Consumer Credit Code Summary

The Uniform Law Commission first promulgated the Uniform Consumer Credit Code (or "U3C") in 1968. It is a comprehensive regulation of con­sumer credit in any state which chooses to enact it.   Since its promulgation in 1968, changes occurred in consumer credit practices which made a revision desirable. For example, the bank credit card distributed on a nationwide basis was only a small part of the consumer credit field in the 1960s. Today such credit cards are a pervasive aspect of the entire consumer credit industry. 

 Also, new information focused upon consumer problems in consumer credit is available. There has been activity at the federal level which has modified state concerns. The National Commission on Con­sumer Finance has finished its landmark study of the entire field and has provided a number of recommendations which stimulated new thinking with respect to state law. All of these factors led to the decision to develop a revised Uniform Consumer Credit Code. 

The pattern of the Uniform Consumer Credit Code, as established in 1968, remains largely the same. Perhaps the key provisions in the 1968 U3C were those relating to regulation of the price of credit. The U3C in its initial formulation provided ceiling rates for interest on consumer credit, and provided for enhanced competition in the consumer credit field. It was felt that maximum rates plus enhanced competition would ultimately result in the fairest prices for the extension of credit to the consumer.

This basic structure is unchanged in the revised U3C. The rate ceilings remain the same as in 1968. In addition, no new changes have been made to limit entry into the business of extending credit. The same provisions remain for supervised lenders. There are no so-called "brick wall" provisions. Enhancement of competition is still the basic theme of the U3C. 

The greatest change in the revised U3C regards the disclosure provisions of the 1968 code. It is the judgment of the ULC that the federal government has preempted the field of dis­closure with its truth-in-lending legislation and the regulations implementing this legislation. Therefore, the U3C no longer con­tains disclosure provisions. This has resulted in a decrease in the total size of the comprehensive act. 

In the Revised U3C, the original prohibition of the use of negotiable instruments in consumer sales and leases has been con­tinued and substantially strengthened. Waiver of defense clauses are prohibited in consumer contracts. The Revised U3C also subjects lenders to the defenses of buyers against sellers in the instances in which the lender and the seller have a close relationship and the lender either acts in a manner or receives benefits of a kind that tie the lender not only to the seller but to the particular kind of sale transaction. These provisions would go a long way toward' eliminating the objections to the holder-in-due-course doctrine and to the problems of consumers relating to lenders isolated by this doctrine.

In addition, there are provisions to do much the same thing in credit card transactions. A bank is subject to the claims or defenses of a card holder against a seller if the customer makes a good faith attempt to resolve a disagreement with the seller, and the credit card transaction involves more than $50, and both the residence of the card holder and the place where the sale or lease occurs are within the same state or 100 miles of each other. This provision would eliminate the same problems with respect to credit cards.

Another of the important consumer protection provisions is the one relating to home solicitation sales. The original home solicitation provisions have been widened to cover transactions at any residence, not just a residence of the buyer. Provisions prevent evasion by the seller or lessor who arranges to have some­one else do the financing, or who makes too free use of the emergency exception. The buyer is also entitled to statement of the buyer's right to cancel at the time he signs the agreement. The consumer also cannot be charged a cancellation fee and the right to cancel exists even though the goods sold have received the ordinary care or consumption contemplated by the transaction. It has become considerably more difficult in home solicitations to abuse the consumer under these new provisions.

There have also been increased limitations upon deficiency judgment. Originally, deficiency judgments under the U3C were per­mitted on amounts over $1,000. This has been extended to $1,750 in the new revised act.  There are also, following a National Commission on -Consumer Finance recommendation, new provisions for special court re­lief from garnishments after judgment on normally non-exempt earnings.

Another of the important provisions regards unconscionable trans­actions. Unconscionability is a concept carried over from the Uniform Commercial Code to the U3C. In the new revised version of the U3C the concept is widened to include more tangential transactions to immediately identifiable consumer credit transactions, and to un­conscionable collection practices. 

One of the continuing arguments in the area of consumer credit regards the means of computing finance charges. The two contending methods for computing such charges are the previous balance and the adjusted balance methods. A newcomer to the controversy is the average daily balance method, a method made possible by the availability of computerized accounting and the use of the open end charge account with a credit card. The revised U3C permits computation of finance charges on an average daily balance. In addition, it provides alternative language relating to whichever method a state otherwise wishes to legitimize, the previous balance method or the adjusted balance method, or both.

A related matter regards the means of computing deferrals and rebates. The prevailing practice has been to use the sum of the balance method. This provides a single computation in transactions involving both one or more deferrals and a subsequent rebate. The language of the U3C has been redesigned to provide affirmatively for the sum of the balances method of computation.

Probably the most far-reaching aspects of the new revised U3C regard those specific protections provided for consumers in dealing with lenders of consumer credit. One of the most controversial aspects of consumer credit has been the holder-in-due-course doctrine. Much credit has traditionally been evidenced by negotiable paper, which is merchandised from lenders to banks and to other buyers at a discount. In order to facilitate the exchange of negotiable paper, the purchasers have been insulated from any claims against the initial lender, and from defenses raisable by the lendee against the original lender. This has been done in order to en­courage free marketing of such kinds of commercial paper. 

However, consumer interests have long felt that the holder­-in-due-course doctrine has worked a severe disadvantage upon con­sumers. A seller could provide to a buyer defective merchandise on credit. The obligation to pay on the credit agreement would then follow the paper negotiated to a third party. The seller might then go out of business, or become insolvent, or leave the juris­diction. When the buyer would find that his goods were defective, he would be unable to find the seller and would have no remedy against the holder of his obligation because of the holder-in-due-course doctrine. If the buyer attempted to stop payment because of the defective goods, then the holder of the obligation would have a course of action against him.

Consumer interests have long felt that the purchasers of commercial paper were in the best position to police such practices and possibilities. They can and do cite many instances in which consumers have been grievously injured by current practices.

These are some of the new additions to the Uniform Consumer Credit Code which will enhance protection of the consumer. It is felt that these provisions will improve the value of Uniform Consumer Credit Code in the states, and that better regulation of consumer credit will indeed follow.