To protect consumers, the federal and state governments regulate the credit industry. Some states have set a maximum on the interest rates charged for certain types of credit. The federal government has also passed laws designed to increase the flow of credit information to consumers. In this section, you’ll learn about these laws and how they protect consumers from unfair credit practices.
Laws Protecting Borrowers
Laws have been enacted to protect borrowers against unfair lending practices and to help them make informed decisions.
Economics & You What do you think might happen if there were no laws protecting people who borrow? Read on to learn about these laws and how they protect your rights as a consumer.
There are many laws designed to protect consumers who borrow. Here we look at some important federal laws and then explore state laws in general.
The Truth in Lending Act
The Truth in Lending Act of 1968 was the first of a series of major federal laws that greatly expanded the government’s role in protecting users of consumer credit. This act requires creditors to keep consumers fully informed about the costs and conditions of borrowing.
The Equal Credit Opportunity Act
In 1974 Congress enacted the Equal Credit Opportunity Act (ECOA) as an addition to the Truth in Lending Act. Among other things, those who provide credit cannot deny you such credit solely on the basis of your race, religion, national origin, gender, marital status, or age. Also, no one can deny you credit simply because your income might come from public assistance benefits.
State Usury Laws
A law restricting the amount of interest that can be charged for credit is called a usury law. Some states set up different maximum rates for different types of consumer credit. Maximum rates on charge accounts and credit cards, for example, are often about 18 percent a year, or 1½ percent per month. Consumer finance agencies, in contrast, can often charge higher rates because their loans involve higher risks.
Women and Credit
Before the Equal Credit Opportunity Act of 1974, many creditors would not approve a married woman for credit unless her husband signed the application as well. Now, only joint applications require the signatures of both spouses.
Personal bankruptcy should be used only as a last resort to relieve the financial burden of debt.
Economics & You Have you ever found yourself in the position of owing someone more than you were able to quickly pay back? What steps did you take to fix the situation? Read on to learn about personal bankruptcy.
Every day in the United States, thousands of families get into financial trouble because they have ignored the total costs of all their borrowing. They have too many credit cards, too many charge accounts, and own a home that has too large a mortgage. Just because someone offers you credit or allows you to borrow does not mean that you should accept. Buying on credit is a serious consumer activity.
If debtors take out too many loans, use too many credit cards, and pile up debts that they cannot pay off, they may have to file personal bankruptcy. When a bankruptcy is approved through a bankruptcy court, debtors must give up most of what they own, which is then distributed to their creditors. The Constitution authorizes Congress to establish bankruptcy laws. Certain debts, such as taxes, must continue to be paid, however.
Just because credit card companies make it easy to obtain credit does not mean that you should accept their offers. Relying too much on credit cards can result in major credit problems and even bankruptcy.
If you declare personal bankruptcy, be aware that the bankruptcy proceedings remain on your credit record for 10 years. During this period, it is very difficult to reestablish credit and borrow funds for items such as a new car or home. That is why choosing bankruptcy to get out of credit problems should be a last resort. Also, when you declare bankruptcy, you are making sure that your creditors will never be paid off (at least not in full) for what they loaned out.
In 2005, Congress passed extensive amendments to federal bankruptcy laws. It is now more difficult to avoid paying off student loans, for example.