Draw the Law – Payment Issues, Part III: Credit Policy and Application and TILA

So on last week’s post I discussed the process of extending credit, the concerns of doing so, and the legal requirement that interest on the extension of credit be capped, depending on State law. Today’s Draw the Law, is all about the policy (what can and can you not do), the application that customers will fill out to get credit from you, and the federal law Truth in Lending Act (TILA).

Your Policy and Application for Extending Credit to Customers

Credit Policy

First, having a credit policy forces you to sit down and think of what potential customers you want to go after because you are creating customers where you had none before. Consider, that with their cash on hand plus whatever amount you decide to give on credit creates a customer that can buy bigger ticket items.

Second, the details of the policy should take into account administrative costs, how much risk can you tolerate (or how much credit are you willing to extend), for how long, interest rate, what happens if things go if there is missed payment or you have to try and collect on the debt, and the procedures you are going to follow. There is no point in creating a credit policy if a) you do not reduce it to writing, as you have no record to follow and b) why go through all that effort if you aren’t going to follow your own rules.

Some legal things to note: take a peek at Boilerplate Blurb for forum selection, governing law, and arbitration clauses that you might want apart of your policy. Secondly, putting things in writing (so long as everything is legal) provides a good recordkeeping and evidence function for disputes.

The Application Process

Once you got your credit policy in place, and before you start extending credit, you need to gather information on the creditworthiness of applicants. There are two ways to do it, and depends on the situation, you can try to gather it on your own by requesting reports and contacting other known creditors of the applicant. After you have collected enough creditworthy-type of information, make an assessment if this applicant is good for the credit.

Some things that you want to ask, if you do ask the applicant to fill out a form:

  1. customer’s name
  2. if a business, the entity’s form and name
  3. personal and business addresses
  4. personal and business telephone numbers
  5. their bank(s) name(s)
  6. type of account(s)
  7. account number(s)
  8. credit card account(s)
  9. and if a business, contact information to other trade creditors
  10. social security number*

Be aware as you collect information you cannot discriminate the granting of credit on certain bases, such as race. I will cover this more next week, when I go over the Equal Credit Opportunity Act (ECOA). *Especially, the act of obtaining and recording SSNs is regulated by various other state and federal laws.

Truth in Lending Act (TILA)

What is the Truth in Lending Act?

This law is an effort to help inform consumers whether to buy on credit or borrow, and to shop around for the best credit rate for them. Thus it is a disclosure requirement on your part.

What do I have to Disclose?

Basically, before the signing of a credit contract you have to disclose (in writing) the following:

  1. Amount of money being financed (how much credit are you extending);
  2. What are the number of monthly payments that are to be made;
  3. What is the APR or the annual percentage rate.

Is that it?

No, TILA also regulates your advertising of credit programs, therefore it makes it easy for consumers to shop around. Therefore, content-wise, if you made the pitch that buying a television would only cost the consumer “a low monthly payment” you should be giving a dollar figure and relevant information like the APR.  These are not the only requirements, and the application of TILA’s regulation depends on the structure of the credit extension. So therefore, have an attorney review your policies and papers to make sure you are doing things legitimately.

For another helpful starting point guide out this great write-up on Inc., it lays out from a more business standpoint the setting of credit policy.

Some Insight: Administrative Costs

I cannot emphasize this enough from a business background, while you can setup everything perfectly some people are caught unaware by the intake and processing of large volumes of data, then tracking, and then organizing it. Be aware the extension of credit, especially on a B2B level, is really a relationship building tool. You extend credit to your customer because you think it will be good for them, which in turn keeps them in business and constantly buying from you. However, like all relationship-building exercises you need to monitor and respond, while still looking at the numbers.

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*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.