What Small Businesses Need to Know About Extending Credit
Running a small business involves many considerations. Among them is the decision about what types of payments you will accept for your goods or services. At some point, many businesses decide to extend credit to their customers to facilitate sales. However, offering credit based purchases also comes with a host of legal responsibilities. There are many laws governing the extension of credit. Learn what you should be aware of when engaging in this area of business practices.
Comply With the Credit Practices Rule
A major area of compliance regarding credit practices involves the Credit Practices Trade Regulation Rule. This rule was promulgated by the federal government. Therefore, it applies to businesses in every U.S. jurisdiction. Specifically, it is applicable to any entity that falls under the review of the Federal Trade Commission. Your business may be included if it is a finance company, credit union, car dealer or retail store. Basically, any business that offers credit contracts will need to comply.
What Transactions Are Covered?
Any type of consumer credit action falls under the purview of the rule. Lease to purchase plans, or rent to own agreements, are also covered by the Credit Practices Rule. Additionally, loans secured by real estate require compliance. Yet, pure real estate transactions are not addressed by this regulation. You can contact a real estate lawyer who is familiar with business contracts for further explanation.
There are four areas that the rules do not apply to. These include wage assignments, confessions of judgment, waivers of exemption and security interests. However, the rule allows these to remain enforceable if they were used prior to the year 1985. Otherwise, your business should not include these types of provisions in credit agreements.
What Compliance Looks Like
There are three major areas of compliance with the Credit Practices Act. As discussed above, you must avoid including prohibited provisions in a credit agreement created after March of 1985. Therefore, it is a good idea to have an experienced lawyer review your credit contracts to ensure none of the four prohibitions are present.
The second area of compliance deals with cosigner notices. If you wish to allow a consumer to present a cosigner for credit, a specific notice is required. This verbiage seeks to fully inform the cosigner about the risks associated with signing for credit. A cosigner needs to be fully aware that he or she will be held liable for the debt if the principal applicant fails to pay. Proper notice is crucial for this area of compliance.
Finally, a business needs to comply with the rules regarding late charges. This section mainly prohibits the use of pyramid methods to charge late fees. In essence, you cannot regard all future payments as delinquent due to the non-payment of a current late charge. Once again, it helps to discuss this area of compliance with a business law attorney to ensure that no issues arise.
T.R. Spencer Law Office can help you set up a valid credit program for your business. Get in touch with an experienced attorney today for assistance with regulatory compliance plans.