Consumer Credit Laws and Your Small Business

There have been a series of laws passed to place increasing demands on businesses who issue credit to customers to deal with consumers in a transparent manner and to report consumers’ credit behavior honestly and accurately. Consumer credit laws, such as the ones listed below, may affect your small business.

Fair Credit Reporting Act

The Fair Credit Reporting ACT became law in 1970. It largely defines how personal information may be used by private businesses. The law further establishes uniform standards that consumer reporting agencies must follow while placing increasing pressure on businesses to report credit behaviors accurately by providing consumers the ability to sue and seek damages for violations of the Act.

State Statutes

Various states have passed their own regulations regarding consumer credits. The Uniform Consumer Credit Code involves two acts — one in 1968 and the other in 1974. One of the most important aspects of the Act is that it establishes a “rate ceiling” for consumer credit. This act has been adopted in 11 U.S. states, but other states have different laws regarding consumer credit. You need to know the federal laws as well as any state laws that may impact how your business offers and reports credit.

Truth in Lending Act

The laws of the Truth in Lending Act requires businesses that extend credit to provide borrowers certain information when the credit is offered. This information includes:

  • Terms of the Loan
  • Interest Rates
  • Number of Payments
  • Dollar Amount of Payments
  • Due Dates of Payments
  • Additional Charges or Fees
  • Late Payment Penalties or Fees (and when these penalties or fees will be imposed)

Essentially, you’re required to provide all the information consumers need to pay off the borrowed sum so they can ascertain the true costs of the transaction prior to accepting the credit.

Equal Credit Opportunity Act

When it became the law of the land in 1976, the Equal Credit Opportunity Act prohibits businesses from denying credit based on the following:

  • Age
  • Race
  • Gender
  • Marital Status
  • Religion
  • National Origin
  • Receipt of Public Assistance

The goal of the law is to protect consumers from unfair biases when applying for credit.

The Fair Credit Billing Act

This act involves what must happen when consumers notify you of a mistake in billing or claims that you’ve made a billing mistake. In accordance with the Fair Credit Billing Act, consumers have 60 days, from the mailing of the first bill, to notify you of their claim that there is a mistake or error. In some states, consumers have 90 days to make the notification, be aware of the specific laws in your state on this matter.

Businesses have only 30 days to respond unless the dispute is already resolved. However, you have 90 days, from receipt of customer’s letter, to investigate and explain why the bill is correct or to correct the error. Failure to do so will require you to credit $50 towards the disputed amount even if the bill is correct. There are other provisions in the act that may affect your business, particularly those involving reporting delinquencies.

One quick article can’t touch on all the consumer credit laws that impact small businesses today. The fact is there is a lot of red tape involved in extending credit. However, many small businesses benefit greatly from offering credit to their consumers. Arm yourself with the facts in order to make wise decisions about extending credit and consider credit insurance for further protection.