Arranging Customer Financing and the Truth in Lending Act

Why this matters

Offering financing on a system replacement, a roof or a sewer line can be the difference between a sold job and a customer who patches it and waits. Most shops do it through a third-party lender, and assume the lender carries all the legal weight. Mostly it does. But the Truth in Lending Act reaches two things the shop controls completely: what its ads and salespeople say about the financing, and whether the shop itself has quietly become the creditor. The shop also controls the one sentence that produces most financing complaints, which is a tech saying "no interest" about a plan that charges all of it back if one payment is missed. That sentence is the shop's, not the lender's.

The law, in one paragraph

The Truth in Lending Act (15 U.S.C. 1601 and following) is implemented by the Consumer Financial Protection Bureau's Regulation Z (12 CFR Part 1026). It requires creditors to disclose the cost of consumer credit in a standard form, centered on the annual percentage rate (APR) and the finance charge, and it regulates how anyone advertises consumer credit. It applies to credit extended to a person primarily for personal, family or household purposes, which describes nearly every financed residential job. States layer their own rules on top, mostly retail installment sales acts and lender or broker licensing, and those vary widely.

Are you the creditor, or only arranging?

Regulation Z defines a creditor (12 CFR 1026.2(a)(17)) as a person who regularly extends consumer credit that is subject to a finance charge or payable by written agreement in more than four installments, and to whom the obligation is initially payable on the face of the contract. "Regularly" means more than 25 times in the preceding calendar year (or the current year, if not the preceding one), or more than 5 times for credit secured by a dwelling.

That definition produces three common positions for a shop:

• Referral or application only. The customer applies through the lender's portal or a form you send, the loan contract names the lender as the party being paid, and the lender funds you. The lender is the creditor. You are arranging credit, and you are not giving TILA disclosures; the lender is.
• Retail installment contract you sign and sell. The contract names your shop as the seller-creditor, the customer agrees to pay you over time with a finance charge, and you then assign the contract to a finance company. On the face of the contract, the obligation is initially payable to you, so you can be the creditor once you do this regularly, and the state's retail installment sales act typically governs the contract's form. Many dealer programs work this way, and the lender's paperwork usually handles the disclosures in your name, but the obligation is yours to understand.
• Your own payment plan. You let the customer pay in installments directly to you. Whether that is credit under Regulation Z depends on the number of installments, whether any finance charge applies and how often you do it. This is owned elsewhere; see related: In-House Payment Plans and When They Become Credit.

Read the lender's program agreement for who is named on the customer's contract. That one line decides which bucket you are in.

Who owns which disclosure

Even in the referral model, the customer will hear about the financing from your staff before they see a lender document. The division of labor:

The advertising rules apply to any person who advertises consumer credit, not only to creditors. A shop's "low monthly payments" banner is an ad for credit.

The advertising triggers

For closed-end credit, such as a fixed-term installment loan, Regulation Z 1026.24(d) lists triggering terms. If an ad states any of these, it must also state three other things.

Triggering terms:

• the amount or percentage of any down payment ("zero down");
• the number of payments or the period of repayment ("60 months");
• the amount of any payment ("as low as [amount] a month");
• the amount of any finance charge.

If triggered, the ad must also disclose:

• the amount or percentage of the down payment;
• the terms of repayment, which reflect the repayment obligation over the full term including any balloon payment;
• the annual percentage rate, using that term, and if the rate may increase after consummation, that fact.

Any rate stated in an ad must be stated as an APR (1026.24(c)). A simple annual rate may appear alongside it, but not more conspicuously. General phrases that state no terms, such as "financing available" or "ask about our payment options", trigger nothing.

For open-end plans, such as a store-brand credit card from a lender's contractor program, 1026.16 has parallel triggering terms and a specific rule for deferred interest.

Deferred interest, and why "no interest" is the dangerous phrase

Many contractor financing programs offer a promotion where no interest is charged if the balance is paid in full within a promotional period. That is deferred interest: interest accrues from the purchase date the whole time, and if any balance remains when the period ends, all of the accrued interest is charged. It is not the same as 0 percent APR for a period, where no interest accrues during the promotion and the standard rate applies only to the balance left afterward.

For open-end deferred-interest promotions, Regulation Z 1026.16(h) requires an ad that mentions the promotion to use the phrase "if paid in full" in a clear and conspicuous manner preceding the disclosure of the promotional period, to state the length of the period, and to state that interest will be charged from the purchase date if the balance is not paid in full within it. An ad may not call it "no interest" or "0 percent" without those statements.

Worked example: an ad, a promise and the month-18 bill

A shop's truck wraps and website read: "New AC system: zero down, 60 low monthly payments." Its techs present a second program at the table, an 18-month deferred-interest plan on the lender's store card, and describe it as "no interest for 18 months."

The ad. "Zero down" is a down payment term and "60 low monthly payments" is a number of payments. Both trigger 1026.24(d). The ad must also state the down payment (zero), the terms of repayment (60 monthly payments of a stated amount, or a representative example), and the APR, with "the rate may increase" if it is variable. The fix is either the full set of disclosures, or replacing the line with "Financing available, ask for details", which triggers nothing.

The table. Now follow a customer who took the deferred-interest plan, at a standard APR of, say, 27 percent (the lender's documents state the real figure). The customer pays the same amount each month, 5 percent of the original balance, for 18 months, believing that clears it.

• Paid over the promotion: 18 times 5 percent, which is 90 percent of the original balance.
• Left at month 18: 100 minus 90, which is 10 percent.
• The balance during each month runs from 100 percent down to 15 percent, in steps of 5. Its average across the 18 months is 57.5 percent of the original.
• Accrued interest, approximately: 57.5 percent times 27 percent a year times 1.5 years, which is about 23 percent of the original balance (ignoring compounding and the lender's exact daily method).

At month 19 the customer owes the 10 percent left plus about 23 percent in retroactive interest, roughly a third of the original price, on a job they were told carried no interest. The lender's disclosures were correct. The shop's sentence was the misleading one.

The sentence that works. "There's no interest if you pay the full balance within 18 months. If anything is left after that, interest is charged back to the day you bought it. Paying it off in 18 months means a payment of about 1/18 of the balance each month, a bit more than 5.5 percent." That is accurate, it states the condition and the consequence, and it tells the customer the payment that actually clears it.

What changes the answer. If the promotion were a true 0 percent APR for 18 months, the month-19 bill would be the 10 percent balance plus standard interest going forward, with nothing retroactive, and "no interest for 18 months" would be close to accurate. If the loan were secured by the customer's principal dwelling, as some larger home improvement loans are, the customer has a three-business-day right to rescind under 1026.15 or 1026.23, and the creditor must not disburse funds, and generally services must not be performed or materials delivered, until that period has passed and the creditor is satisfied the customer did not rescind; scheduling the install for the next morning puts the job inside the window. Emergency repairs have a narrow waiver path the creditor handles. And if you sign the customer's contract as the seller, the state retail installment sales act can impose form, rate and disclosure requirements of its own.

Pricing that can change the loan

Lenders often charge the contractor a fee on promotional financing, a share of the amount financed. Some shops respond by quoting financed customers a higher price than cash customers for the same job. That can create a problem: a charge imposed only on customers who use credit can be treated as part of the cost of credit, which the lender's disclosures do not show, and some states regulate price differences between cash and credit customers directly. Whether a particular structure crosses that line is a question for the lender's compliance staff and your attorney. Pricing the job the same way for every customer and treating the lender's fee as a cost of doing business sidesteps it.

Before you offer a financing program

Ask the lender four things: who is named as the creditor on the customer's contract, which disclosures they give and when, whether they provide approved ad language for your trucks and website, and what training they require for your staff. Then write the one-sentence description of each program your staff may use, and forbid the rest. See related: The Customer Financing Offer SOP.

This is not legal advice. Retail installment contracts, home-secured loans and any program where your shop is named on the contract are worth an hour with your attorney before you start.

References

• Truth in Lending Act, 15 U.S.C. 1601 and following; Regulation Z, 12 CFR Part 1026, including 1026.2(a)(17), 1026.16, 1026.18, 1026.23 and 1026.24
• CFPB official interpretations to Regulation Z (Supplement I to Part 1026)
• Your state's retail installment sales act and lender or broker licensing statute
• See related: The Holder Rule and Why Your Workmanship Follows the Loan; Presenting Financing Without Sounding Like a Used Car Lot; Customer Financing Options Reference