D. Cal. 1991). When communicating with anyone other than the consumer to find out the consumer’s whereabouts, the debt collector must identify himself, state that he is confirming or correcting location information concerning the consumer and, only if expressly asked, identify his employer. He may not—
1.state that the consumer owes any debt;
2.communicate with that third person more than once, unless either—
a.the person requests further contact; or
b.the debt collector reasonably believes that the person’s earlier response was erroneous or incomplete, and that the person now has correct or complete information regarding the consumer’s whereabouts;
3.communicate by postcard;
4.use any language or symbol that indicates he is in the debt collection business or that the communication relates to collection of a debt; or
5.communicate with anyone other than the consumer’s attorney after he knows the consumer is represented by an attorney.
§ 2.16Prohibited Practices: Misrepresentations
§ 2.16:1Falsehoods and Deceptions Generally
The debt collector may not use a false representation or deceptive means to collect or attempt to collect a debt or obtain information concerning a consumer. 15 U.S.C. § 1692e(10); see Peter v. GC Services, L.P., 310 F.3d 344 (5th Cir. 2002); Bentley v. Great Lakes Collection Bureau, 6 F.3d 60 (2d Cir. 1993).
The list of prohibited practices in 15 U.S.C. § 1692e(1)–(16) is not exclusive; any false, deceptive, or misleading act or practice of a debt collector is illegal. Tsenes v. Trans-Continental Credit & Collection Corp., 892 F. Supp. 461 (E.D.N.Y. 1995).
§ 2.16:2Nature, Character, or Amount of Debt
A debt collector may not misrepresent the amount, character, or legal status of the debt. 15 U.S.C. § 1692e(2)(A). Even if the debt collector unintentionally misstates the amount of the debt, the collector is liable unless he can prove bona fide error. Smith v. Transworld Systems, Inc., 953 F.2d 1025 (6th Cir. 1992) (no liability); cf. Duffy v. Landberg, 215 F.3d 871 (8th Cir. 2000) (liability found); Patzka v. Viterbo College, 917 F. Supp. 654 (W.D. Wis. 1996) (liability found).
§ 2.16:3Referral or Transfer of Debt
A debt collector may not falsely represent or imply that the sale, referral, or other transfer of the debt causes the consumer to lose any claim or defense to its payment of the debt or become subject to any practice prohibited by the FDCPA and may not falsely represent or imply that an account has been turned over to an innocent purchaser for value. 15 U.S.C. § 1692e(6), (12).
§ 2.16:4Governmental Affiliation
A debt collector may not falsely represent or imply that he is vouched for by, bonded by, or affiliated with the United States or any state, such as by using a badge, uniform, or facsimile of either. 15 U.S.C. § 1692e(1).
§ 2.16:5Attorney Participation
A debt collector may not falsely represent or imply that the collector is an attorney or that a communication is from an attorney. 15 U.S.C. § 1692e(3). Demand letters sent by a nonattorney debt collector using the attorney’s letterhead and an image of the attorney’s signature violates the FDCPA. The attorney as well as the debt collector is liable. Taylor v. Perrin, Landry, DeLaunay & Durand, 103 F.3d 1232 (5th Cir. 1997); Clomon v. Jackson, 988 F.2d 1314 (2d Cir. 1993). Liability also attaches if the attorney signs demand letters at the direction of a debt collection agency without independent knowledge of the cases. Masuda v. Thomas Richards & Co., 759 F. Supp. 1456 (C.D. Cal. 1991).
The debt collector may not represent or imply that nonpayment will result in the arrest or imprisonment of any person or the seizure, garnishment, attachment, or sale of any property or wages, unless the action is lawful and the debt collector or creditor intends to take that action. 15 U.S.C. § 1692e(4). Also, a debt collector may not threaten to “take any action that cannot be legally taken or is not intended to be taken.” 15 U.S.C. § 1692e(5); see also United States v. National Financial Services, Inc., 98 F.3d 131 (4th Cir. 1996) (false statement of intent to sue); Bentley v. Great Lakes Collection Bureau, 6 F.3d 60, 63 (2d Cir. 1993).
A debt collector may not falsely represent or imply that the consumer committed a crime or other conduct in order to disgrace the consumer. 15 U.S.C. § 1692e(7).
§ 2.17Prohibited Practices: Handling Funds
§ 2.17:1Collection of More Than Amount Allowed
A debt collector may not collect any amount, including interest, fees, charges, or expenses incidental to the obligation, unless the amount is expressly authorized by the agreement or permitted by law. 15 U.S.C. § 1692f(1); see also Sandlin v. Shapiro & Fishman, 919 F. Supp. 1564 (M.D. Fla. 1996). Charges that are discretionary with a court should not be demanded as if they are automatically due. Duffy v. Landberg, 215 F.3d 871 (8th Cir. 2000).
A debt collector may not accept a check postdated by more than five days unless the person giving the check is notified in writing of the debt collector’s intent to deposit the check not more than ten or less than three business days before that deposit. 15 U.S.C. § 1692f(2). The debt collector may not deposit or threaten to deposit a postdated check before the date shown. 15 U.S.C. § 1692f(4).
§ 2.18Bringing Collection Suit in Court of Improper Venue
Except when filing a suit to foreclose a real estate lien, a debt collector must bring its action against the consumer in the judicial district in which the consumer signed the contract sued on or in which the consumer resides at the commencement of the action. 15 U.S.C. § 1692i(a). This requirement preempts any contrary provision of state law. Hageman v. Barton, 817 F.3d 611, 618 (8th Cir. 2016); see also Beeler-Lopez v. Dodeka, LLC, 711 F. Supp. 2d 679, 681 (E.D. Tex. 2010) (stating that a law firm substituted after a violation of the venue provision of the FDCPA could not be held liable for the violation). See part II. in chapter 15 of this manual regarding venue generally.
If the violation was not intentional and resulted from a bona fide error made despite the maintenance of procedures reasonably adapted to avoid any such error, the debt collector can avoid liability. 15 U.S.C. § 1692k(c); see also Stojanovski v. Strobl & Manoogian, P.C., 783 F. Supp. 319 (E.D. Mich. 1992). But see Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA, 559 U.S. 573 (2010) (holding that bona fide error defense does not apply if violation resulted from incorrect interpretation of law).
A debt collector who violates the FDCPA is liable for—
1.actual damages;
2.additional damages not to exceed $1,000 in the case of an action by an individual;
3.for a class action, the amount that could have been recovered by each individual in actual damages and additional recovery for all class members not to exceed the lesser of $500,000 or 1 percent of the debt collector’s net worth; and
4.reasonable attorney’s fees and court costs.
The $1,000 statutory damages cap on an individual claim is per suit, not per violation. Wright v. Finance Service of Norwalk, 22 F.3d 647 (6th Cir. 1994); Harper v. Better Business Services, Inc., 961 F.2d 1561 (11th Cir. 1992). Further, actual damages attributable to the consumer’s conduct cannot be assessed, even if they occurred in conjunction with a possible FDCPA violation. See Coursen v. Shapiro & Fishman, GP, 558 Fed. App’x 882, 886 (11th Cir. 2014) (technical FDCPA violation during foreclosure proceeding did not result in consumer’s loss of property; consumer’s failure to pay was precipitating cause).
Certain case law supports the premise that materiality is necessarily a consideration when viewing an alleged violation of the FDCPA. Materiality is evaluated based on the perceived impact on the consumer’s understanding and reaction to the alleged misstatement. See Jensen v. Pressler & Pressler, 791 F.3d 413, 420–22 (3d Cir. 2015) (“a statement in a communication is material if it is capable of influencing the decision of the least sophisticated debtor”); Janson v. Katharyn B. Davis, LLC, 806 F.3d 435 (8th Cir. 2015) (although collector’s statement was false in technical sense, there is no violation of sections 1692e or 1692f if no one was misled); Donohue v. Quick Collect, Inc., 592 F.3d 1027, 1034 (9th Cir. 2010) (mislabeling amounts owed did not undermine consumer’s ability to choose her response to debt); Hahn v. Triumph Partnerships LLC, 557 F.3d 755, 757 (7th Cir. 2009) (“[m]ateriality is an ordinary element of any federal claim based on a false or misleading statement”); Wahl v. Midland Credit Management, Inc., 556 F.3d 643, 645–46 (7th Cir. 2009) (it is not enough to show that statement is false; consumer must prove that false statement would mislead or deceive an unsophisticated consumer).
Claims for recovery under the FDCPA must be brought within one year. 15 U.S.C. § 1692k(d). The cause of action accrues when the plaintiff has a complete cause of action under the FDCPA and occurrence of the violation first becomes known to the consumer. Benzemann v. Citibank N.A., 806 F.3d 98, 102–03 (2d Cir. 2015).
§ 2.20:4Bad-Faith Suit by Consumer
If the court finds that a consumer’s action was brought in bad faith or for purposes of harassment, the court may award the defendant attorney’s fees reasonable in relation to the work expended and costs. 15 U.S.C. § 1692k(a)(3).
[Sections 2.21 through 2.30 are reserved for expansion.]
III. Texas Debt Collection Practices Act
The abbreviation “DCPA” is often used in Texas by judges, authors, and practitioners when writing about the Texas Debt Collection Practices Act and is so used in this part of the chapter.
The DCPA, Tex. Fin. Code §§ 392.001–.404, applies to anyone who attempts to collect a “consumer debt,” which is an obligation or alleged obligation primarily for personal, family, or household purposes, arising from a transaction or alleged transaction. Tex. Fin. Code § 392.001(2). The DCPA does not apply to commercial transactions. Ford v. City State Bank of Palacios, 44 S.W.3d 121, 135–36 (Tex. App.—Corpus Christi 2001, no pet.).
Unlike the FDCPA, the DCPA applies not only to attorneys and collection agencies but also to creditors who are collecting their own debts from consumers. See Tex. Fin. Code § 392.001(3), (5), (6).
Although the DCPA generally covers anyone who attempts to collect a consumer debt, other requirements are placed on third-party debt collectors. These are debt collectors as defined by the FDCPA, but do not include an attorney collecting a debt as an attorney on behalf of and in the name of a client unless the attorney has nonattorney employees who either are regularly engaged to solicit debts for collection or regularly make contact with debtors to collect or adjust debts. Tex. Fin. Code § 392.001(7). See sections 2.32:3 and 2.32:4 below regarding laws particularly applicable to third-party debt collectors.
A DCPA violation must arise out of a debtor-creditor relationship, but the cause of action is not exclusive to the debtor. Any person against whom the prohibited acts are committed may sue. Campbell v. Beneficial Finance Co., 616 S.W.2d 373, 374–75 (Tex. Civ. App.—Texarkana 1981, no writ).
§ 2.31:4Restrictive Language of Debt Collection Practices Act
Unlike the FDCPA, which uses expansive language to describe a violation (see, for example, the first paragraph of 15 U.S.C. § 1692e), the DCPA is apparently violated only if a party commits one of the acts specified in Tex. Fin. Code §§ 392.301–.306.
§ 2.31:5Use of Independent Debt Collector
A creditor violates the DCPA if it uses an independent debt collector after having actual knowledge that that debt collector repeatedly or continuously engages in acts or practices that violate the DCPA. Tex. Fin. Code § 392.306.
§ 2.32:1Providing Name of Assignee
Except for a person servicing or collecting real estate first-lien mortgage or credit card debts, a debt collector must clearly disclose in any communication with the debtor the name of the party to whom the debt has been assigned or is owed at the time of making any demand for money. Tex. Fin. Code § 392.304(a)(4), (b).
§ 2.32:2Debt Collector Identification
In any written communication regarding an alleged debt, the debt collector must clearly disclose his name, address (either street or post office box), and telephone number. Tex. Fin. Code § 392.304(a)(6).
§ 2.32:3Correction of Files of Third-Party Debt Collectors and Credit Bureaus
If an individual disputes the accuracy of an item in a third-party debt collector’s or credit bureau’s file and gives written notice of the dispute, a specific procedure must be followed for resolution of the dispute. See Tex. Fin. Code § 392.202 for details of the procedure.
Two federal courts in Texas have held that the Fair Credit Report Act, 15 U.S.C. § 1681 et seq. (“FCRA”) preempts state statutory claims related to information furnishers to credit reporting bureaus. See Shaunfield v. Experian Information Solutions, Inc., 991 F. Supp. 2d 786, 800 (N.D. Tex. 2014), and Pachecano v. JPMorgan Chase Bank National Ass’n, No. SA-11-CV-00805-DAE, 2013 U.S. Dist. WL 4520530 (W.D. Tex. Aug. 26, 2013).
§ 2.32:4Surety Bond for Third-Party Debt Collector
Third-party debt collectors must obtain a $10,000 surety bond and file it with the secretary of state. This bond must be payable both to any person damaged by a violation of the DCPA and to the state in favor of any such person. Tex. Fin. Code § 392.101. Most bond issuers do not file the bonds, and third-party collectors who purchase bonds should take steps to ensure that their bonds are filed.
Debt collectors may not oppress, harass, or abuse a person by—
1.using profane or obscene language or language intended to abuse the hearer or reader unreasonably;
2.placing phone calls without disclosing the name of the individual making the call and with the intent to annoy, harass, or threaten a person at the called number;
3.causing a person to incur collect phone call or telegram charges without first disclosing the name of the person making the communication; or
4.causing a phone to ring repeatedly or continuously or making repeated or continuous phone calls, with the intent to harass a person at the called number.
Tex. Fin. Code § 392.304(a) lists nineteen fraudulent, deceptive, or misleading representations that are illegal under the DCPA. Some of the commonly encountered violations include—
1.using a name other than the true business or professional name or the true legal or personal name of the debt collector while engaged in the debt collection;
2.falsely representing that the debt collector has information or something of value for the consumer in order to solicit or discover information about the consumer;
3.in the case of a third-party debt collector, failing to disclose clearly in the initial written or oral communication between the third-party debt collector and the debtor that the communication is an attempt to collect a debt and that any information obtained will be used for that purpose (does not apply to a formal pleading);
4.in the case of a third-party debt collector, failing to disclose in communications between the third-party debt collector and the debtor subsequent to the initial communication that the communication is from a debt collector (does not apply to a formal pleading);
5.using a written communication that fails to indicate clearly the name of the debt collector and the debt collector’s address if the written notice refers to a delinquent consumer debt;
6.misrepresenting the character, extent, or amount of a consumer debt or misrepresenting the consumer debt’s status in a judicial or governmental proceeding;
7.using a communication that purports to be from an attorney or law firm if it is not; and
8.representing that a consumer debt is being collected by an attorney or law firm if it is not.
Tex. Fin. Code § 392.304(a)(1), (3), (5)(A), (5)(B), (6), (8), (16), (17).
Eight separate threats or coercive practices are proscribed at Tex. Fin. Code § 392.301. Commonly encountered violations are—
1.accusing falsely or threatening to accuse falsely a person of fraud or another crime;
2.threatening to file a charge, complaint, or criminal action against a debtor if the debtor has not violated a criminal law; and
3.threatening to take an action prohibited by law.
Tex. Fin. Code § 392.301(a)(2), (6), (8).
See also Dixon v. Brooks, 604 S.W.2d 330, 334 (Tex. Civ. App.—Houston [14th Dist.] 1980, writ ref’d n.r.e.). A debt collector may not threaten criminal prosecution to collect a consumer debt, even if the debtor’s conduct may have been criminal. Brown v. Oaklawn Bank, 718 S.W.2d 678, 680 (Tex. 1986).
§ 2.33:4Other Unfair or Unconscionable Means
Debt collectors may not use unfair or unconscionable means to seek or obtain a written statement or acknowledgment in any form specifying that the debt was incurred for necessaries if it was not or to collect or attempt to collect interest, a charge, a fee, or an expense incidental to the obligation unless it was expressly authorized by the agreement creating the obligation or legally chargeable to the consumer. Tex. Fin. Code § 392.303. Further, the debt collector may not collect or attempt to collect an obligation under a check, draft, debit payment, or credit card payment if the check or draft was dishonored or the payment was refused because the check or draft was not drawn or the payment was not made by a person authorized to use the account; the debt collector has received written notice from a person authorized to use the account that the check, draft, or payment was unauthorized; and the authorized person has filed a report concerning the unauthorized check, draft, or payment with a law enforcement agency and has provided the debt collector a copy of the report. Tex. Fin. Code § 392.303(a)(3). A debt collector is not prohibited from collecting or attempting to collect such an obligation if the debt collector has credible evidence that the report filed with the law enforcement agency is fraudulent and that the check, draft, or payment was authorized. Tex. Fin. Code § 392.303(c).
§ 2.34Requirement of Actual Damages
In addition to proving a violation of the DCPA, a consumer ordinarily must also prove actual damages to recover. Elston v. Resolution Services, Inc., 950 S.W.2d 180, 183–84 (Tex. App.—Austin 1997, no writ). It is possible that recovery of an injunction under the Act is enough to allow an award of attorney’s fees, but Elston did not reach that issue.
No liability accrues if the violation resulted from a bona fide error that occurred despite the use of reasonable procedures adopted to avoid the error. Tex. Fin. Code § 392.401.
Any person affected by a violation of the DCPA may maintain an action for injunctive relief and to recover actual damages. If the action is successful, the person may recover attorney’s fees and court costs. Tex. Fin. Code § 392.403. Certain violations carry minimum damages of $100. Tex. Fin. Code § 392.403(e). But see Elston v. Resolution Services, Inc., 950 S.W.2d 180 (Tex. App.—Austin 1997, no writ).
Any person who violates the Debt Collection Practices Act commits a misdemeanor punishable by a fine of between $100 and $500 per violation. Tex. Fin. Code § 392.402.
§ 2.36:3Debt Collection Practices Act Violation Also DTPA Violation
A violation of the DCPA is a deceptive trade practice under the Texas Deceptive Trade Practices–Consumer Protection Act (DTPA). Tex. Fin. Code § 392.404(a). A consumer who sues under the DTPA as a result of a DCPA violation is not subject to the limitations on damages imposed by the 1995 amendments to the DTPA. Tex. Bus. & Com. Code § 17.50(h).
§ 2.36:4Bad-Faith Suit by Debtor
If the court finds that a DCPA suit was brought in bad faith or for purposes of harassment, it must award the defendant attorney’s fees reasonably related to the work performed and costs. Tex. Fin. Code § 392.403(c); see also Sifuentes v. Carrillo, 982 S.W.2d 500 (Tex. App.—San Antonio 1998, pet. denied).
[Sections 2.37 through 2.40 are reserved for expansion.]
IV. Interest and Time-Price Differential
Interest is the compensation allowed by law for the use, forbearance, or detention of money. Tex. Fin. Code § 301.002(a)(4). It does not include time-price differential, nor does it include compensation or other amounts that are determined or stated by the Finance Code or other applicable law not to constitute interest or that are permitted to be contracted for, charged, or received in addition to interest in connection with an extension of credit. Tex. Fin. Code § 301.002(a)(4). See section 2.46 below regarding time-price differential.
§ 2.41:2Use, Forbearance, or Detention of Money
The “use” of money is that which is contracted for when a loan is made. Forbearance occurs if there is a debt due or to become due and parties agree to extend the time of its payment. Detention of money arises within the meaning of the usury statute if a debt has become due and the debtor has withheld payment without a new contract giving him the right to do so. Parks v. Lubbock, 51 S.W. 322, 323 (Tex. 1899); Tygrett v. University Gardens Homeowners’ Ass’n, 687 S.W.2d 481, 483 (Tex. App.—Dallas 1985, writ ref’d n.r.e.).
§ 2.42Charges Other Than Contractual Interest
§ 2.42:1Other Charges Generally
It is often essential in potential usury cases to determine whether a particular charge constitutes “interest.” Successful usury claims or defenses have often been made on the basis of categorizing a charge as interest even though the interest rate of the loan itself was nonusurious. In general, whether a charge is construed as interest depends on the substance of the transaction, not what the charge is called. First USA Management, Inc. v. Esmond, 960 S.W.2d 625, 627 (Tex. 1997); Gonzales County Savings & Loan Ass’n v. Freeman, 534 S.W.2d 903, 906 (Tex. 1976). An amount charged or collected in connection with a loan but not for the use, forbearance, or detention of money is not interest. First Bank v. Tony’s Tortilla Factory, Inc., 877 S.W.2d 285, 288 (Tex. 1994) (bank’s insufficient funds charges); Texas Commerce Bank-Arlington v. Goldring, 665 S.W.2d 103, 104 (Tex. 1984) (lender’s attorney’s fees).
If the lender charges or deducts prepaid interest, fees, commissions, or other “front-end” charges, and these charges do not purchase additional consideration, they are considered interest. To determine whether the additional interest charge constitutes usury, the amount of the stated principal is reduced by the charges to calculate the interest rate. Nevels v. Harris, 102 S.W.2d 1046, 1049 (Tex. 1937); Gibson v. Drew Mortgage Co., 696 S.W.2d 211, 212–13 (Tex. App.—Houston [14th Dist.] 1985, writ ref’d n.r.e.); see also Riverdrive Mall, Inc. v. Larwin Mortgage Investors, 515 S.W.2d 5, 8–9 (Tex. Civ. App.—San Antonio 1974, writ ref’d n.r.e.).
If the consideration given by the lender is the lender’s commitment to make a loan in the future, the charge for that commitment is not interest. Gonzales County Savings & Loan Ass’n v. Freeman, 534 S.W.2d 903, 906 (Tex. 1976).
If a borrower is charged for failing to make a required loan payment on time, the charge has been held to be a “charge for the detention of money” and therefore interest. Butler v. Holt Machinery Co., 741 S.W.2d 169, 173–74 (Tex. App.—San Antonio 1987, writ denied), disapproved as to other issue by George A. Fuller Co. of Texas v. Carpet Services, Inc., 823 S.W.2d 603 (Tex. 1992). If the transaction is not a credit or lending transaction, however, a late charge is not interest. See, e.g., Bexar County Ice Cream Co. v. Swensen’s Ice Cream Co., 859 S.W.2d 402, 406 (Tex. App.—San Antonio 1993, writ denied) (franchise agreement), overruled on other grounds by Barraza v. Koliba, 933 S.W.2d 164, 167–68 (Tex. App.—San Antonio, 1996, writ denied); Potomac Leasing Co. v. Housing Authority of City of El Paso, 743 S.W.2d 712, 713 (Tex. App.—El Paso 1987, writ denied) (lease).
If the debtor alleges usury because of late charges, the presence of a usury savings clause in the contract may negate the usury claim. See Parhms v. B&B Ventures, Inc., 938 S.W.2d 199, 203–04 (Tex. App.—Houston [14th Dist.] 1997, writ denied); see also Coxson v. Commonwealth Mortgage Co. of America, L.P., 43 F.3d 189, 191 (5th Cir. 1995) (quoting Shropshire v. Commerce Farm Credit Co., 120 Tex. 400, 30 S.W.2d 282, 285–86 (Tex. 1930) (“[A] contract is usurious when there is any contingency by which the lender may get more than the lawful rate of interest”). See section 2.59 below regarding usury savings clauses.
Many types of loans set out in the Finance Code have specific provisions governing late charges. For example, see Tex. Fin. Code § 348.107 regarding motor vehicle installment loans.
§ 2.42:5Prepayment Penalties or Charges
For a loan subject to chapter 306 of the Finance Code, a prepayment premium, make-whole premium, or similar fee or charge is not interest. Tex. Fin. Code § 306.005 (commercial transactions); Boyd v. Life Insurance Co. of the Southwest, 546 S.W.2d 132, 133 (Tex. Civ. App.—Houston [14th Dist.] 1977, writ ref’d n.r.e.). Prepaid interest or other charges, however, must be refunded in several types of loan transactions—for example, installment loans, retail installment transactions, motor vehicle installment transactions, and small cash advance loans. See sections 2.84:5, 2.84:6, 2.86:3, and 2.88:3 below.
§ 2.42:6Assumption of Third Party’s Debt
If as a condition of making a loan to a borrower a lender requires that the borrower assume a third party’s debt to that lender, the amount of the assumed debt is interest on the new loan. Alamo Lumber Co. v. Gold, 661 S.W.2d 926, 928 (Tex. 1983). But if the lender requires that the borrower assume a debt owed to another creditor, that debt is not interest. Victoria Bank & Trust Co. v. Brady, 811 S.W.2d 931, 935–36 (Tex. 1991).
A pleading asserting a claim for prejudgment interest for a period during which no interest was due does not constitute a “charge” of interest and therefore is not subject to a usury claim. George A. Fuller Co. of Texas v. Carpet Services, Inc., 823 S.W.2d 603 (Tex. 1992). Pleadings are directed to the court and not the debtor and therefore are not a charging.
§ 2.43Methods of Computing Interest
Under the United States Rule, interest is computed on the principal for only that time during which the principal is unpaid. If a payment is insufficient to pay accumulated interest, the unpaid interest continues to accumulate and is paid from proceeds of subsequent payments without being added to the unpaid balance; that is, interest does not accrue on a deficiency in payment of interest. This method is sanctioned by Regulation Z (see 12 C.F.R. § 1026.22), as one way of computing the annual percentage rate for closed-end credit transactions. See 12 C.F.R. pt. 1026, app. J (2017).
Under the actuarial method, at the end of each unit-period or fraction of a unit-period, the unpaid balance of the amount financed is increased by the finance charge earned during that period and is decreased by the total payment, if any, made at the end of that period. This method is generally considered the true rate of return on a creditor’s investment and is one way of computing the annual percentage rate for closed-end transactions under Regulation Z. See 12 C.F.R. § 1026.22; 12 C.F.R. pt. 1026, app. J (2017). Each payment is allocated between interest and principal so that it is applied first to accumulated interest with the remainder subtracted from (or any deficiency added to) the unpaid balance.
Under the add-on method, interest is computed, at the time the loan is made, on the full principal amount for the full term of the loan and is added to the amount the debtor is obligated to pay. That total is divided by the number of payments to be made, with the result being the same amount for each payment, even though the principal owed will decline with each payment. Add-on interest rates yield substantially higher monthly payments for the same stated interest rate than other interest rates. For example, a $10,000.00 loan, payable in monthly installments over one year with an add-on interest rate of 10 percent, yields monthly payments of $916.67. Under the United States Rule, such a monthly payment would be equivalent to an annual interest rate of 17.97 percent.
§ 2.43:4Determining Which Method to Use
If the loan is of a type in which add-on interest is allowed or dictated by statute—for example, motor vehicle installment contracts—that method should be used unless the situation dictates otherwise. For an act committed or a transaction occurring before September 1, 1997, the United States Rule apparently is the correct method in Texas of computing earned interest absent an agreement otherwise. See Community Savings & Loan Ass’n v. Fisher, 409 S.W.2d 546, 550 (Tex. 1966). For acts committed or transactions occurring on or after September 1, 1997, the actuarial method should be used. See Tex. Fin. Code § 302.001(c).
§ 2.43:5Calculating Interest Based on 360-Day Year
A creditor and an obligor may agree to calculate an annual interest rate on a commercial loan on a 365/360 basis or a 366/360 basis, as applicable, determined by applying the ratio of the percentage annual interest rate agreed to by the parties over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding.
The parties may also agree to compute the term and rate of a commercial loan on the basis of a 360-day year consisting of twelve thirty-day months. Tex. Fin. Code § 306.003(a).
The parties may agree that one or more payments of interest due with respect to a commercial loan may be paid on a periodic basis when due wholly or partly by adding to the principal balance of the loan the amount of unpaid interest due or scheduled to be due, regardless of whether the interest added to the principal balance is evidenced by an existing or a separate promissory note or other agreement. “On and after the date an amount of interest is added to the principal balance, that amount no longer constitutes interest, but instead [is] part of the principal for purposes of calculating the maximum lawful rate or amount of interest on the loan.” Tex. Fin. Code § 306.003(b).
Determining the interest rate (including the maximum rate) applicable to a transaction under Texas law can vary, depending on whether the transaction is a commercial or consumer transaction, involves a revolving account, involves a default, or involves a judgment, among other things, and can be preempted by other authorities, including federal law. The discussions below should be viewed with these understandings in mind.
§ 2.44:1Default Maximum Rate of 10 Percent
Unless a statute provides otherwise, the maximum interest rate in Texas is 10 percent per annum. Tex. Const. art. XVI, § 11; Tex. Fin. Code §§ 302.001(b), 342.004(a); Cf. Tully v. Citibank (South Dakota), N.A., 173 S.W.3d 212, 218, n.6 (Tex. App.—Texarkana 2005, no pet.) (noting that Texas’s usury laws may be preempted by federal law and that Texas law allows for interest up to 18 percent per annum for revolving charge accounts). Virtually all loans have a statutorily provided alternative maximum interest rate.
§ 2.44:2If Rate Not Specified—6 Percent
If no specified interest rate is agreed on by the parties, 6 percent annual interest, starting thirty days after the amount is due and payable, may be charged. Tex. Const. art. XVI, § 11; Tex. Fin. Code § 302.002; see Miner-Dederick Construction Corp. v. Mid-County Rental Service, Inc., 603 S.W.2d 193, 200 (Tex. 1980). This rate is referred to as “legal interest.” See Tex. Fin. Code § 301.002(a)(8).
If the parties agree to the material terms of the loan, that is, the principal amount and the amount the obligor is to pay, and the interest rate can be calculated from the information stated, the failure to explicitly state the interest rate does not relegate the interest rate to 6 percent. Community Savings & Loan Ass’n v. Fisher, 409 S.W.2d 546, 550 (Tex. 1966).
The issue of an unspecified interest rate frequently arises if a seller wants to encourage prompt payment by charging interest on unpaid amounts, even though no interest rate was agreed on by the parties. See Triton Oil & Gas Corp. v. Marine Contractors & Supply, Inc., 644 S.W.2d 443 (Tex. 1982); Watson v. Cargill, Inc., Nutrena Division, 573 S.W.2d 35 (Tex. Civ. App.—Waco 1978, writ ref’d n.r.e.). If the seller’s charges on invoices or statements consistently reflect the interest charge, the seller may be able to establish that the interest rate was agreed to by implied contract. See Preston Farm & Ranch Supply, Inc. v. Bio-Zyme Enterprises, 625 S.W.2d 295, 298 (Tex. 1981).
It is important to note that the 6 percent interest rate under Tex. Fin. Code § 302.002 is distinct from interest charges under section 342.201, which governs the interest rates charged in loans and financed transactions. For a further discussion on interest rates under Tex. Fin. Code § 342.201, see section 20.10:2 in chapter 20.
Four interest rate ceilings may be used by parties to written contracts: weekly, monthly, quarterly, and yearly. Tex. Fin. Code §§ 303.002–.009. The weekly ceiling is determined by taking the “auction rate” (the auction average rate quoted on a bank discount basis for twenty-six-week treasury bills issued by the federal government, as published by the Federal Reserve Board, for the week preceding the week for which the weekly ceiling is to take effect), multiplying it by two, and rounding it to the nearest one-quarter of one percent. The weekly rate becomes effective on Monday of each week and continues until the following Sunday. Tex. Fin. Code § 303.003. The monthly ceiling is computed by the consumer credit commissioner on the first business day of the month for which the rate applies. It is computed by averaging the weekly ceilings computed during the preceding month. Tex. Fin. Code § 303.005. The quarterly and annualized ceilings are computed by the consumer credit commissioner on December 1, March 1, June 1, and September 1 of each year and become effective the following January 1, April 1, July 1, and October 1, respectively. Tex. Fin. Code § 303.008.
If the computation is less than 18 percent, the ceiling interest rate is 18 percent. Tex. Fin. Code § 303.009(a). If the computation is more than 24 percent, the ceiling interest rate is 24 percent. Tex. Fin. Code § 303.009(b).
If another applicable law provides for an alternative ceiling or maximum rate, that rate may be used instead of these ceilings. Tex. Fin. Code § 303.001(a).
§ 2.45:2Variable Rate Ceilings
The parties to a contract may agree to a variable interest rate, but the rate as it varies must not exceed the ceiling applicable to the contract. Tex. Fin. Code §§ 303.015, 303.402. This sort of variable contract rate may not be used in a contract in which the interest or time-price differential is precomputed and added into the amount of the contract at the time the contract is made. Tex. Fin. Code § 303.015(b).
See section 2.101 below for other rules and requirements governing variable rate transactions.
§ 2.45:3Maximum Interest Rates for Particular Types of Loans
The rules governing interest rates for particular types of transactions are set out at the following sections in this chapter:
•open-end accounts, section 2.83:2
•consumer loans, section 2.84:4
•revolving credit accounts, section 2.85:2
•variable rate transactions, section 2.101:2
•credit card transactions, section 2.102:2
•loans for business, commercial, or investment purposes, section 2.103
•loans to corporations, section 2.104
•commercial loans, section 2.105:2
•commercial loans of $3,000,000 or more, section 2.106:2
•negotiable instruments, section 2.107
•home solicitation transactions, section 2.108:2
§ 2.45:4Where to Find Ceiling Rates
The consumer credit commissioner publishes ceiling interest rates in the Texas Register. Each such publication indicates both the type of ceiling (weekly, monthly, quarterly, or yearly) and the effective period of the ceiling.
§ 2.46:1Time-Price Differential Generally
A time-price differential generally is the amount that is added to the cash price at which a seller offers to sell property or services and is payable for the privilege of paying after the time of sale. Tex. Fin. Code § 301.002(a)(16). Although time-price differential is not considered interest, the amount chargeable is limited by statute for particular types of loans, such as retail installment sales and motor vehicle installment sales.
§ 2.46:2Retail Installment Sale or Retail Charge Agreement
For a retail installment sale governed by Texas Finance Code chapter 345, time-price differential is the amount paid or payable for paying for goods or services in installments. Tex. Fin. Code § 345.001(9). See section 2.86:2 below regarding rules governing time-price differential in retail installment sales and section 2.87:2 regarding rules governing time-price differential in retail charge agreements.
§ 2.46:3Motor Vehicle Installment Sale
For a motor vehicle installment sale governed by Texas Finance Code chapter 348, time-price differential is the total amount added to the principal balance to determine the balance of the retail buyer’s indebtedness. Tex. Fin. Code § 348.001(9). See section 2.88:2 below regarding rules governing time-price differential in motor vehicle installment sales.
[Sections 2.47 through 2.50 are reserved for expansion.]
“Usurious interest” is defined as interest that exceeds the applicable maximum amount allowed by law. Tex. Fin. Code § 301.002(a)(17).
Usury is committed by contracting for, charging, or receiving interest or time-price differential greater than the maximum allowable by law. Tex. Fin. Code § 302.001(b); Cf., Tully v. Citibank (South Dakota), N.A., 173 S.W.3d 212, 218 n.6 (Tex. App.—Texarkana 2005, no pet.) (noting that Texas’s usury laws may be preempted by federal law and that Texas law allows for interest up to 18 percent per annum for revolving charge accounts).
A usurious transaction has three elements: a loan of money; an absolute obligation to repay the principal; and the exaction of a greater compensation than allowed by law for the use of the money by the borrower. First Bank v. Tony’s Tortilla Factory, Inc., 877 S.W.2d 285, 287 (Tex. 1994). The “exaction” of money can be by contracting for, charging, or receiving. Tex. Fin. Code § 305.001(a).
The civil penalties for excessive interest, time-price differential, and other charges are set out in Finance Code chapters 305 and 349 and discussed at sections 2.56:1 and 2.56:2 below.
§ 2.52Actions Constituting Usury
§ 2.52:1Contracting for Usurious Interest
If there is a question regarding the existence or terms of a contract, traditional rules of contract interpretation apply. See Baker v. Howard, 799 S.W.2d 450 (Tex. App.—Waco 1990, no writ). However, “when the contract by its terms, construed as a whole, is doubtful, or even susceptible of more than one reasonable construction, the court will adopt the construction which comports with legality.” Walker v. Temple Trust Co., 80 S.W.2d 935, 936 (Tex. 1935).
A contract issue arises more often if an acceleration clause is in the note or contract. An interest-bearing contract or note allowing acceleration of the unpaid balance of the contract or note can be usurious, because it calls for payment of interest not yet accrued. Acceleration of the debt, however, is not usurious, because future interest has not accrued. Jim Walter Homes, Inc. v. Schuenemann, 668 S.W.2d 324, 327–29 (Tex. 1984); Coastal Cement Sand, Inc. v. First Interstate Credit Alliance, Inc., 956 S.W.2d 562, 568 (Tex. App.—Houston [14th Dist.] 1997, writ denied).
§ 2.52:2Charging Usurious Interest
A usurious charge may be contained in an invoice, letter, ledger sheet, or other book or document. The basis of the action is a claim or demand for usury made by the creditor, and the vehicle for the claim or demand is immaterial except as an evidentiary fact. Danziger v. San Jacinto Savings Ass’n, 732 S.W.2d 300, 304 (Tex. 1987). A pleading is not a “charge.” George A. Fuller Co. of Texas v. Carpet Services, Inc., 823 S.W.2d 603, 605 (Tex. 1992). Demand letters, however, can be charges. Woodcrest Associates, Ltd. v. Commonwealth Mortgage Corp., 775 S.W.2d 434, 437 (Tex. App.—Dallas 1989, writ denied). Invoices can contain a usurious charge; usury litigation often derives from a statement on an invoice adding interest to the amount due. See William C. Dear & Associates v. Plastronics, Inc., 913 S.W.2d 251 (Tex. App.—Amarillo 1996, writ denied).
§ 2.53Agent’s Liability for Usury
A creditor’s agent, such as a law firm or collection agency, may be liable if by its actions it contracts for, charges, or receives usurious interest or time-price differential. Lupo v. Equity Collection Service, 808 S.W.2d 122, 124–25 (Tex. App.—Houston [1st Dist.] 1991, no writ).
Guarantors are not obligors for purposes of the Texas Credit Title (Texas Finance Code tit. 4, subtit. A, Tex. Fin. Code §§ 301.001–339.005) and therefore cannot claim usury under that title. Tex. Fin. Code § 301.002(a)(13)(B). The Finance Code does not specifically address whether guarantors may claim usury, but it is doubtful that a guarantor could claim usury unless the guaranty contract itself was usurious. See Houston Sash & Door Co. v. Heaner, 577 S.W.2d 217, 222 (Tex. 1979).
An “account purchase transaction” is one in which a person engaged in a commercial enterprise sells accounts, instruments, documents, or chattel paper at a discount, even if the person has a repurchase obligation related to the transaction. Tex. Fin. Code § 306.001(1). A discount in or charged under an account purchase transaction is not interest. The parties’ characterization of an account purchase transaction as a purchase is conclusive that the transaction is not subject to a usury claim. Tex. Fin. Code § 306.103. See also Ravkind v. Mortgage Funding Corp., 881 S.W.2d 203, 206 (Tex. App.—Houston [1st Dist.] 1994, no writ) (sale of note at discount does not constitute usury).
§ 2.56:1Texas Finance Code Chapter 305
Liability for Usurious Interest: A person who contracts for, charges, or receives interest greater than the amount allowed in connection with a transaction for personal, family, or household use is liable to the obligor for an amount equal to the greater of (1) three times the amount computed by subtracting the amount of interest allowed from the total amount of interest contracted for, charged, or received or (2) $2,000 or 20 percent of the amount of the principal, whichever is less. Tex. Fin. Code § 305.001(a). A person who contracts for or receives interest that is greater than the amount allowed in connection with a commercial transaction is liable to the obligor for an amount that is equal to three times the amount computed by subtracting the amount of interest allowed from the total amount of interest contracted for or received. Tex. Fin. Code § 305.001(a–1). This liability applies only to a contract or transaction subject to tit. 4, subtit. A, Tex. Fin. Code §§ 301.001–339.005. Tex. Fin. Code § 305.001(b).
Additional Liability for More Than Twice Authorized Rate of Interest: A person who charges and receives interest greater than twice the amount allowed is liable to the obligor for (1) the principal amount on which the interest is charged and received and (2) the interest and all other amounts charged and received. Tex. Fin. Code § 305.002(a). This additional liability applies only to a contract or transaction for personal, family, or household use subject to Tex. Fin. Code §§ 301.001–339.005. Tex. Fin. Code § 305.002(b).
Liability for Usurious Legal Interest: A person who charges or receives legal interest greater than the amount allowed is liable to the obligor for an amount equal to the greater of (1) three times the amount computed by subtracting the amount of legal interest allowed from the total amount of interest charged or received or (2) $2,000 or 20 percent of the amount of the principal, whichever is less. Tex. Fin. Code § 305.003(a). This liability applies only to a transaction subject to Tex. Fin. Code §§ 301.001–339.005. Tex. Fin. Code § 305.003(b).
Additional Liability for More Than Twice Authorized Rate of Legal Interest: A person who charges and receives legal interest greater than twice the amount allowed is liable to the obligor for (1) the principal amount on which the interest is charged and received and (2) the interest and all other amounts charged and received. Tex. Fin. Code § 305.004(a). This additional liability applies only to a contract or transaction subject to Tex. Fin. Code §§ 301.001–339.005. Tex. Fin. Code § 305.004(b).
Penalties Exclusive: The penalties provided by chapter 305 are the only penalties for violation of Tex. Fin. Code §§ 301.001–339.005 for contracting for, charging, or receiving interest in an amount greater than the amount allowed. Common-law penalties do not apply. Tex. Fin. Code § 305.007.
Criminal Penalty: A person commits a misdemeanor punishable by a fine not to exceed $1,000 if the person contracts for, charges, or receives interest on a transaction for personal, family, or household use that is greater than twice the amount allowed. Tex. Fin. Code § 305.008(a), (b). Each contract or transaction is a separate offense. Tex. Fin. Code § 305.008(c). Those provisions apply only to a contract or transaction subject to Tex. Fin. Code §§ 301.001–339.005. Tex. Fin. Code § 305.008(d).
§ 2.56:2Texas Finance Code Chapter 349
Liability for Contracting for, Charging, or Receiving Excessive Interest: A person who contracts for, charges, or receives interest or time-price differential greater than the amount allowed under title 4, subtitle B, Tex. Fin. Code §§ 341.001–351.164, is liable to the obligor for an amount equal to twice the amount of the interest or time-price differential contracted for, charged, or received. Tex. Fin. Code § 349.001(a)(1). Also, a person who contracts for, charges, or receives a charge, other than interest or time-price differential, greater than the amount allowed is liable to the obligor for an amount equal to the greater of (1) three times the amount computed by subtracting the amount of the charge allowed from the amount of the charge contracted for, charged, or received or (2) $2,000 or 20 percent of the principal balance, whichever is less. Tex. Fin. Code § 349.001(b)(1).
Liability for Charges Exceeding Twice Amount Authorized: A person who contracts for, charges, or receives interest or time-price differential that in an aggregate amount exceeds twice the total amount of interest or time-price differential allowed under title 4, subtitle B, Tex. Fin. Code §§ 341.001–351.164, is liable to the obligor for (1) all principal or principal balance and (2) all interest or time-price differential. Tex. Fin. Code § 349.002(a).
Criminal Penalty: A person commits a misdemeanor punishable by a fine not to exceed $100 if the person contracts for, charges, or receives interest, time-price differential, and other charges that in an aggregate amount exceed twice the amount of interest, time-price differential, and other charges allowed. Tex. Fin. Code § 349.501(a), (b). Each contract or transaction is a separate offense. Tex. Fin. Code § 349.501(c).
In all usury cases the person committing the act of usury is also liable for the obligor’s reasonable attorney’s fees. Tex. Fin. Code §§ 305.005, 349.001(a)(2), (b)(2), 349.002(b).
§ 2.56:4No Liability for Charging Interest Exceeding Contractual Amount
A person who charges or receives interest greater than the amount contracted for, but not greater than the maximum amount allowed, is not subject to penalties for usurious interest but may be liable for other remedies and relief as provided by law. Tex. Fin. Code § 305.001(c).
§ 2.56:5No Liability for Charging Legal Interest during Thirty-Day Period
A person is not liable to an obligor solely because he charges or receives legal interest before the thirtieth day after the date on which the debt is due. Tex. Fin. Code § 305.102. See section 2.44:2 above regarding legal interest.
Before suing for a violation of the Texas Credit Title, claiming that the creditor has contracted for, charged, or received usurious interest, the obligor must give written notice advising the creditor in reasonable detail of the nature and amount of the violation at least sixty days before filing suit. Tex. Fin. Code § 305.006(b). The creditor may cure the violation within the sixty-day period and avoid liability. Tex. Fin. Code § 305.006(c). See section 2.60 below regarding curing usury.
An obligor who raises usury as a counterclaim to an original action by the creditor must provide notice complying with section 305.006(b) (described above) when the counterclaim is filed. The action may then be abated for sixty days, during which the creditor may cure the violation, pay the obligor’s reasonable attorney’s fees, and avoid liability. Tex. Fin. Code § 305.006(d). There is no corresponding requirement for notice for a claim of excessive charges under chapter 349 of the Finance Code.
Spreading is a method of allocating the total interest provided for in a loan over the full term of the loan. See Groseclose v. Rum, 860 S.W.2d 554, 558 (Tex. App.—Dallas 1993, no writ).
To determine whether a loan secured in any part by an interest in real property is usurious, the interest rate is computed by amortizing or “spreading” all interest contracted for, charged, or received, using the actuarial method, during the stated term of the loan. Tex. Fin. Code § 302.101(a). Realty-based loans are beyond the scope of this manual.
Spreading could be argued as being applicable to other cases, because it is well-recognized in the common law. See, e.g., Nevels v. Harris, 102 S.W.2d 1046, 1049 (Tex. 1937); Mills v. Johnston, 23 Tex. 308 (1859).
A usury savings clause in a note or other loan document provides that, if the transaction is usurious, the interest rate will be lowered automatically to the maximum legal rate. See First State Bank v. Dorst, 843 S.W.2d 790 (Tex. App.—Austin 1992, writ denied). Most appellate cases discussing the effect of these clauses involve both a savings clause and the spreading doctrine. See section 2.58 above. A usury savings clause will not be given effect if a contract is usurious by its express terms but can purge a transaction of usury if the occurrence of a contingency causes the usury. Parhms v. B&B Ventures, Inc., 938 S.W.2d 199, 203–04 (Tex. App.—Houston [14th Dist.] 1997, writ denied); Dorst, 843 S.W.2d at 793 (interest rate increased on transfer of mortgaged property).
The creditor will not be liable for a usury violation under the Texas Credit Title if—
1.not later than sixty days after the date of actually discovering the violation, the creditor corrects the violation by taking any necessary action and making any necessary adjustment, including paying interest on a refund, if any, at the applicable rate provided for in the contract between the parties; and
2.the creditor gives written notice to the debtor of the violation before the debtor gives notice of the violation or files an action alleging the violation.
Tex. Fin. Code § 305.103(a). “Actually discovered” means just that—it does not mean when an ordinarily prudent person in the creditor’s position would have discovered it. Tex. Fin. Code § 305.103(b). See Tex. Fin. Code § 305.103(c) regarding requirements of the notice to the debtor.
If more than one creditor may be liable for a particular violation, a correction by any of those creditors entitles all of them to protection from liability. Tex. Fin. Code § 305.104.
§ 2.60:2Texas Finance Code Chapter 349
See section 2.90:3 below regarding curing excessive charge violations of Finance Code subtitle B.
A person is not subject to usury penalties for usurious interest or excessive charges resulting from accidental and bona fide error. Tex. Fin. Code §§ 305.101, 349.101(a)(1). The “bona fide error” defense is available if the evidence shows that usury resulted from ignorance of a material fact or from other unintentional mishaps in office practice or routine that may fairly be characterized as “clerical” errors. Karg v. Strickland, 919 S.W.2d 722, 725 (Tex. App.—Corpus Christi 1996, writ denied). Bona fide error is an affirmative defense, and the party asserting it has the burden of pleading and proving it. Moore v. Sabine National Bank, 527 S.W.2d 209, 213 (Tex. Civ. App.—Austin 1975, writ ref’d n.r.e.).
§ 2.61:2Safe Harbors (Conformity with Other Law)
Texas Credit Title: A creditor does not commit usury if its action or omission conforms with an interpretation of the Credit Title in effect at the time of the act or omission that was made either by the consumer credit commissioner or a state or federal appellate court. Tex. Fin. Code § 303.401.
Texas Finance Code: A creditor does not violate the excessive charge rules of chapter 349 of the Finance Code if the violation was an act done or committed in good faith and in conformity with a rule adopted under an interpretation of title 4 of the Finance Code by a state agency, board, or commission; the federal Consumer Credit Protection Act, 15 U.S.C. §§ 1601–1693r; or a rule or regulation adopted under, or an interpretation of, the Consumer Credit Protection Act by an agency, board, or commission of the United States. Tex. Fin. Code § 349.101(a)(2).
§ 2.61:3Time-Price Differential
If the transaction is not one in which a maximum time-price differential is set by law (for example, a motor vehicle installment transaction), proof that the transaction involved a time-price differential and not interest is a defense to usury. The creditor must prove that—
1.the transaction was a bona fide sale and not a cash loan;
2.two prices were offered to the buyer;
3.the buyer was aware that two prices were being offered; and
4.the buyer knowingly chose the higher price for the privilege of paying after the time of sale.
Kinerd v. Colonial Leasing Co., 800 S.W.2d 187, 190 (Tex. 1990).
A minor usury violation may be excused under the doctrine of de minimis non curat lex. Thornhill v. Sharpstown Dodge Sales, Inc., 546 S.W.2d 151, 153 (Tex. Civ. App.—Beaumont 1976, no writ).
§ 2.61:5Limitation of Liability (Texas Finance Code)
See section 2.90 below regarding limiting liability for excessive charge violations of the Finance Code.
A usury action brought under the Texas Credit Title must be brought within four years from the date when the usurious interest was contracted for, charged, or received. Tex. Fin. Code § 305.006(a).
An action for excessive charges brought under chapter 349 of the Texas Finance Code must be brought before the later of either the fourth anniversary of the date of the applicable loan or retail installment transaction or the second anniversary of the date of the violation. Tex. Fin. Code § 349.402(a). An action with respect to an open-end credit transaction, however, must be brought before the second anniversary of the date of the violation. Tex. Fin. Code § 349.402(b).
Texas courts have recognized a common-law usury claim deriving from Tex. Const. art. XVI, § 11. The elements are the same as for statutory usury; see section 2.51 above. This cause of action is not a suit for penalties, but one to declare the usurious transaction void. This means that no interest is collectible and the debtor is entitled to recover all interest paid. See Allee v. Benser, 779 S.W.2d 61, 65 (Tex. 1988); Danziger v. San Jacinto Savings Ass’n, 732 S.W.2d 300, 304 (Tex. 1987).
Tex. Fin. Code § 305.007 abolishes common-law remedies for violations of the former Texas Credit Title (now repealed).
[Sections 2.64 through 2.70 are reserved for expansion.]
VI. Federal Statutory Requirements
§ 2.71Truth in Lending Act and Regulation Z
From a collections law perspective, the federal Truth in Lending Act and its accompanying Regulation Z often affect two primary areas: disclosures and billing disputes.
§ 2.71:1Covered and Exempt Transactions—Truth in Lending Act
The Truth in Lending Act, 15 U.S.C. §§ 1601–1667f, covers traditional credit transactions between consumer and creditor. See, e.g., Pollock v. Birmingham Trust National Bank, 650 F.2d 807 (5th Cir. 1981).
Transactions exempt from truth-in-lending coverage include business, commercial, and agricultural transactions, and credit transactions other than those in which a security interest is acquired in property to be used as the consumer’s principal dwelling in which the total amount financed exceeds $50,000. 15 U.S.C. § 1603.
§ 2.71:2Covered Transactions—Regulation Z
The Truth in Lending Act is implemented by Regulation Z of the Federal Reserve Board, 12 C.F.R. pt. 1026.
In general, Regulation Z applies to individuals or businesses who offer or extend credit if—
1.the credit is extended or offered to consumers;
2.the offering or extension of credit is done regularly;
3.the credit is subject to a finance charge or is payable by a written agreement in more than four installments; and
4.the credit is primarily for personal, family, or household purposes.
12 C.F.R. § 1026.1(c)(1).
“If a credit card is involved, . . . certain provisions [of Regulation Z] apply even if the credit is not subject to a finance charge or is not payable by a written agreement in more than four installments.” 12 C.F.R. § 1026.1(c)(2).
§ 2.71:3Required Disclosures—Open-End Transactions
12 C.F.R. § 1026.5 details the disclosures required for open-end credit transactions. Generally, they fall into three categories:
1.Initial disclosure statements that must be furnished to the consumer before the first transaction is made. 12 C.F.R. § 1026.5(b)(1) (with particular requirements set out at 12 C.F.R. § 1026.6).
2.Periodic statements. 12 C.F.R. § 1026.5(b)(2) (with particular requirements set out at 12 C.F.R. § 1026.7).
3.Subsequent disclosures required if prior disclosures have become inaccurate. 12 C.F.R. § 1026.5(e) (with particular requirements set out at 12 C.F.R. § 1026.9).
A written disclosure statement must be provided to a potential cosigner on an open-end account, in substantially the wording set out in the regulation. See 12 C.F.R. § 535.13(c).
§ 2.71:4Required Disclosures—Credit Card Transactions
Required disclosures in credit card transactions are governed by 15 U.S.C. § 1637(c) and 12 C.F.R. § 1026.60. Three notable disclosure categories are:
1.Annual percentage rates and fees. 15 U.S.C. § 1637(c)(1)(A)(i), (ii); 12 C.F.R. § 1026.60(b)(1).
2.Grace periods for avoiding finance charge, if such periods exist. 15 U.S.C. § 1637(c)(1)(A)(iii); 12 C.F.R. § 1026.60(b)(5).
3.How the balance is calculated. 15 U.S.C. § 1637(c)(1)(A)(iv); 12 C.F.R. § 1026.60(b)(6).
§ 2.71:5Required Disclosures—Closed-End Transactions
The disclosure requirements for closed-end transactions are found at 12 C.F.R. §§ 1026.17–.20.
The creditor can avoid liability by showing that its violation both was not intentional and resulted from a bona fide error, despite the maintenance of procedures reasonably adapted to avoid such an error, as set forth in 15 U.S.C. § 1640(c). Clerical errors, computer malfunctions, and printing errors are bona fide errors, while errors of legal judgment are not. See 15 U.S.C. § 1640(c).
A creditor is exempt from liability if it acted in good faith and in conformity with any official rule, regulation, or interpretation of the Truth in Lending Act by the Federal Reserve Board “or in conformity with any interpretation or approval by an official or employee of the Federal Reserve System authorized by the Bureau [of Consumer Financial Protection] to issue such interpretations or approvals under such procedures as the Bureau may proscribe therefor, 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.” 15 U.S.C. § 1640(f).
A creditor can avoid liability with regard to certain provisions under the Truth in Lending Act if it takes certain actions within the proscribed periods of time and before receiving notice of the error from a consumer or before the consumer brings an action against the creditor. 15 U.S.C. § 1640(b). Specifically, section 1640(b) provides:
A creditor or assignee has no liability under this section or section 1607 of this title or section 1611 of this title for any failure to comply with any requirement imposed under this part or part E, if within sixty days after discovering an error, whether pursuant to a final written examination report or notice issued under section 1607(e)(1) of this title or through the creditor’s or assignee’s own procedures, and prior to the institution of an action under this section or the receipt of written notice of the error from the obligor, the creditor or assignee notifies the person concerned of the error and makes whatever adjustments in the appropriate account are necessary to assure that the person will not be required to pay an amount in excess of the charge actually disclosed, or the dollar equivalent of the annual percentage rate actually disclosed, whichever is lower.
15 U.S.C. § 1640(b). See also 12 C.F.R. § 1026.31(h).
A creditor is deemed to be in compliance with disclosure requirements with respect to non-numerical disclosures if it either uses the model form or clause or uses the model but deletes information that is not required or rearranges the format, as long as the alterations do not affect the substance, clarity, or meaningful sequence of disclosure. 15 U.S.C. § 1604(b). Model forms are found at the appendices to Regulation Z. 12 C.F.R. pt. 1026 apps. G, H.
§ 2.73Interaction of State and Federal Disclosure Laws
The Truth in Lending Act does not exempt any creditor from complying with state credit disclosure laws and does not affect state law except to the extent that the state law is inconsistent with the federal law or regulation. If the Federal Reserve Board determines that an inconsistency between federal and state disclosure laws exists, creditors in the state may not use the inconsistent state term or form and will incur no liability under state law for failure to do so. 15 U.S.C. § 1610(a)(1).
§ 2.73:2Retail Installment Sales
For retail installment sales as described in Texas Finance Code chapter 345, if there is an inconsistency between federal and state disclosure requirements, the federal law controls, and inconsistent state requirements need not be followed. Tex. Fin. Code § 345.009.
§ 2.73:3Retail Charge Agreements
For periodic statements under retail charge agreements, compliance with the federal disclosure laws is deemed to be compliance with state law requirements. Tex. Fin. Code § 345.113.
§ 2.73:4Credit Card Transactions
The tabular format required for certain disclosures by 15 U.S.C. § 1632(c) and the disclosure requirements required by 15 U.S.C. § 1637(c)–(f) expressly supersede state law. 15 U.S.C. § 1610(e).
§ 2.73:5Availability of State and Federal Remedies
A judgment under the federal Consumer Credit Protection Act bars subsequent actions under Tex. Fin. Code §§ 349.001–.003 by the same obligor with respect to the same violation. Tex. Fin. Code § 349.404(a). Also, a consumer who recovers under the Truth in Lending Act has made an election of remedies, intentional or not.
§ 2.74Resolution of Billing Errors (Fair Credit Billing Act)
If a consumer gives proper written notice to the creditor of an alleged billing error, 15 U.S.C. § 1666; 12 C.F.R. § 1026.13 impose procedures the creditor must follow regarding resolution of the error and limitations on the creditor’s actions. In general, the consumer may withhold payment of the disputed amount until the billing error procedure has been completed, and the creditor is prohibited from making or threatening to make adverse credit reports because of the consumer’s refusal to pay. 15 U.S.C. § 1666(c); 12 C.F.R. § 1026.13(d)(1), (2). See 12 C.F.R. § 1026.13(b) regarding what constitutes proper written notice from the consumer.
A creditor who fails to comply with the requirements of the Fair Credit Billing Act as to any amount properly disputed by the debtor forfeits his right to collect the disputed amount and any accrued finance charges, except that the forfeiture cannot exceed $50. 15 U.S.C. § 1666(e). An attorney who subsequently attempts to collect such forfeited charges violates 15 U.S.C. §§ 1692e(2)(A), 1692f(1).
§ 2.75No Holder-in-Due-Course Rule for Credit Card Purchases
A credit card issuer under an open-end consumer credit plan is subject to all claims (other than tort claims) and defenses arising out of any transaction in which the credit card is used as a method of payment or extension of credit if—
1.the obligor has made a good-faith effort to obtain satisfactory resolution of the problem with the person honoring the card;
2.the amount of the initial transaction exceeds $50; and
3.the initial transaction occurred either within the same state as the cardholder’s previously provided mailing address or within one hundred miles of that address.
Requirements 2. and 3. do not apply if the merchant is the card issuer, is controlled by the card issuer, is under direct or indirect common control with the card issuer, is a franchised dealer in the card issuer’s products or services, or has obtained the order through “a mail solicitation made by or participated in by the card issuer in which the cardholder is solicited to enter into [the] transaction by using the issuer’s credit card.” 15 U.S.C. § 1666i(a).
§ 2.75:2Limitation on Amount of Claim or Defense
“The amount of claims or defenses asserted by the cardholder may not exceed the amount of credit outstanding with respect to the transaction at the time the cardholder first notifies the card issuer or [the seller] of the claim or defense.” 15 U.S.C. § 1666i(b).
§ 2.76FTC Holder-in-Due-Course Rule
See section 2.112:5 below regarding the FTC holder-in-due-course rule.
§ 2.77Consumer Lease Disclosures
Consumer leases are regulated by 15 U.S.C. §§ 1667–1667f, implemented by Regulation M of the Federal Reserve Board, 12 C.F.R. §§ 213.1–.9.
For purposes of this disclosure statute, a consumer lease is—
1.a contractual lease or bailment;
2.made by a natural person;
3.for the use of personal property;
4.for longer than four months;
5.for a total not exceeding $50,000;
6.primarily for personal, family, or household purposes;
7.regardless of whether the lessee has “the option to purchase or otherwise become the owner of the property at the expiration of the lease.”
15 U.S.C. § 1667(1).
Consumer leases do not include—
1.leases for agricultural purposes;
2.leases for business or commercial purposes;
3.leases to governmental agencies or instrumentalities;
4.leases to organizations; or
5.sales for which the seller extends or arranges for credit, which includes “any contract in the form of a bailment or lease if the bailee or lessee contracts to pay as compensation for use a sum substantially equivalent to or in excess of the aggregate value of the property and services involved and it is agreed that the bailee or lessee will become, or for no other or a nominal consideration has the option to become, the owner of the property upon full compliance with his obligations under the contract.”
15 U.S.C. §§ 1667(1), 1602(h).
Before consummation of a consumer lease, the lessor must provide the lessee with a written and dated statement that accurately, clearly, and conspicuously discloses, with respect to the lease—
1.the identities of the lessor and lessee;
2.a brief description of the leased property;
3.the amount of any payment required at the inception of the lease;
4.the amounts for official fees, registration, certificate of title, or license fees or taxes;
5.the amounts of other charges not included in the periodic payments and a description of those charges;
6.if agreed, that the lessee will be liable for any difference between the property’s anticipated fair market value and its appraised actual value at the end of the lease;
7.a statement of the amount or method of determining the amount of any liability imposed on the lessee at the end of the lease;
8.whether the lessee has the option to purchase the property and, if so, at what price and time;
9.a statement of all express warranties or guarantees for the property whether made by the lessor or by the manufacturer;
10.a description of the required maintenance of the leased property and an identification of the party charged with maintaining or servicing it;
11.a brief description of any insurance provided or paid for by the lessor or required of the lessee, including the types and amounts of the coverages and costs;
12.a description of any security interest held by the lessor and a clear identification of the subject collateral;
13.the number, amounts, and due dates of periodic payments;
14.the total amount of the periodic payments;
15.if the lease imposes liability on the lessee for the anticipated fair market value of the property at the end of the lease, a statement of the fair market value of the property at the lease’s inception, the aggregate cost of the lease at its expiration, and the difference between the two figures;
16.a statement of the conditions under which either party can terminate the lease before the end of the term; and
17.the amount, or the method for determining the amount, of any penalty or other charge for delinquent payments, default, or early termination.
15 U.S.C. § 1667a. The action on a lease is discussed at section 14.26 in this manual.
§ 2.78Servicemembers Civil Relief Act
Note: In this section, all persons covered as members of the armed forces on active duty are referred to as “servicemembers,” and persons who were on active duty but have left active military service are referred to as “veterans.” The terms are used for convenience only. The Servicemembers Civil Relief Act, 50 U.S.C. §§ 3901–4043, is referred to as the “SCRA.”
Enforcement of certain civil liabilities and prosecution of certain legal proceedings against persons in military service is suspended to enable those persons to devote their entire energies to the defense needs of the nation. 50 U.S.C. § 3902.
§ 2.78:1Persons Entitled to Claim Protection
Servicemember: The SCRA primarily protects persons in the military service. Military service means active duty with any military branch set out below, as well as training or education under the supervision of the United States before induction into military service. A person in the military service is a member of the Army of the United States, the United States Navy, the Marine Corps, the Air Force, or the Coast Guard on active duty. Members of the National Guard are included while under a call to active service for a period of more than thirty consecutive days. Any officer of the Public Health Service or the National Oceanic and Atmospheric Association on active service is also included. Although military service ends with the servicemember’s termination of active service or death, many provisions of the SCRA allow for relief by a veteran after he leaves active service. Military service includes any period during which the servicemember is absent from duty due to sickness, wounds, leave, or other lawful cause. See 50 U.S.C. § 3911(1)–(3). The SCRA also covers U.S. citizens serving in the forces of a nation allied with the United States in a war or military action if that service is similar to military service. 50 U.S.C. § 3914.
Call-Up Period: A person who has been ordered for induction into the armed forces or a person in the armed forces reserve who has been called to active service is entitled to the protection of the SCRA from the date he receives the order until he reports for induction or service. 50 U.S.C. § 3917.
Protection of Parties Secondarily Liable: If a right against a servicemember or veteran is stayed, postponed, or suspended, the court taking that action may, in its discretion, also grant the same relief to sureties, guarantors, endorsers, accommodation makers, and others, whether primarily or secondarily liable. 50 U.S.C. § 3913(a). The same right accrues when a court vacates or sets aside a judgment or decree. 50 U.S.C. § 3913(b). See section 2.78:14 below regarding the ability of a secondarily liable party to waive the protection of the SCRA.
§ 2.78:2Installment Contract for Purchase of Property
If a person enters into a contract to buy or lease property, pays a deposit or installment toward the purchase or lease, and then enters military service, the creditor or lessor may not exercise a right or option to terminate the contract or repossess the property for nonpayment of the contract or any other breach of its terms, except through court action. In a court action, the court may order the repayment of prior installments or deposits or any part of them as a condition of terminating the contract and resuming possession of the property, may order a stay of proceedings, or may make other disposition of the case as may be equitable to preserve the interests of all parties (as set out in sections 2.78:5 through 2.78:8 below). 50 U.S.C. § 3952. The servicemember’s dependents may claim the protection of this provision unless in the court’s opinion their ability to comply with the contract is not materially impaired by the servicemember’s military service. 50 U.S.C. § 3959.
§ 2.78:3Maximum Interest Rate for Preservice Obligation
If the servicemember incurred an obligation requiring him to pay interest greater than 6 percent per year before entering military service, his obligation is reduced to 6 percent annual interest during his period of military service and one year thereafter, in case of an obligation or liability consisting of a mortgage, trust deed, or other security in the nature of a mortgage or during his period of military service, in the case of any other obligation or liability. 50 U.S.C. § 3937(a). “Interest” includes service charges, renewal charges, fees, or any other charges except bona fide insurance in respect of the obligation. 50 U.S.C. § 3937(d). The creditor may apply to a court for an order authorizing payment of a greater interest rate on a showing that the ability of the servicemember to pay more than 6 percent annual interest is not materially affected by his military service. 50 U.S.C. § 3937(c).
§ 2.78:4Judicial Foreclosure of Security Interest
If a servicemember is obligated under a security agreement and still owns the collateral when he enters military service, any action to enforce the security interest arising from the servicemember’s alleged breach of the security agreement committed before or during his military service may be stayed as provided in sections 2.78:5 through 2.78:8 below, or the court may make another disposition of the case as may be equitable to preserve the interests of all parties. 50 U.S.C. § 3953(b). The servicemember’s dependents may claim the protection of this provision unless in the court’s opinion their ability to comply with the security agreement is not materially impaired by the servicemember’s military service. 50 U.S.C. § 3959.
§ 2.78:5Stay of Enforcement of Obligation
A servicemember may, at any time of his military service or within 180 days thereafter, apply for a stay of enforcement of any of his obligations incurred before his military service. 50 U.S.C. § 4021(a). The court may grant a stay of enforcement of the obligation during his service and after his service for a period of time equal to the period of his military service. 50 U.S.C. § 4021(b). The postservice stay is subject to the servicemember’s paying the balance of principal and accumulated interest owed at the time of his separation from military service in equal periodic installments during the extended period, at the rate of interest prescribed for the obligation if paid when due and with other terms as may be just. 50 U.S.C. § 4021(b). The court may also find that the ability of the applicant to meet his obligation has not been materially affected by his military service and refuse to grant the stay. 50 U.S.C. § 4021(b). If the court grants such a stay, no fine or penalty may accrue during the postservice payment term because of the failure of the veteran to meet his original contractual obligation. 50 U.S.C. § 4021(c).
§ 2.78:6Stay of Fines and Penalties on Contracts
If an action for compliance with any term of a contract is stayed by other provisions of the SCRA, the servicemember will not be liable for any fine or penalty otherwise owed because of the servicemember’s nonperformance of the obligation. 50 U.S.C. § 3933(a). Also, if a servicemember fails to perform any obligation and a fine or penalty is incurred as a result, a court may reduce or waive the fine or penalty if it appears that the servicemember was in military service when the fine or penalty was imposed and, because of his service, his ability to pay or perform was materially impaired. 50 U.S.C. § 3933(b).
§ 2.78:7Stay of Nonjudicial Repossession of Security Interest
If a servicemember is obligated under a security agreement when he enters military service and still owns the collateral when he enters, the secured creditor may not seize, sell, or foreclose on the collateral during the period of his military service or for one year thereafter, except under an agreement between the servicemember and the creditor as described in section 2.78:14 below or on order previously granted by a court with a return of it made and approved by the court. 50 U.S.C. § 3953(c). The servicemember’s dependents may claim the protection of this provision unless in the court’s opinion their ability to comply with the security agreement is not materially impaired by the servicemember’s military service. 50 U.S.C. § 3959.
§ 2.78:8Stay of Judicial Proceedings
If a person is a plaintiff or defendant in a civil action or proceeding that he has received notice of and either is in military service or has separated from military service within ninety days, the court may, on its own motion, or shall, on the application of the servicemember, stay the proceeding for a period of at least ninety days. 50 U.S.C. § 3932(a), (b)(1). The application must contain—
1.a letter stating how the servicemember’s military duty materially affects his ability to appear and stating a date when he would be available to appear; and
2.a letter from the servicemember’s commanding officer stating that the servicemember’s military duty prevents appearance and that military leave for the servicemember has not been authorized.
50 U.S.C. § 3932(b)(2).
The application does not constitute an appearance for jurisdictional purposes or a waiver of any substantive or procedural defense. 50 U.S.C. § 3932(c). The servicemember may apply for an additional stay based on the continuing effect of military duty on his ability to appear. 50 U.S.C. § 3932(d). If the court refuses to grant an additional stay, the court must appoint counsel to represent the servicemember in the proceeding. 50 U.S.C. § 3932(d).
In all default judgments, if the defendant has not made an appearance, the prevailing plaintiff must file an affidavit setting forth facts showing that the defendant is not in military service. 50 U.S.C. § 3931(b)(1). If the plaintiff is unable to make such a showing, he must file an alternative affidavit, stating either that the defendant is in military service or the defendant’s military service status cannot be determined. 50 U.S.C. § 3931(b)(1). A person who knowingly uses a false affidavit may be fined or imprisoned or both. 50 U.S.C. § 3931(c). See form 20-3 in this manual for a nonmilitary affidavit. If the defendant is in military service, the court may not enter a judgment until it has appointed an attorney to represent the defendant. 50 U.S.C. § 3931(b)(2). If appointed counsel cannot locate the servicemember, the attorney’s actions in the case do not waive any of the servicemember’s defenses or otherwise bind him. 50 U.S.C. § 3931(a), (b)(2). On counsel’s application or on the court’s own motion, the court shall also grant a stay of proceedings for at least ninety days if the court determines that there may be a defense to the action and it cannot be presented without the defendant’s presence, or, after due diligence, counsel has not been able to determine if a meritorious defense exists. 50 U.S.C. § 3931(d).
If the court is unable to determine whether the defendant is in military service, the court may require the plaintiff to file a bond to indemnify the defendant against loss or damage suffered by reason of the judgment, should the judgment later be set aside. 50 U.S.C. § 3931(b)(3). If a default judgment is taken against a person in military service during the term of that person’s service or within sixty days thereafter, the defendant may apply to the court rendering judgment to reopen the judgment for the purpose of allowing the servicemember to defend the action. 50 U.S.C. § 3931(g). The application must be made within ninety days of the defendant’s release from military service, and the defendant will have to show a meritorious or legal defense against the plaintiff’s claim and that the servicemember’s ability to defend the action was materially affected by military service. 50 U.S.C. § 3931(g).
If the court vacates, sets aside, or reverses a default judgment under the SCRA, that action does not impair the title acquired by a bona fide purchaser for value under the judgment. 50 U.S.C. § 3931(h).
§ 2.78:10Stay or Vacation of Judgment, Attachment, or Garnishment
In an action or proceeding commenced in any court against a servicemember during the period of his service or within ninety days thereafter, the court may, on its own motion, or shall, on the application of the servicemember, stay the execution of a judgment, order, attachment, or garnishment issued against the servicemember, if in the opinion of the court the ability of the servicemember to comply is materially affected by his military service. 50 U.S.C. § 3934.
This stay may last for the length of the servicemember’s military service and for ninety days thereafter. 50 U.S.C. § 3935(a). The stay may be subject to such terms as may be just, such as ordering payment of a debt in installments. If the servicemember is a codefendant with others, the plaintiff may proceed against the other defendants after obtaining leave of court. 50 U.S.C. § 3935(b).
§ 2.78:11Settlement of Cases Involving Property
In an action to foreclose on or repossess property, the court may appoint three disinterested persons to appraise the collateral and use their appraisal to set an amount to be paid to the servicemember (or his dependent as appropriate) as a condition of foreclosure or repossession. 50 U.S.C. § 3954. If the court finds that this appraisal process would cause undue hardship to the dependents of the servicemember, it will not order the appraisal. 50 U.S.C. § 3954.
§ 2.78:12Statutes of Limitation Affected by Military Service
Regardless of whether the plaintiff’s cause of action accrued before or during the defendant’s period of military service, the servicemember’s period of military service is not included in computing any limitations period or period for the redemption of real property, except limitations periods under the internal revenue laws. 50 U.S.C. § 3936.
§ 2.78:13Exercise of SCRA Rights and Future Financial Transactions
If a servicemember applies for or receives any of the protections of the SCRA, that fact alone does not allow a lender or creditor to determine that the servicemember is unable to pay the obligation or liability, deny credit to the servicemember, change the terms of an existing credit agreement with the servicemember, refuse to grant credit to the servicemember in substantially the amount or on substantially the terms requested, or make an adverse report on the servicemember’s creditworthiness, refuse to insure the servicemember, make an annotation in the servicemember’s credit record to the effect that he is a member of the National Guard or reserves, or change the terms offered for insurance. 50 U.S.C. § 3919.
The protections of the SCRA can be waived by written agreement of the parties executed during or after the period of military service. 50 U.S.C. § 3918. Specific requirements apply to waivers for certain purposes.
A secondarily liable party may waive the protections set out above by written waiver executed as an instrument separate from the contract or instrument setting out the obligation or liability. 50 U.S.C. § 3913. No such waiver is valid if it is executed by an individual who later joins the military or if it is executed by a dependent of that individual, unless executed by the individual during the call-up period set out in section 2.78:1 above. 50 U.S.C. § 3913(d)(2).
§ 2.78:15Real Estate–Related Provisions
The SCRA contains numerous provisions affecting mortgages or other liens or claims against servicemembers’ real property. Those provisions often differ from those set out here and are beyond the scope of this manual. See generally State Bar of Tex., Texas Real Estate Forms Manual chs. 2, 11, 14, 25 (3d ed. 2017).
§ 2.78:16Distinguishable from Military Lending Act
The SCRA is distinguishable from the Military Lending Act (the “MLA”), which is codified at 10 U.S.C. § 987, and the regulations promulgated in connection therewith, which are also defined as the MLA for purposes of this section. 32 C.F.R. § 232.1 et seq. The SCRA applies to servicemembers and their spouses and dependents with regard to preservice debts when they subsequently become active duty servicemembers. By contrast, the MLA applies to servicemembers and their spouses and dependents who are on active duty at the time they become obligated on the indebtedness at issue. See 10 U.S.C. § 987(a). Interest, including fees, is capped at 6 percent per annum under the SCRA, whereas interest, including fees, is capped at a 36 percent per annum Military Annual Percentage Rate (MAPR) as that term is defined under the MLA. Compare 50 U.S.C. § 3937(a) and 10 U.S.C. § 987(b). Under the SCRA, certain written disclosures are required after forty-five days of delinquency, whereas, under the MLA, written and oral disclosures are required at the time the credit account is established or when the borrower becomes obligated on the transaction under the new MLA rule. See 10 U.S.C. § 987(c). As with most laws, many of the key terms of the MLA are defined and must be carefully reviewed and considered. See 10 U.S.C. § 987(i). A failure to comply with the MLA can result in serious penalties, including a voiding of the note or credit as of inception and a requirement that the creditor refund all fees and interest paid by the affected borrower. See 10 U.S.C. § 987(f). A violation of the MLA may also constitute a violation under Regulation Z and an unfair, deceptive, or abusive act or practice under the Dodd-Frank Act, which is set forth in 12 U.S.C. §§ 5531, 5536.
§ 2.79Fair Credit Reporting Act
The Fair Credit Reporting Act, 15 U.S.C. §§ 1681–1681x, requires consumer reporting agencies to adopt reasonable procedures to meet the needs of commerce for consumer credit, insurance, and other information in a manner that is fair and equitable to the consumer with regard to the confidentiality, adversity, relevance, and proper use of that information. The Act applies not only to reporting agencies but also to providers of credit information. Although creditors or creditor-side entities may face litigation under the Fair Credit Reporting Act, it is not likely to give rise to a counterclaim to a collections suit.
[Section 2.80 is reserved for expansion.]
VII. Texas Consumer Credit Laws
§ 2.81Consumer Credit Laws Generally
The Texas Consumer Credit Code was formerly found at Texas Revised Civil Statutes articles 5069–2.01 through –8.06. In 1997, the legislature moved those provisions to subtitle B of title 4 of the Texas Finance Code, and the former statutes were repealed.
Remedies for violations of subtitle B are found in Tex. Fin. Code ch. 349. See part V. in this chapter regarding usury generally and section 2.89 below regarding other statutory violations.
§ 2.82Commonly Encountered Violations
Some of the more common nonusury violations of subtitle B include—
1.failing to give disclosures in ten-point type (see, e.g., Tex. Fin. Code § 345.052(d));
2.failing to provide documents in at least eight-point type (see, e.g., Tex. Fin. Code § 345.051(c); O.R. Mitchell Motors, Inc. v. Bell, 528 S.W.2d 856, 860 (Tex. Civ. App.—San Antonio 1974, writ ref’d n.r.e.));
3.requiring the consumer to buy collateral protection or credit insurance through the lender (see, e.g., Tex. Fin. Code § 345.205);
4.selling collateral protection or credit insurance at higher-than-lawful rates (see, e.g., Tex. Fin. Code § 345.208; see also Southwestern Investment Co. v. Mannix, 557 S.W.2d 755 (Tex. 1977));
5.contracting for rights to trespass or breach the peace in connection with repossession or enforcement of a security interest (see, e.g., Tex. Fin. Code § 348.411);
6.contracting for a confession of judgment or assignment of wages, or providing for waivers of claims against creditors (see, e.g., Tex. Fin. Code § 348.410);
7.taking a prohibited lien against real estate (see, e.g., Tex. Fin. Code § 342.503(b)); and
8.imposing a surcharge for buying with a credit card, instead of cash, check, or other means of payment (Tex. Fin. Code § 339.001(a)).
Other commonly encountered violations specific to a particular class of transaction are indicated in the following sections by the notation “commonly encountered violation.”
An open-end account is one in which—
1.an account under a written contract exists between creditor and obligor;
2.the creditor reasonably contemplates repeated transactions, and the obligor is authorized to make purchases or borrow money;
3.interest or time-price differential may be charged from time to time on an outstanding balance; and
4.the amount of credit that may be extended during the term of the account is generally made available to the extent that any outstanding balance is repaid.
Open-end accounts include agreements for more than one loan or cash advance, retail installment sales, and revolving credit accounts. Tex. Fin. Code § 301.002(a)(14); see also 15 U.S.C. § 1602(i).
§ 2.83:2Rules Governing Interest
1.Ceilings generally. Tex. Fin. Code §§ 303.001–.017, 303.101.
2.Ceilings, variable rate account. Tex. Fin. Code §§ 303.015, 303.402.
3.Billing cycle interest limitation on open-end credit card account without merchant discount. Tex. Fin. Code § 339.002.
4.Ceiling on open-end account involving credit card transaction or merchant discount. Tex. Fin. Code § 303.006(c).
5.Ceiling on open-end account providing for credit card transaction in which merchant discount is not imposed or received (21 percent). Tex. Fin. Code § 303.009(d).
6.If creditor implements quarterly or annualized ceiling for majority of Texas obligors under a particular plan or arrangement, that ceiling is also the ceiling for all open-end accounts during period of plan or arrangement. Tex. Fin. Code § 303.106.
1.Disclosures for variable rate accounts. Tex. Fin. Code § 303.105(b).
2.Disclosures for rate variations. Tex. Fin. Code § 303.105.
3.Notice of change of any agreement term. Tex. Fin. Code § 303.103(a)–(c).
4.Right of obligor to terminate open-end account on change in agreement term. Tex. Fin. Code § 303.103(d), (e).
Also, note the disclosure requirements for open-end transactions in the Truth in Lending Act and Regulation Z. 15 U.S.C. § 1637; 12 C.F.R. §§ 1026.5–.16. See section 2.71:3 above.
§ 2.84Consumer Loans (Texas Finance Code Chapter 342)
A regular transaction is a loan payable in installments that are consecutive, monthly, and substantially equal in amount, with the first scheduled installment due within one month and fifteen days after the date of the loan. Tex. Fin. Code § 342.001(2).
An irregular transaction is a loan payable in installments that are not consecutive, monthly, and substantially equal in amount, with the first scheduled installment due within one month and fifteen days after the date of the loan. Tex. Fin. Code § 342.001(1).
§ 2.84:2Constitutional Interest, Exemption for Loan with Interest Rate of 10 Percent or Less
Unless otherwise fixed by law, the maximum interest rate is 10 percent per year. Tex. Fin. Code § 342.004(a). A loan with an interest rate that is 10 percent per year or less is not subject to chapter 342 of the Finance Code. Tex. Fin. Code § 342.004(b).
§ 2.84:3Applicability of Chapter 342
A loan is governed by chapter 342 of the Finance Code if it (1) provides for interest in excess of 10 percent per year; (2) is extended primarily for personal, family, or household use; (3) is made by a lender engaged in the business of making, arranging, or negotiating those types of loans; and (4) either is not secured by a lien on real property or is a secondary mortgage loan as described by Tex. Fin. Code §§ 342.001(4), 342.301, or 342.456 and is predominantly payable in monthly installments. Tex. Fin. Code § 342.005.
§ 2.84:4Rules Governing Interest Charges on Non–Real Property Loans
1.Maximum interest charge and administrative fee. Tex. Fin. Code § 342.201.
2.Maximum charge for loan with single repayment. Tex. Fin. Code § 342.202.
3.Additional interest for default, regular transaction. Tex. Fin. Code §§ 342.203, 342.205.
4.Additional interest for installment deferment, regular transaction. Tex. Fin. Code §§ 342.204, 342.205.
5.Additional interest for default, irregular transaction. Tex. Fin. Code § 342.206.
6.Revision of ceiling or bracket. Tex. Fin. Code §§ 341.202–.204.
§ 2.84:5Rules Governing Alternate Charges for Certain Loans (Cash Advances)
1.Maximum cash advance as computed yearly by the consumer credit commissioner, indexing the amount to the percentage growth of the Consumer Price Index from December 1967 to the present year, using a base of $100 (or $200 for loans subject to Finance Code section 342.259). Tex. Fin. Code § 342.251.
2.Alternate charges instead of the charges allowed by Tex. Fin. Code § 342.201, including acquisition and investment account handling charges. Tex. Fin. Code § 342.252.
3.Maximum interest charge for loan with single repayment. Tex. Fin. Code § 342.253.
4.No other charges allowed, including insurance charges. Tex. Fin. Code § 342.254.
5.Maximum loan term. Tex. Fin. Code § 342.255.
6.Charges subject to refund. Tex. Fin. Code § 342.256.
7.Default charge, deferment of payment. Tex. Fin. Code § 342.257.
8.Schedules for weekly, biweekly, or semimonthly installments. Tex. Fin. Code § 342.258.
§ 2.84:6Other Charges or Credits
1.Limits on charges and types of charges generally. Tex. Fin. Code § 342.502.
2.Collateral protection insurance paid by debtor. Tex. Fin. Code §§ 307.051–.058.
3.Refund of precomputed interest, regular transaction. Tex. Fin. Code §§ 342.351, 342.353.
4.Refund of precomputed interest on contract, irregular transaction or term of more than sixty months. Tex. Fin. Code §§ 342.352, 342.353.
§ 2.84:7Form and Content of Loan Instruments
The lender must deliver a copy of each document signed by the borrower and, if it is not already contained in the note or loan contract, a written statement in English that states the names and addresses of the borrower and the lender, any type of insurance for which a charge is included, and the amount of the charge. Tex. Fin. Code § 342.451.
A lender may not take an instrument with blanks to be filled in after the loan is made. Tex. Fin. Code § 342.506. “A lender may not take an instrument in which a borrower waives any right accruing under [Code chapter 342].” Tex. Fin. Code § 342.507.
1.Generally, only licensed lenders can make consumer loans. Tex. Fin. Code § 342.051(a) (see Tex. Fin. Code § 342.051(c)–(e) for exceptions to the licensure requirement).
2.Must give receipt to borrower for cash payment. Tex. Fin. Code § 342.452.
3.Must accept full or partial prepayments. Tex. Fin. Code § 342.453.
4.Must return loan instruments to borrower on repayment. Tex. Fin. Code § 342.454.
5.May not take assignment of wages or lien against real property other than lien created by abstract of judgment. Tex. Fin. Code § 342.503 (commonly encountered violation).
6.May not take confession of judgment or power of attorney authorizing lender to enter confession of judgment. Tex. Fin. Code § 342.504.
7.May not take promise to pay or loan obligation that does not disclose amount financed and schedule of payments. Tex. Fin. Code § 342.505.
8.May not induce or permit person to be obligated for more than one loan if purpose is to obtain more than lawful interest. Tex. Fin. Code § 342.501.
9.Disclosures in advertising. Tex. Fin. Code § 341.301.
10.Discrimination on various grounds prohibited, Tex. Fin. Code § 341.401; penalties, Tex. Fin. Code § 341.402.
11.False, misleading, or deceptive advertising prohibited. Tex. Fin. Code § 341.403.
12.Rules regarding agreement for more than one loan or cash advance. Tex. Fin. Code § 342.455.
13.Maximum loan terms. Thirty-seven calendar months for cash advance of $1,500 or less; forty-nine calendar months for advance of between $1,500 and $3,000; sixty calendar months for loans of more than $3,000. Tex. Fin. Code § 342.508.
14.Rules regarding insurance. Tex. Fin. Code §§ 342.401–.416. See section 2.84:9 below.
§ 2.84:9Commonly Encountered Violations Regarding Insurance
1.Requiring credit life or credit health and accident insurance. If the loan is for $100 or more, the lender may request that the buyer provide the insurance. Tex. Fin. Code § 342.402.
2.Requiring insurance to be purchased from a particular agent or broker. Tex. Fin. Code § 342.405.
§ 2.85Revolving Credit Accounts
A revolving credit account is an account—
1.established by a creditor for a customer under a written agreement between the creditor and the customer;
2.accepted by the customer by using the account;
3.in which the unpaid balance of and interest on the extensions of credit are debited to the account;
4.in which interest is not precomputed but may be computed on the balances of the account outstanding from time to time;
5.in which the customer may defer payment of any part of the balance of the account; and
6.in which the customer may obtain from the creditor one or more extensions of credit.
Tex. Fin. Code § 346.003. Revolving credit accounts include both direct loan accounts (the seller or lessor is the creditor) and revolving triparty accounts. Tex. Fin. Code § 346.003(b), (c).
§ 2.85:2Rules Governing Interest
1.Average daily balance defined. Tex. Fin. Code § 346.002.
2.Maximum interest rate. Tex. Fin. Code § 346.101.
3.Permissible interest rate for billing cycle. Tex. Fin. Code § 346.102.
4.Optional ceiling rate as set out in Tex. Fin. Code § 303.001.
1.No fees except those authorized by statute. Tex. Fin. Code § 346.103.
2.Charges recoverable by creditor. Tex. Fin. Code § 346.202.
1.Revolving credit accounts are subject to Tex. Fin. Code chs. 303 and 349 but are not subject to other chapters of title 4 unless specifically provided for in chapter 346. Tex. Fin. Code § 346.005(a).
2.A creditor offering a revolving credit account for personal, family, or household use must hold a license under chapter 342 unless he is not required to hold a license under Tex. Fin. Code § 342.051. Tex. Fin. Code § 346.005(b).
3.May enter into more than one revolving credit account at customer’s request. Tex. Fin. Code § 346.203(a).
4.May not require customer to enter into more than one revolving credit account to collect higher-than-legal interest rates. Tex. Fin. Code § 346.203(b).
5.May unilaterally amend revolving credit account. Tex. Fin. Code § 346.204(a). See Tex. Fin. Code § 346.204(b) regarding when amended terms take effect.
6.Rules governing insurance. Tex. Fin. Code § 346.201.
§ 2.86Retail Installment Sales
§ 2.86:1Definitions and General Rules
1.Retail installment contract. One or more instruments entered into in Texas evidencing a secured or unsecured retail installment transaction. Tex. Fin. Code § 345.001(6).
2.Retail installment transaction. One in which retail buyer purchases goods or services from retail seller under retail installment contract or retail charge agreement that provides for time-price differential and in which buyer agrees to pay unpaid balance and time-price differential in one or more installments. Tex. Fin. Code § 345.001(7).
3.Retail seller. Person who regularly and substantially engages in business of selling goods or services to retail buyers, other than services of a member of a learned profession not specifically included under Tex. Fin. Code § 345.003(b). Tex. Fin. Code § 345.001(8).
4.Goods. Tex. Fin. Code § 345.002.
5.Services. Tex. Fin. Code § 345.003.
6.Cash price. Tex. Fin. Code § 345.004.
7.Itemized charge. Tex. Fin. Code § 345.005.
8.Bailment or lease. A bailment or lease will be considered a retail installment transaction if the bailee-lessee contracts to pay as compensation an amount substantially equal to or greater than value of goods and, on full compliance with the bailment or lease, the bailee-lessee will become owner or has option to become owner of goods for no or nominal consideration. Tex. Fin. Code § 345.068.
§ 2.86:2Rules Governing Time-Price Differential
1.How principal balance is computed. Tex. Fin. Code § 345.059.
2.Maximum time-price differential, contract payable in equal monthly installments. Tex. Fin. Code § 345.055.
3.Maximum time-price differential, other contracts. Tex. Fin. Code § 345.057.
4.Time-price differential computation and amount. Tex. Fin. Code § 345.155.
5.When charging of time-price differential under market competitive rate ceiling prohibited. Tex. Fin. Code § 345.156.
6.Use of optional ceilings. Tex. Fin. Code § 345.056.
7.Minimum time-price differential. Tex. Fin. Code § 345.058.
8.Medical and dental services may be financed only at rates authorized by Tex. Fin. Code ch. 303. Tex. Fin. Code § 345.253.
9.Rules governing acceleration. Tex. Fin. Code § 345.062.
§ 2.86:3Other Charges or Credits
1.Charges for default of payment of installment. Tex. Fin. Code § 345.060 (commonly encountered violation).
2.Debt collection charges. Tex. Fin. Code § 345.061.
3.Charges for deferment of installment. Tex. Fin. Code § 345.069(b), (c).
4.Allocation of payments on consolidation of contracts. Tex. Fin. Code § 345.079.
5.Delinquency charge for retail charge agreements governed by market competitive rate ceiling. Tex. Fin. Code § 345.157.
6.Documentary fees for certain vehicles (for example, motorcycles, boats, boat trailers). Tex. Fin. Code § 345.251.
7.Refund credit on prepayment of monthly installment contract. Tex. Fin. Code § 345.075.
8.Refund credit on prepayment of other contracts. Tex. Fin. Code § 345.076.
§ 2.86:4Form and Content of Contract
1.Must be in writing. Tex. Fin. Code § 345.051(a)(1).
2.Must be dated. Tex. Fin. Code § 345.051(a)(2).
3.Must be signed by retail buyer. Tex. Fin. Code § 345.051(a)(3).
4.Must be completed as to all essential provisions, except as provided by Tex. Fin. Code § 345.064. Tex. Fin. Code § 345.051(a)(4).
5.Must be designated “Retail Installment Contract.” Tex. Fin. Code § 345.051(b). Not required if sale is negotiated or entered into by mail or telephone and contract is based on printed solicitation clearly setting forth cash price of sales. Tex. Fin. Code § 345.353.
6.Must contain names of retail seller and retail buyer. Tex. Fin. Code § 345.052(a)(1).
7.Must contain address of retail seller’s place of business. Tex. Fin. Code § 345.052(a)(2).
8.Must contain retail buyer’s residence address, unless buyer specifies another address. Tex. Fin. Code § 345.052(a)(3).
9.Must contain cash price. Tex. Fin. Code § 345.052(a)(4).
10.Must specify down payment, including amount paid in money and amount allowed for trade-in goods. Tex. Fin. Code § 345.052(a)(5).
11.Must specify each itemized charge. Tex. Fin. Code § 345.052(a)(6).
12.Must reasonably identify goods sold or services furnished under contract. Tex. Fin. Code § 345.052(c).
13.Must contain notice as set out in Tex. Fin. Code § 345.052(d). Not required for contract negotiated and entered into by mail or phone, where seller has provided printed solicitation clearly setting forth cash price. Tex. Fin. Code § 345.353.
14.May not contain power of attorney to confess judgment or assignment of wages. Tex. Fin. Code § 345.354 (commonly encountered violation).
15.May not authorize holder to enter buyer’s premises unlawfully or breach the peace, or provide for power of attorney by buyer appointing holder or holder’s agent as buyer’s agent in repossession. Tex. Fin. Code § 345.355.
16.May not contain waiver of buyer’s rights of action against holder or person acting on holder’s behalf for illegal acts committed in collection or repossession. Tex. Fin. Code § 345.356(a).
17.May not contain covenant that buyer will not assert claims or defenses arising out of sale. Tex. Fin. Code § 345.356(a)(2).
18.May not allow holder to accelerate unless either buyer is in default or holder in good faith believes that prospect of payment or performance is impaired. Tex. Fin. Code § 345.062.
19.May not provide for first lien on real estate to secure contract obligation except under abstracted judgment or for construction of improvements. Tex. Fin. Code § 345.357 (commonly encountered violation).
20.Promise of retail seller to compensate retail buyer for referring customers or prospective customers must be disclosed in retail installment contract if promise is part of the contract, made to induce buyer into entering contract, or made incidental to negotiations for contract. Tex. Fin. Code § 345.053.
21.Requirements for retail installment contract that is more than one document. Tex. Fin. Code § 345.063.
22.Blanks in contract generally prohibited. Tex. Fin. Code § 345.064.
23.Buyer’s acknowledgment of receipt of copy of contract. Tex. Fin. Code § 345.067.
24.Disclosure regarding documentary fees for certain vehicles (for example, motorcycles, boats, boat trailers). Tex. Fin. Code § 345.251(c), (d).
25.Must contain Federal Trade Commission holder-in-due-course disclaimer rule, providing that holder is subject to all claims and defenses that could be asserted against original seller. 16 C.F.R. pt. 433 (commonly encountered violation).
1.Must deliver copy of contract to buyer. Tex. Fin. Code § 345.065.
2.If copy of contract is not delivered to buyer and buyer has not received goods or services contracted for, buyer may rescind contract and receive all money paid to seller, as well as any goods traded in. Tex. Fin. Code § 345.066.
3.Rules regarding amendment of retail installment contract. Tex. Fin. Code §§ 345.070–.072.
4.Buyer may prepay unpaid time balance at any time. Tex. Fin. Code § 345.073.
5.Rules governing consolidation of contracts. Tex. Fin. Code §§ 345.078, 345.079.
6.May not induce buyer or buyer’s spouse to become indebted at substantially same time under more than one retail installment contract with same seller for deliberate purpose of obtaining greater time-price differential than is permitted for one contract. Contract made more than thirty days after original contract is presumed not to be violative. Tex. Fin. Code § 345.080.
7.Must provide buyer with written statement of dates and amounts of installment payments and total amount unpaid. Buyer entitled to one free statement every six months. Tex. Fin. Code § 345.082.
8.Must give buyer written receipt for each cash payment. Tex. Fin. Code § 345.083.
9.When contract is sold, buyer may make payments to prior known creditor until he has notice of assignment or negotiation. Tex. Fin. Code § 345.303.
10.When subsequent purchaser of contract can take contract free of claims or defenses of buyer against original creditor (includes notice requirement). Tex. Fin. Code § 345.304.
11.Holders who are not authorized lenders must register with Office of Consumer Credit Commissioner. Tex. Fin. Code § 345.351 (see Tex. Fin. Code § 345.001(2) for definition of “holder”).
12.May not promise to pay, pay, or otherwise tender cash to buyer as part of a retail installment transaction. Tex. Fin. Code § 345.352.
13.Before sale, buyer may not waive rights accruing under chapter 345. Tex. Fin. Code § 345.356(b).
14.Rules governing insurance. Tex. Fin. Code §§ 345.201–.215.
§ 2.87Retail Charge Agreements
Note: Retail charge agreements are by definition retail installment transactions. The rules set out in section 2.86 above apply unless contradicted by a particular statutory provision as set out below.
A retail charge agreement consists of “one or more instruments that prescribe the terms of retail installment transactions that may be made under the agreement from time to time and in which a time-price differential is computed on the unpaid balance from time to time. The term includes an instrument that prescribes terms of a retail credit card arrangement.” Tex. Fin. Code § 345.001(4).
§ 2.87:2Rules Governing Time-Price Differential
1.Maximum time-price differential. Tex. Fin. Code § 345.103.
2.Optional ceiling. Tex. Fin. Code § 345.104.
1.Reasonable attorney’s fees and court costs allowed. Tex. Fin. Code § 345.105.
2.Reasonable processing fee of no more than $15 may be added for returned check; fee may be added to unpaid balance. Tex. Fin. Code § 345.106.
3.Cannot charge annual, membership, or participation fees. Tex. Fin. Code § 345.107.
1.Agreement must be in writing and signed by buyer. Tex. Fin. Code § 345.102(a).
2.Agreement must have statutorily prescribed notice. Tex. Fin. Code § 345.102(b).
3.Buyer cannot sign agreement with blank spaces. Tex. Fin. Code § 345.108.
4.Must deliver copy of agreement to buyer. Tex. Fin. Code § 345.109.
5.If acknowledgment of delivery of copy of contract is in body of contract, it must be set out as required in statute. Tex. Fin. Code § 345.110.
6.Cash price must be furnished to buyer in sales slip or other memorandum furnished by seller. Tex. Fin. Code § 345.111.
7.Seller must provide statement of unpaid balance to buyer at end of each statement period in which unpaid balance remains. Tex. Fin. Code § 345.112. Compliance with applicable disclosure requirements of Consumer Credit Protection Act is compliance with these disclosure requirements. Tex. Fin. Code § 345.113.
§ 2.88Motor Vehicle Installment Sales
§ 2.88:1Criteria and Relevant Definitions
1.Motor vehicle. Tex. Fin. Code § 348.001(4).
2.Retail installment transaction. Retail buyer buys motor vehicle from retail seller other than principally for purpose of resale and agrees with seller to pay part or all of cash price in one or more deferred installments. Tex. Fin. Code § 348.001(7).
3.Holder. Tex. Fin. Code § 348.001(3).
4.A bailment or lease is a retail installment transaction if the bailee or lessee contracts to pay as compensation for use of the vehicle an amount substantially equal to or exceeding the value of the vehicle and, on full compliance with bailment or lease, will become the owner or, for no or nominal consideration, has the option to become the owner. Tex. Fin. Code § 348.002.
5.A transaction is still a retail installment transaction even if—
a.the retail seller arranges to transfer retail buyer’s obligation;
b.amounts of charges are determined by reference to a chart or other reference furnished by financing institution;
c.a form for all or part of the retail installment contract is furnished by a financing institution; or
d.credit standing of a retail buyer is determined by a financing institution.
6.See Tex. Fin. Code §§ 348.007–.009 regarding applicable law, conflicts among other sections of Finance Code, and federal Truth in Lending Act.
§ 2.88:2Rules Governing Time-Price Differential
1.Cash price defined. Tex. Fin. Code § 348.004.
2.How principal balance computed. Tex. Fin. Code § 348.006(a), (b).
3.Maximum time-price differential, contract with equal monthly installments. Tex. Fin. Code § 348.104.
4.Time-price differential for other contracts. Tex. Fin. Code § 348.106.
5.Optional ceiling. Tex. Fin. Code § 348.105.
6.Rules governing acceleration. Tex. Fin. Code § 348.109.
§ 2.88:3Other Charges or Credits
1.Itemized charge defined. Tex. Fin. Code § 348.005.
2.Documentary fee. Tex. Fin. Code § 348.006(c) (commonly encountered violation).
3.Cannot impose late charge until payment is at least fifteen days overdue, late charge cannot exceed 5 percent of amount of installment, and only one late charge per installment may be imposed. Tex. Fin. Code § 348.107 (commonly encountered violations).
4.Debt collection charges—reasonable attorney’s fees, court costs, reasonable out-of-pocket expenses. Tex. Fin. Code § 348.108.
5.Charges involved when contract is amended. Tex. Fin. Code §§ 348.114–.115.
6.Buyer’s refund credit on prepayment, monthly installment contract. Tex. Fin. Code § 348.120.
7.Buyer’s refund credit on prepayment, other contracts. Tex. Fin. Code § 348.121.
§ 2.88:4Form and Content of Contract
1.Must be a retail installment contract for each transaction. Tex. Fin. Code § 348.101(a).
2.Must be in writing. Tex. Fin. Code § 348.101(b)(1).
3.Must be dated. Tex. Fin. Code § 348.101(b)(2).
4.Must be signed by buyer and seller. Tex. Fin. Code § 348.101(b)(3).
5.Generally must be completed as to all essential provisions before signed by buyer. Tex. Fin. Code § 348.101(b)(4).
6.Printed part of contract must be in at least eight-point type unless a different size dictated by law. Tex. Fin. Code § 348.101(c).
7.Must contain names of buyer and seller. Tex. Fin. Code § 348.102(a)(1).
8.Must contain place of business or address of seller. Tex. Fin. Code § 348.102(a)(2).
9.Must contain residence or other address of buyer as specified by buyer. Tex. Fin. Code § 348.102(a)(3).
10.Must contain description of vehicle being sold. Tex. Fin. Code § 348.102(a)(4).
11.Must contain cash price of transaction. Tex. Fin. Code § 348.102(a)(5) (commonly encountered violation).
12.Must contain amount of down payment, specifying amount of money and valuation of trade-in. Tex. Fin. Code § 348.102(a)(6) (commonly encountered violation).
13.Must specify each itemized charge. Tex. Fin. Code § 348.102(a)(7) (commonly encountered violation).
14.Contract calling for variable contract rate must set out method of computation. Tex. Fin. Code § 348.102(c).
15.Must contain notice as specified in Tex. Fin. Code § 348.102(d) (commonly encountered violation).
16.May not contain confession of judgment. Tex. Fin. Code § 348.410(1) (commonly encountered violation).
17.May not contain assignment of wages. Tex. Fin. Code § 348.410(2) (commonly encountered violation).
18.May not authorize holder to enter buyer’s premises in violation of chapter 9 of the Business and Commerce Code or breach the peace. Tex. Fin. Code § 348.411(1) (commonly encountered violation).
19.May not provide for power of attorney by buyer appointing holder or holder’s agent as buyer’s agent in repossession. Tex. Fin. Code § 348.411(2).
20.May not provide waiver of buyer’s rights for collection or repossession disputes. Tex. Fin. Code § 348.412(a)(1) (commonly encountered violation).
21.May not provide covenant that buyer agrees not to assert claim or defense. Tex. Fin. Code § 348.412(a)(2).
22.Requirements regarding documentary fee, including that documentary fee notice must be in same language as that of oral sales presentation. Tex. Fin. Code § 348.006(c)–(i) (commonly encountered violation).
23.Requirements, content and type size, buyer’s acknowledgment of delivery of contract copy. Tex. Fin. Code § 348.112.
24.Amendment to contract must be confirmed in writing signed by buyer and delivered or mailed to buyer. Tex. Fin. Code § 348.116.
25.May not be conditioned on the subsequent assignment of the contract to a holder. Tex. Fin. Code § 348.1015.
1.Must deliver copy of contract to buyer. If seller fails to deliver, buyer who has not received delivery of vehicle may rescind contract and recover all payments made and goods traded in. Tex. Fin. Code §§ 348.110–.111.
2.Rules regarding amendment of contract. Tex. Fin. Code § 348.113.
3.Rules regarding refinancing of large installments. Tex. Fin. Code § 348.123.
4.Rules when contract is sold to third-party creditor. Tex. Fin. Code §§ 348.301–.303.
5.Rules regarding seller’s paying or promising to pay money back to buyer. Tex. Fin. Code §§ 348.403, 348.404.
6.Rules regarding buyer’s request for account information. Tex. Fin. Code §§ 348.405, 348.408–.409.
7.Holder must give buyer written receipt for cash payment. Tex. Fin. Code § 348.406.
8.Buyer may transfer equity in vehicle with written consent of holder. Tex. Fin. Code § 348.413.
9.Rules regarding insurance. Tex. Fin. Code §§ 348.201–.215.
§ 2.89Liability for Violation of Subtitle B (Former Consumer Credit Code)
A person who violates one of the provisions of Texas Finance Code chapters 342 through 348 is liable to the debtor for—
1.three times the amount of actual economic loss resulting from the violation; or
2.if the violation was material and induced the obligor to enter into a transaction that would not have been entered into but for the violation, twice the interest or time-price differential contracted for, charged, or received, not to exceed $2,000 in a transaction in which the amount financed does not exceed $5,000, or not to exceed $4,000 for any other transaction. The court determines whether the violation was “material.”
The lender is also liable for the debtor’s reasonable attorney’s fees. Tex. Fin. Code § 349.003(a).
If the lender makes either a consumer loan governed by Texas Finance Code chapter 342 or a revolving credit account loan governed by chapter 346 and does not possess the required license, the lender not only commits a criminal offense but is also liable for an amount equal to all principal and charges contracted for or collected, as well as reasonable attorney’s fees. Tex. Fin. Code §§ 349.004, 349.502. See Tex. Fin. Code §§ 349.301–.305 regarding late payment of registration and filing fees as a means of curing the creditor’s failure to obtain the license.
§ 2.90Defenses to and Limitations of Liability for Violation of Subtitle B (Former Consumer Credit Code)
No liability accrues from a violation that was unintentional and resulted from bona fide error notwithstanding the maintenance of procedures reasonably adopted to avoid such a violation. Tex. Fin. Code § 349.101(a).
§ 2.90:2Safe Harbors (Conformity with Other Laws)
A creditor is exempt from liability if it acted in good faith in conformity with either—
1.a rule adopted under or an interpretation of title 4 (Tex. Fin. Code chs. 301–351) by a state agency, board, or commission;
2.the federal Consumer Credit Protection Act, 15 U.S.C. §§ 1601–1693r; or
3.a rule or regulation adopted under or an interpretation of the Consumer Credit Protection Act by a federal agency, board, or commission.
This exemption exists even if the rule, regulation, or interpretation is later amended, rescinded, or determined to be invalid. Tex. Fin. Code § 349.101(a)(2), (b).
§ 2.90:3Correcting Violation within Sixty Days
The creditor will not be liable for a subtitle B violation if, within sixty days of actually discovering the violation, the creditor cures the violation by either performing the required act or refunding the excessive payment and gives written notice to the debtor of the violation before the debtor gives notice of the violation or files an action alleging the violation. Tex. Fin. Code § 349.201(a). “Actually discovered” means just that—it does not mean when an ordinarily prudent person in the creditor’s position would have discovered it. Tex. Fin. Code § 349.201(b).
If more than one person may be liable for a particular violation, a correction by any one such person entitles all of them to protection from liability. Tex. Fin. Code § 349.205.
§ 2.90:4Correcting Violation after Sixty-Day Period
If the creditor fails to take advantage of the sixty-day cure period set out in section 2.90:3 above, it can still limit its liability by performing the required act or refunding the illegal payment before the debtor gives written notice of the violation or files an action alleging it. Such a cure limits liability to either actual economic loss suffered by the debtor or the interest or time-price differential contracted for, charged, or received, not to exceed $2,000.
The debtor can also recover reasonable attorney’s fees set by the court. Forfeiture of interest or time-price differential is available only if the violation was material and induced the debtor into a transaction into which the debtor would not have entered had the violation not occurred. Tex. Fin. Code §§ 349.202–.203.
If more than one person may be liable for a particular violation, a correction by any such person entitles all of them to a limitation of liability. Tex. Fin. Code § 349.205.
If the creditor has both charged excessive interest or fees and violated one or more other provisions of subtitle B, it will be liable only for the usury or for the excessive charge penalties. Tex. Fin. Code § 349.102(a). If the creditor violates multiple provisions of subtitle B, it can be held liable for only one such violation. Tex. Fin. Code § 349.102(b).
An action for excessive charges brought under chapter 349 of the Finance Code must be brought before the later of either the fourth anniversary of the date of the applicable loan or retail installment transaction or the second anniversary of the date of the violation. Tex. Fin. Code § 349.402(a). An action with respect to an open-end credit transaction, however, must be brought before the second anniversary of the date of the violation. Tex. Fin. Code § 349.402(b).
§ 2.90:7Judgment under Federal Consumer Credit Protection Act
A judgment under the Consumer Credit Protection Act (15 U.S.C. §§ 1601–1693r) bars a subsequent subtitle B action by the same obligor with respect to the same violation. Tex. Fin. Code § 349.404(a). If the debtor obtains a judgment under subtitle B and then seeks recovery for the same violation against the same creditor under the Consumer Credit Protection Act, that creditor can recover the amount of the subtitle B judgment and reasonable attorney’s fees. Tex. Fin. Code § 349.404(b).
[Sections 2.91 through 2.100 are reserved for expansion.]
VIII. Other Texas Statutes Affecting Debtor-Creditor Relations
§ 2.101Variable Rate Transactions
A variable rate transaction is a contract, including a contract for an open-end account, that provides for an index, formula, or provision of law by which the interest rate or amount of time-price differential is determined. Tex. Fin. Code § 303.015(a).
§ 2.101:2Rules Governing Interest
1.Parties may agree to any index, formula, or provision of law to determine interest rate that does not exceed applicable rate ceiling. Tex. Fin. Code § 303.015(a).
2.Variable contract rate may not be used in contract in which interest or time-price differential is precomputed and added into amount of contract when contract is made. Tex. Fin. Code § 303.015(b).
3.Ceiling for variable rate account. Tex. Fin. Code § 303.001.
4.Ceiling for open-end variable rate account. Tex. Fin. Code § 303.102.
A variable rate agreement for credit extended for personal, family, or household use must include the disclosures either as required by the Truth in Lending Act or as provided in the Finance Code. Tex. Fin. Code § 303.015(c).
§ 2.102Credit Card Transactions
See Tex. Fin. Code § 301.002(a)(9) for a definition of a “lender credit card agreement,” but note that this section refers to statutes applicable to all credit card transactions, not just the transactions described in that statute.
§ 2.102:2Rules Governing Interest
1.Maximum rate for lender credit card agreement with merchant discount. Tex. Fin. Code § 303.014.
2.Billing cycle interest limitation on open-end credit card account without merchant discount. Tex. Fin. Code § 339.002.
3.Ceiling on open-end account involving credit card transaction or merchant discount. Tex. Fin. Code § 303.006(c).
4.Ceiling on open-end account providing for credit card transaction where merchant discount is not imposed or received 21 percent. Tex. Fin. Code § 303.009(d).
1.For lender credit card agreement in which merchant discount is imposed or received by creditor, no fee or charge not allowed by Finance Code chapter 346 may be charged. Tex. Fin. Code § 303.014(2)(A).
2.Seller may not impose surcharge for payment by credit card. Tex. Fin. Code § 339.001(a).
1.Required disclosures. 15 U.S.C. § 1637; 12 C.F.R. §§ 1026.12, 1026.60.
2.Credit card issuer generally subject to all claims or defenses of cardholder. 15 U.S.C. § 1666i; 12 C.F.R. § 1026.12(c).
3.See 12 C.F.R. § 1026.12 for additional rules affecting credit cards.
§ 2.103Loans for Business, Commercial, or Investment Purposes
For extensions of credit for a business, commercial, investment, or similar purpose, the maximum interest rate is 28 percent. Tex. Fin. Code § 303.009(c).
§ 2.104Loans to Corporation—Rules Governing Interest
Tex. Rev. Civ. Stat. arts. 1302–2.09 and 1302–2.09A, setting the maximum interest rates for loans to a corporation, were repealed by the legislature in 2003. See Acts 2003, 78th Leg., R.S., ch. 238, § 44(10)–(12) (H.B. 1165), eff. Sept. 1, 2003.
A commercial loan is one made primarily for business, commercial, investment, agricultural, or similar purposes. It does not include a loan made primarily for personal, family, or household use. Tex. Fin. Code § 306.001(5).
§ 2.105:2Rules Governing Interest
1.Maximum interest rate. Tex. Fin. Code § 306.002.
2.Computation of term. Tex. Fin. Code § 306.003.
3.Determining interest rates by spreading. Tex. Fin. Code § 306.004.
4.Maximum interest rate under ceilings for loan for business, commercial, or investment purposes. Tex. Fin. Code § 303.009(c).
1.Prepayment charge allowed. Tex. Fin. Code § 306.005.
2.Late charge allowed. Tex. Fin. Code § 306.006(1).
3.Bad check charge allowed. Tex. Fin. Code § 306.006(2).
§ 2.106Qualified Commercial Loans ($3 Million or More)
A “qualified commercial loan” is either—
1.a commercial loan with an aggregate value of—
a.$3 million or more if secured by real property; or
b.$250,000 or more if not secured by real property, and, if the aggregate value of the loan is less than $500,000, the loan documents contain a written certification from the borrower that the borrower was advised by the lender to seek the advice of an attorney or accountant and the borrower had the opportunity to do so; or
2.a renewal or extension of a commercial loan as described above, regardless of the principal amount of the loan at the time of renewal or extension.
Tex. Fin. Code § 306.001(9)(A). A commercial loan made for financing a business licensed by the Motor Vehicle Board of the Texas Department of Motor Vehicles is not a qualified commercial loan. Tex. Fin. Code § 306.001(9)(B).
§ 2.106:2Rules Governing Interest
The interest rate on a qualified commercial loan may not exceed the applicable rate ceiling. Tex. Fin. Code § 306.101(a).
A variety of other charges are listed in Tex. Fin. Code § 306.101(b).
§ 2.107Interest on Negotiable Instruments Provided for, but Rate Not Ascertainable
If a negotiable instrument provides for interest, but the amount of interest is not ascertainable from the instrument, interest is payable at the judgment rate in effect at the place of payment of the instrument and at the time interest first accrues. Tex. Bus. & Com. Code § 3.112(b).
§ 2.108Home Solicitation Transactions
Chapter 601 of the Texas Business and Commerce Code (the former Home Solicitation Transactions Act) applies to a consumer transaction in which a merchant or agent personally solicits a sale to a consumer at a place other than the merchant’s place of business, the consumer agrees to purchase at a place other than the merchant’s place of business, and the goods or services are sold for a consideration of $25 or more. Tex. Bus. & Com. Code § 601.002(a)(3)(A). It does not apply to a sale of goods made under a preexisting revolving charge account or retail charge agreement or after negotiations between parties at a business establishment at a fixed location at which goods or services are offered for sale. Tex. Bus. & Com. Code § 601.002(b)(3).
§ 2.108:2Rules Governing Interest
The ceilings set out in Texas Finance Code chapter 303 do not apply to home solicitation transactions. Tex. Fin. Code § 303.301(1). The attorney should refer to the laws governing the type of transaction in question, for example, Tex. Fin. Code § 345.055 (retail installment contract).
§ 2.108:3Contents of Contract or Documentation
1.Notice form requirements. Tex. Bus. & Com. Code §§ 601.052–.055, 601.154; see section 2.108:5 below regarding particular violations commonly committed.
2.Contract or receipt cannot contain waiver of rights or confession of judgment. Tex. Bus. & Com. Code § 601.151.
§ 2.108:4Rights Involving Cancellation
1.Qualifying transaction may be canceled by consumer not later than midnight of third business day after consumer signs agreement or offer to purchase. Tex. Bus. & Com. Code § 601.051. Merchant not entitled to compensation if consumer properly cancels. Tex. Bus. & Com. Code § 601.101.
2.May not transfer, negotiate, sell, or assign debt before midnight of fifth business day after contract signed or goods or services purchased. Tex. Bus. & Com. Code § 601.153 (commonly encountered violation).
3.May not fail to notify consumer before end of tenth business day after receiving notice of cancellation of merchant’s intent to repossess or abandon shipped or delivered goods. Tex. Bus. & Com. Code § 601.154(1).
4.Rights and duties regarding goods possessed by consumer. Tex. Bus. & Com. Code §§ 601.102–.103.
5.May not refuse valid cancellation. Tex. Bus. & Com. Code § 601.154(2), (3) (commonly encountered violation).
6.Generally, must undo transaction. Tex. Bus. & Com. Code § 601.154(2), (3).
All these rules are commonly violated.
1.Must inform consumer orally of right to cancel transaction. Tex. Bus. & Com. Code § 601.152(1).
2.May not misrepresent consumer’s right to cancel. Tex. Bus. & Com. Code § 601.152(2).
3.Must provide consumer with the “notice of cancellation” set out in Tex. Bus. & Com. Code § 601.053(3), set in ten-point, bold-faced type, in the same language as that of the oral sales presentation.
4.Must provide consumer with a fully completed receipt or copy of the contract in the same language as that principally used in the oral sales presentation. Tex. Bus. & Com. Code § 601.052.
5.Must furnish notice of right to cancel in immediate proximity to the signature space on the contract in ten-point, bold-faced type. Tex. Bus. & Com. Code § 601.052(b)(4).
6.Must furnish consumer, at the time consumer signs contract or otherwise agrees to the purchase, with a completed notice of cancellation, in duplicate, attached to the contract or receipt and easily detachable. Tex. Bus. & Com. Code § 601.053.
7.Must complete both copies of the notice of cancellation by entering the merchant’s name and address, the date of transaction, and the date by which consumer must give notice of cancellation. Tex. Bus. & Com. Code § 601.052(b).
8.Must furnish notice of cancellation in same language used in the contract. Tex. Bus. & Com. Code § 601.053(2).
§ 2.109Business Opportunity Act
A “business opportunity” is defined as a sale or lease for an initial consideration of $500 or more of products, equipment, supplies, or services to be used by the buyer to begin a business in which the seller represents that—
1.the buyer will or is likely to earn profit in excess of initial consideration; and
2.the seller will either (a) provide or help the buyer find locations; (b) provide a sales, production, or marketing program; or (c) buy back any of what is bought or produced by the purchaser.
Tex. Bus. & Com. Code § 51.003(a). For exceptions, see Tex. Bus. & Com. Code § 51.003(b).
§ 2.109:2Requirements for Disclosure Form and Contract
1.Sellers must register and file a disclosure statement with the secretary of state. Tex. Bus. & Com. Code §§ 51.051–.054, 51.164 (commonly encountered violation).
2.Rules regarding disclosures to the buyer. Tex. Bus. & Com. Code §§ 51.151–.163.
3.Rules regarding the form and content of the contract. Tex. Bus. & Com. Code § 51.201 (commonly encountered violation: failure to put contract in writing).
4.Seller may not ask the buyer to waive provisions of this statute. Tex. Bus. & Com. Code § 51.006 (commonly encountered violation).
1.May not employ representation, device, scheme, or artifice to deceive buyer. Tex. Bus. & Com. Code § 51.301(1).
2.May not make untrue statement or omission of material fact. Tex. Bus. & Com. Code § 51.301(2).
3.May not represent that business opportunity provides or will provide income or earning potential unless seller has documented data substantiating claim and discloses data to buyer when representation made. Tex. Bus. & Com. Code § 51.301(3).
4.May not make claim in promotional or advertising material or in oral sales presentation, solicitation, or discussion inconsistent with information required to be disclosed by Texas Business and Commerce Code chapter 51. Tex. Bus. & Com. Code § 51.301(4).
5.Copies of completed contract and any other documents seller requires buyer to sign must be given to buyer at time buyer signs contract. Tex. Bus. & Com. Code § 51.202 (commonly encountered violation).
6.Seller must keep complete set of books, records, and accounts of business opportunity sales for at least four years from date of contract. Tex. Bus. & Com. Code § 51.007 (commonly encountered violation).
[Section 2.110 is reserved for expansion.]
IX. Acceleration; Holder in Due Course
§ 2.111:1Acceleration Generally
Acceleration is defined as a change in the date of the maturity of an obligation from a future date to the present. General Motors Acceptance Corp. v. Uresti, 553 S.W.2d 660, 663 (Tex. Civ. App.—Tyler 1977, writ ref’d n.r.e.). Acceleration is the only practical solution to the problem of how to enforce a defaulted installment debt. Acceleration is particularly important if enforcing a security interest in personal property, because the foreclosure sale of the collateral discharges the security interest under which it is made. Tex. Bus. & Com. Code §§ 9.617(a), 9.601(a).
To accelerate, there must be a clear, unequivocal contractual provision permitting it. If the meaning of a term in an acceleration clause is open to reasonable doubt, it should be construed to avoid acceleration. Shumway v. Horizon Credit Corp., 801 S.W.2d 890, 893 (Tex. 1991); Ramo, Inc. v. English, 500 S.W.2d 461, 466 (Tex. 1973). A waiver of notice of intent to accelerate is not sufficient to waive notice of acceleration. Shumway, 801 S.W.2d at 893–94.
§ 2.111:3“Acceleration of Note” vs. “Acceleration of Debt”
An important distinction has been made between “acceleration of the note” and “acceleration of the debt.” “Acceleration of the note” has been interpreted as authorizing the entire face amount of the note, including unearned interest, to be collected on acceleration; “acceleration of the debt” does not call for the collection of unearned interest, because interest does not become part of the “debt” until it is earned. Jim Walter Homes, Inc. v. Schuenemann, 668 S.W.2d 324, 328 (Tex. 1984). The phrases all amounts due or to become due hereunder, all sums herein agreed to be paid, and the entire unpaid balance have all been found not to call for the acceleration of unearned interest or time-price differential. Schuenemann, 668 S.W.2d at 329 (and cases cited therein). The attorney should keep these distinctions in mind, not only when drafting contracts and security agreements, but also when making any type of communication to the debtor or the debtor’s attorney and when drafting pleadings and motions.
§ 2.111:4Acceleration for Insecurity
Section 1.208 of the Texas Business and Commerce Code, providing that the creditor “may accelerate payment or performance at will” or “when he deems himself insecure” if he in good faith believes that the prospect of payment or performance is impaired, was repealed by the 2003 legislature. See Acts 2003, 78th Leg., R.S., ch. 542, § 1 (H.B. 1394), eff. Sept. 1, 2003.
§ 2.111:5Retail and Motor Vehicle Installment Sales
A retail installment sale for goods, services, or motor vehicles or a retail charge agreement may not authorize the holder of the debt to accelerate all or part of the debt unless either the retail buyer is in default of his obligations or the holder believes in good faith that the prospect of the buyer’s payment or performance is impaired. Tex. Fin. Code §§ 345.062, 348.109.
§ 2.111:6Notice of Intent to Accelerate and Notice of Acceleration
Without a waiver, the holder of a note providing for acceleration of maturity at the option of the holder must demand payment of the delinquent installments before exercising the option to accelerate, and failure to give proper notice of intent to accelerate makes any attempted acceleration ineffective. Williamson v. Dunlap, 693 S.W.2d 373, 374 (Tex. 1985); Ogden v. Gibraltar Savings Ass’n, 640 S.W.2d 232, 233–34 (Tex. 1982); Allen Sales & Servicenter v. Ryan, 525 S.W.2d 863, 866 (Tex. 1975). See section 2.111:7 below regarding waivers. After notice of intent to accelerate has been given, an additional notice that the debt has been accelerated is also required. Notice of intent to accelerate is necessary to provide the debtor an opportunity to cure his default, and notice that the debt has been accelerated cuts off the debtor’s right to cure the default and gives notice that the entire debt is due and payable. A notice that the debt has been accelerated is ineffective unless proper notice of intent to accelerate has been given. A letter to the debtor stating that failure to cure the default on or before a specified date “may” result in acceleration is not sufficient notice of intent to accelerate. Ogden, 640 S.W.2d at 234.
If the creditor makes demand for payment at the same time that he gives the debtor notice of acceleration and then sues to collect on the note, the creditor will be entitled to a judgment for past-due installments plus accumulated interest as provided in the note, not the accelerated amount of the entire indebtedness and not a take-nothing judgment. Williamson, 693 S.W.2d at 374.
See form 5-3 in this manual for a letter giving notice of default and intent to accelerate and form 5-4 for a letter giving notice of acceleration.
Waiver of presentment, notice of intent to accelerate, and notice of acceleration is effective only if it is clear and unequivocal. Shumway v. Horizon Credit Corp., 801 S.W.2d 890, 893 (Tex. 1991).
§ 2.112:1Effect of Holder-in-Due-Course Status
A holder in due course takes a negotiable instrument free of most contractual defenses a debtor can raise against enforcement of the instrument. Tex. Bus. & Com. Code § 3.305(b). The exceptions, sometimes called “real defenses,” are discussed at section 2.112:4 below. Also, a number of state and federal statutes further limit the applicability of the holder-in-due-course doctrine, particularly in consumer transactions. See sections 2.112:5 and 2.112:6 below.
§ 2.112:2Elements of Holder-in-Due-Course Status
1.The instrument must be negotiable. See Tex. Bus. & Com. Code § 3.104.
2.The person claiming holder-in-due-course status must be a holder of the instrument. Tex. Bus. & Com. Code § 3.302(a); see Tex. Bus. & Com. Code § 1.201(b)(21) for the definition of “holder.”
3.When issued or negotiated to the holder, the instrument must not bear such apparent evidence of forgery or alteration or be otherwise so irregular or incomplete as to call its authenticity into question. Tex. Bus. & Com. Code § 3.302(a)(1).
4.The holder must take for value. Tex. Bus. & Com. Code § 3.302(a)(2)(A).
5.The holder must take in good faith. Tex. Bus. & Com. Code § 3.302(a)(2)(B).
6.The holder must take without notice that—
a.the instrument is overdue;
b.the instrument has been dishonored; or
c.there is an uncured default with respect to payment of another instrument issued as part of the same series. Tex. Bus. & Com. Code § 3.302(a)(2)(C).
7.The holder must take without notice that the instrument contains an unauthorized signature or has been altered. Tex. Bus. & Com. Code § 3.302(a)(2)(D).
8.The holder must take without notice of any claim of a property or possessory right in the instrument or its proceeds, including a claim to rescind a negotiation and to recover the instrument or its proceeds. Tex. Bus. & Com. Code §§ 3.302(a)(2)(E), 3.306.
9.The holder must take without notice that a party has a defense or claim in recoupment described in section 3.305(a) of the Texas Business and Commerce Code. Tex. Bus. & Com. Code § 3.302(a)(2)(F). See section 2.112:4 below regarding these “real” defenses. A “claim in recoupment” is a claim raised by the obligor against the original payee arising out of the original transaction. See FDIC v. Lattimore Land Corp., 656 F.2d 139, 143 (5th Cir. 1981).
If a defense or claim in recoupment is proved by the debtor, the holder has the burden to prove holder-in-due-course status. Tex. Bus. & Com. Code § 3.308(b).
§ 2.112:4“Real” Defenses Not Defeated by Holder-in-Due-Course Status
Holder-in-due-course status does not defeat an obligor’s claims of—
1.infancy, to the extent it is a defense to a simple contract (see section 17.8:2 in this manual);
2.duress, lack of legal capacity, or illegality of the transaction that, under other law, nullifies the obligor’s obligation (see sections 17.19, 17.8, and 17.24);
3.fraud that induced the obligor to sign the instrument with neither knowledge nor reasonable opportunity to learn of its character or essential terms (see section 17.16); or
4.discharge in insolvency proceedings.
Tex. Bus. & Com. Code § 3.305(a)(1).
§ 2.112:5Federal Holder-in-Due-Course Rule
One who sells or leases goods or provides services to consumers cannot take or receive a consumer credit contract that does not have the following provision in at least ten-point, bold-faced type:
NOTICE
Any holder of this consumer credit contract is subject to all claims and defenses which the debtor could assert against the seller of goods or services obtained pursuant hereto or with the proceeds hereof. Recovery hereunder by the debtor shall not exceed amounts paid by the debtor hereunder.
The intent of this rule is to make it impossible for a holder of a consumer credit contract to be a holder in due course. Tex. Bus. & Com. Code § 3.106 cmt. 3. The rule goes further, however, in that a subsequent holder is not only subject to all defenses available against the seller but also all claims that could be asserted against the seller, with affirmative recovery limited only by the amounts paid under the contract.
§ 2.112:6Retail Installment Sales (Limit of Holder-in-Due-Course Doctrine)
A right of action or defense of a retail buyer arising out of a retail installment transaction cannot be affected by the transfer of the contract to a third party unless—
1.the third party acquires the contract in good faith;
2.the buyer is notified of the transfer; and
3.the third party does not receive written notice from the buyer of the buyer’s claim or defense before the thirty-first day after notice is mailed.
Tex. Fin. Code § 345.304(a). See Tex. Fin. Code § 345.304(b) for the specific requirements for the notice.
§ 2.112:7General Prohibition against Waiver of Rights
Several provisions of the Texas Finance Code prohibit lenders from taking instruments if borrowers have waived certain rights, including rights of holders in due course. They include—
1.Tex. Fin. Code § 342.507 (consumer loans; see section 2.84 above);
2.Tex. Fin. Code § 345.356 (retail installment sales; see section 2.86);
3.Tex. Fin. Code § 347.053 (manufactured-home credit transactions); and
4.Tex. Fin. Code § 348.412 (motor vehicle installment sales; see section 2.88).
[Sections 2.113 through 2.120 are reserved for expansion.]
X. Revised Chapter 9 of Texas Business and Commerce Code: Secured Transactions
Article 9 of the Uniform Commercial Code (Secured Transactions) was substantially rewritten in all fifty states effective July 1, 2001, except in Connecticut (effective October 1, 2001) and Alabama, Florida, and Mississippi (effective January 1, 2002). In Texas, this law is referred to as chapter 9 of the Texas Business and Commerce Code. The revisions to chapter 9 contain the first major changes to the law of secured transactions since 1972. There are significant changes in scope, substantive rules, and procedures intended to bring greater certainty to secured financing transactions by bringing more types of property and types of financing transactions within chapter 9 and by enforcement of security interests. However, many of the familiar procedures and principles of chapter 9 remain:
1.The filing of a financing statement (now called a UCC1) is still the primary method for perfecting a security interest.
2.“Floating” or “blanket” lien on after-acquired property remains a privileged arrangement.
3.The “first to file” rule remains the primary (although not the sole) priority principle.
4.Purchase-money security interests remain the primary exception to the “first to file” rule, although they have been changed slightly to make them easier to maintain.
5.The lender has a lien on the proceeds of the collateral if he has a perfected lien on the collateral, although the definition of proceeds has been significantly enlarged and the lien on proceeds is now “automatic.”
6.Attachment and perfection of security interest are retained concepts and still central issues for lenders.
7.A first security interest perfected under chapter 9 still takes priority over a lien creditor or trustee in bankruptcy whose lien arises later.
A complete review of the 2001 revisions to chapter 9 is beyond the scope of this manual, but a good summary for the interested reader appears in the statute at UCC comment 4, “Summary of Revisions,” to Code section 9.101.
§ 2.121:1Multistate Secured Lending Transactions
Many states did not enact in full the official version of revised UCC article 9 recommended by the American Law Institute and the National Conference of Commissioners on Uniform Laws. For example, although one of the heralded changes in the revision was the abolition of local filing (for example, in Texas, filings with county clerks), Georgia and Louisiana did not abolish local filing, although both states maintain a central index to facilitate lien searches. As another example, although the debtor does not have to sign or authenticate a UCC1 financing statement under the official version, in Alabama the debtor’s signature is required unless the transaction fits within certain very carefully defined exceptions. The practitioner should investigate the specific UCC provisions involved in each transaction or collection effort in the jurisdiction whose law is applicable. The practitioner should also become familiar with the place-of-filing and choice-of-law rules contained in the 2001 revisions to chapter 9.
§ 2.121:2Consumer-Goods Transactions
The 2001 revisions to chapter 9, including the accompanying conforming revisions to other chapters in the Texas Business and Commerce Code, include special rules for “consumer goods,” “consumer-goods transactions,” and “consumer transactions”; for example:
1.Tex. Bus. & Com. Code §§ 2.502 and 2.716 provide a buyer of consumer goods with enhanced rights to possession of the goods, thereby accelerating the opportunity to achieve “buyer in ordinary course of business” status under section 1.201.
2.Tex. Bus. & Com. Code § 9.103(e) (allocation of payments for determining extent of purchase-money status), § 9.103(f) (purchase-money status not affected by cross-collateralization, refinancing, restructuring, or the like), and § 9.103(g) (secured party has burden of establishing extent of purchase-money status) do not apply to consumer-goods transactions. The limitation of those provisions to nonconsumer transactions leaves to the courts the fashioning of proper rules for consumer-goods transactions.
3.Tex. Bus. & Com. Code § 9.108 provides that in a consumer transaction, a description of consumer goods, a security entitlement, a securities account, or a commodity account “only by [UCC-defined] type of collateral” is not a sufficient collateral description in a security agreement.
4.When applicable, Tex. Bus. & Com. Code §§ 9.403 and 9.404 make effective the Federal Trade Commission’s anti-holder-in-due-course rules—16 C.F.R. pt. 433—even in the absence of the required legend.
Chapter 9 includes the following definitions relevant to consumer-goods transactions:
1.“Consumer debtor” means a debtor in a consumer transaction (Tex. Bus. & Com. Code § 9.102(a)(22)).
2.“Consumer goods” means goods that are used or bought for use primarily for personal, family, or household purposes (Tex. Bus. & Com. Code § 9.102(a)(23)).
3.“Consumer-goods transaction” means a consumer transaction in which (a) an individual incurs an obligation primarily for personal, family, or household purposes; and (b) a security interest in consumer goods secures the obligation (Tex. Bus. & Com. Code § 9.102(a)(24)).
4.“Consumer obligor” means an obligor who is an individual and who incurred the obligation as part of a transaction entered into primarily for personal, family, or household purposes (Tex. Bus. & Com. Code § 9.102(a)(25)).
5.“Consumer transaction” means a transaction in which (a) an individual incurs an obligation primarily for personal, family, or household purposes; (b) a security interest secures the obligation; and (c) the collateral is held or acquired primarily for personal, family, or household purposes. The term includes consumer-goods transactions (Tex. Bus. & Com. Code § 9.102(a)(26)).
See Tex. Bus. & Com. Code § 9.102 UCC cmt. 7 for an explanation of the impact of the July 1, 2001, revisions to chapter 9 on the definitions relating to consumer-goods transactions.
Certain provisions of chapter 9 do not apply to consumer transactions:
1.The ten-day safe harbor for advance notification of disposition provided by Tex. Bus. & Com. Code § 9.612 does not apply in a consumer transaction.
2.Tex. Bus. & Com. Code § 9.613 (specifying the contents and form of notice of disposition) does not apply to a consumer-goods transaction.
3.Tex. Bus. & Com. Code § 9.620 prohibits partial strict foreclosure with respect to consumer-goods collateral and, unless the debtor agrees to waive the requirement in an authenticated record after default, in certain cases requires the secured party to dispose of consumer goods collateral that has been repossessed.
4.The “rebuttable presumption” rule does not apply to a consumer transaction. Tex. Bus. & Com. Code § 9.626. (See section 2.122:7 below for a discussion of the “rebuttable presumption rule.”) Section 9.626 also provides that its limitation to transactions other than consumer transactions leaves to the courts the proper rules for consumer transactions and prohibits the courts from drawing inferences from that limitation. Tex. Bus. & Com. Code § 9.626(b).
A secured party in a consumer-goods transaction must provide a debtor with a notification explaining how the secured party calculated a deficiency at the time he first undertakes to collect the deficiency. Tex. Bus. & Com. Code § 9.616.
§ 2.121:3Information-Gathering Procedures under Chapter 9
Tex. Bus. & Com. Code § 9.210 allows a debtor to obtain information from a secured party about the secured obligation and the collateral in which the secured party may claim a security interest, both before and after default. Only the debtor has the right to request information. See Tex. Bus. & Com. Code § 9.210(a)(2)–(4). The debtor may request information from the secured party by—
1.requesting that the secured party prepare and send an accounting (defined in Tex. Bus. & Com. Code § 9.102(a)(4));
2.submitting to the secured party a list of collateral for approval or correction; or
3.submitting to the secured party a statement of the aggregate amount of unpaid secured obligations for approval or correction.
Tex. Bus. & Com. Code § 9.210(a)(2)–(4).
The secured party must respond within fourteen days of the receipt of a request, either by providing an accounting, approving or correcting a list of collateral or the aggregate amount of unpaid secured obligations, or, if the secured party no longer claims an interest in the collateral or secured obligation, providing a statement saying so and the name and mailing address of any known assignee or successor. Tex. Bus. & Com. Code § 9.210(c)–(e).
The debtor’s rights under this section may not be waived or varied. Tex. Bus. & Com. Code § 9.602(2). Noncompliance by the secured party may subject the secured party to injunctive relief, actual damages, and statutory damages under Tex. Bus. & Com. Code § 9.625.
Subchapter F of chapter 9 (referred to as part 6 in the official comments to article 9) extensively revises former subchapter E (referred to as part 5 of article 9 in most other jurisdictions). Provisions relating to enforcement of consumer-goods transactions and consumer transactions are discussed below.
Subchapter F treats the postdefault period and covers the rules and restrictions applicable to collection, enforcement, disposition, and acceptance (that is, in satisfaction of the secured obligation). It is intended to address—
1.the required notices;
2.the persons to whom notices must be sent;
3.required deadlines for notices;
4.the standard of conduct to which a secured party will be held;
5.how any proceeds of a disposition will be applied; and
6.the consequences for failure to observe the requirements of subchapter F.
Although every aspect of a secured party’s disposition of collateral is subject to the requirement that it must be “commercially reasonable” (see Tex. Bus. & Com. Code § 9.610(b)), chapter 9 does not define “commercially reasonable.” It does, however, provide some examples and some safe harbors in Tex. Bus. & Com. Code § 9.627.
§ 2.122:1Debtor, Secondary Obligor, Waiver
Section 9.602 of the Texas Business and Commerce Code requires that certain rights of debtors and obligors and duties owed them by the secured party cannot be waived or varied. Tex. Bus. & Com. Code § 9.602. Section 9.102(a)(28) defines “debtor” as—
1.a person having an interest, other than a security interest or other lien, in the collateral, whether or not the person is an obligor;
2.a seller of accounts, chattel paper, payment intangibles, or promissory notes; or
3.a consignee.
Tex. Bus. & Com. Code § 9.102(a)(28).
An “obligor” is a person who—
with respect to an obligation secured by a security interest in or an agricultural lien on the collateral, (i) owes payment or other performance of the obligation, (ii) has provided property other than the collateral to secure payment or other performance of the obligation, or (iii) is otherwise accountable in whole or in part for payment or other performance of the obligation.
Tex. Bus. & Com. Code § 9.102(a)(60). Issuers or nominated persons under a letter of credit are not obligors. A “secondary obligor” is an obligor to the extent that the obligor’s obligation is secondary or the obligor has a right of recourse with respect to an obligation secured by collateral against the debtor, another obligor, or property of either. Tex. Bus. & Com. Code § 9.102(a)(72). However, with one exception (section 9.616, as it relates to a consumer obligor), the rights and duties addressed in section 9.602 affect nondebtor obligors only if they are secondary obligors.
The secured party is relieved from any duty or liability to any person unless the secured party knows the person is a debtor or obligor. Tex. Bus. & Com. Code § 9.628. Generally, a secondary obligor’s rights and a secured party’s duties under subchapter F may not be waived. Tex. Bus. & Com. Code § 9.602. However, a debtor or secondary obligor may waive the right to notification of disposition of collateral and, in a nonconsumer transaction, waive the right to redeem collateral if the secondary obligor or debtor agrees to do so after default. Tex. Bus. & Com. Code § 9.624.
§ 2.122:2Rights of Collection and Enforcement of Collateral
Tex. Bus. & Com. Code § 9.607 explains in greater detail than former section 9.502 the rights of a secured party who seeks to collect or enforce nonpossessory collateral, such as accounts, chattel paper, and payment intangibles. It also sets forth the enforcement rights of a depositary bank holding a security interest in a deposit account maintained with the depositary bank. See Tex. Bus. & Com. Code § 9.607(a)(4), (5). However, section 9.607 addresses only the rights of the secured party with respect to the debtor and not the rights or duties of third parties, such as account debtors on collateral, which are addressed elsewhere (see, e.g., Tex. Bus. & Com. Code § 9.406). See Tex. Bus. & Com. Code § 9.608 concerning the manner in which proceeds of collection or enforcement are to be applied.
§ 2.122:3Disposition of Collateral
Warranties of Title: The warranties of title, possession, and quiet enjoyment that are made applicable by other law to commercial sales generally also apply to a secured party who disposes of collateral. Tex. Bus. & Com. Code § 9.610(d). Section 9.610(e)–(f) provides rules for the exclusion, modification, or limitation of those warranties.
Notification, Application of Proceeds, Surplus and Deficiency, Other Effects: A secured party is required to give notification of a disposition of collateral to other secured parties and lienholders who have filed financing statements against the debtor covering the collateral. Tex. Bus. & Com. Code § 9.611. However, the secured party is relieved of that duty when a timely search of the filing records is undertaken and the results are not received by the time of notification. Tex. Bus. & Com. Code § 9.611(e). Section 9.613, which applies only to nonconsumer transactions, sets out the contents of a sufficient notice of disposition and provides that a notification sent ten days or more before the earliest time for disposition is deemed sent within a reasonable time. Tex. Bus. & Com. Code § 9.613. Section 9.615 addresses the application of proceeds of disposition, the entitlement of a debtor to any surplus, and the liability of an obligor for any deficiency. Tex. Bus. & Com. Code § 9.615. Section 9.619 clarifies the effect of a disposition by a secured party, including rights of transferees of the collateral. Tex. Bus. & Com. Code § 9.619.
§ 2.122:4Rights and Duties of Secondary Obligor
A secondary obligor obtains the rights and assumes the duties of a secured party if the secondary obligor receives an assignment of a secured obligation, agrees to assume the secured party’s rights and duties on a transfer to it of collateral, or becomes subrogated to the rights of the secured party with respect to the collateral. Tex. Bus. & Com. Code § 9.618. The assumption, transfer, or subrogation is not a disposition of collateral under section 9.610, but it does relieve the former secured party of further duties, clarifying a disputed point under chapter 9 before the July 1, 2001, revisions.
§ 2.122:5Transfer of Record or Legal Title
Texas Business and Commerce Code section 9.619 contains a new provision that provides for a transfer of record or legal title in collateral to a secured party. Such a transfer is not of itself a disposition under subchapter F and does not of itself relieve the secured party of its duties under subchapter F. This rule applies regardless of the circumstances under which the transfer of title occurs. Tex. Bus. & Com. Code § 9.619.
Texas Business and Commerce Code section 9.620, unlike former section 9.505, permits a secured party to accept collateral in partial satisfaction, as well as full satisfaction, of the obligations secured. Tex. Bus. & Com. Code § 9.620. The right of strict foreclosure extends to intangible as well as tangible property. Section 9.622 clarifies the effects of an acceptance of collateral on the rights of junior claimants. Tex. Bus. & Com. Code § 9.622. Unreasonable delay is relevant when determining whether a disposition under section 9.610 is commercially reasonable. See Tex. Bus. & Com. Code § 9.610 UCC cmt. 3.
§ 2.122:7Effect of Noncompliance: “Rebuttable Presumption” Test
The “rebuttable presumption” test applies to a determination of whether the secured party complied with certain provisions of subchapter F (the test does not necessarily apply in consumer transactions—see discussion at section 2.121:2 above). Tex. Bus. & Com. Code § 9.626. The deficiency claim of a noncomplying secured party is calculated by crediting the obligor with the greater of the actual net proceeds of a disposition or the amount of net proceeds that would have been realized if the disposition had been conducted in accordance with subchapter F (that is, in a commercially reasonable manner). Tex. Bus. & Com. Code § 9.626(a)(3). For nonconsumer transactions, this section rejects the “absolute bar” test that some courts have imposed, barring a noncomplying secured party from recovering any deficiency, regardless of the loss (if any) the debtor suffered as a consequence of the noncompliance. See Tex. Bus. & Com. Code § 9.626 cmt. 4.
§ 2.122:8“Low-Price” Disposition: Calculation of Deficiency and Surplus
Tex. Bus. & Com. Code § 9.615(f) addresses the problem of procedurally regular postdefault dispositions of collateral that nonetheless fetch a low price. It provides a special method of calculation of a deficiency if the proceeds of a disposition of collateral to a secured party, a person related to the secured party, or a secondary obligor are “significantly below the range of proceeds that a complying disposition to a person other than the secured party, a person related to the secured party, or a secondary obligor would have brought.” Tex. Bus. & Com. Code § 9.615(f). (See Tex. Bus. & Com. Code § 9.102(a)(64) for a definition of “person related to.”) In these situations, because of the possibility that there were not adequate incentives to obtain a better price, the calculation of a deficiency or surplus is based not on the actual net proceeds but on the proceeds that would have been received in a disposition to a person other than the secured party, a person related to the secured party, or a secondary obligor.