What is the Consumer Credit Protection Act?
The Consumer Credit Protection Act is a collection of federal legislation that was passed in 1968. Its goal is to create better control over lending and to protect consumers from predatory lending practices. The legislation applies to all lenders that issue loans to consumers in the United States, including, but not limited to, banks, finance companies and credit card companies. The act requires that lenders clearly inform consumers about the terms of loans that they take out, including disclosing the annual percentage rate (APR) for any amount borrowed. The act only applies to loans made to individuals and does not affect business credit products, like a commercial vehicle loan for a truck owned by a company, or a business line of credit.
Lenders are required to clearly inform the borrower in writing of the following charges: interest, loan fees, finder’s fees, service or carrying charges, as well as any premiums charged for an insurance policy that is tied to the extension of credit. All costs associated with borrowing must be disclosed to the individual taking out the loan ahead of time and lenders are prohibited from imposing terms that are hidden. One of the goals of the act was to make credit products more transparent, especially to consumers who may not have a good understanding of finance.
As the Consumer Credit Protection Act has been passed at the federal level, all lenders that issue loans to consumers are required to comply with it, regardless of which state they are doing business in and regardless of the state the borrower resides in. However, it should be known that the act allows individual states to create laws and regulations that go above and beyond the minimal requirements stipulated in the act. For example, certain states may have specific requirements as to the format used in loan disclosures, requiring lenders to use language that is easy to understand and putting fees and finance charges in bold or bigger letters to prevent lenders from burying them between several paragraphs of text.
Another issue that is addressed by the Consumer Credit Protection Act is the garnishment of wages related to indebtedness. If a borrower defaults on a loan, the lender retains the right to garnish their wages in an effort to repay the balance owed. However, only a maximum of 25 percent of the borrower’s wages may be garnished to satisfy repayment of a debt. Furthermore, employers are forbidden from discharging a worker for the sole reason that their wages are being garnished for the repayment of any one debt. Once again, individual states are free to pass laws that would put additional restrictions on wage garnishment. For example, a state could set a lower maximum garnishment percentage, or could impose additional requirements that a lender would have to comply with before they become able to garnish someone’s wages due to non-payment of a debt.