Predatory Lending, Illegal Debt Collection, Repossession, and Lien Enforcement
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1. Background. Month after month, year after year, it happens; service members and their families don’t get as much for their hard earned dollars as they should. The largest rip-offs often involve a personal loan or extension of credit to make a purchase. Service members fall prey to harmful, deceptive, or illegal loans of different types: payday loans, refund anticipation loans, personal installment loans, seller financed loans of items such as computers or furniture, high interest personal loans, rent-to-own deals, and, of course, all sorts of awful loans related to the purchase of motor vehicles. Impulse buying, bad consumer judgement, ignorance of the law and lending practices, and deceitful sales practices all play a part in this financial carnage. Sometimes, when the money doesn’t stretch far enough to cover all the bills, service members try to fix their finances by obtaining a payday loan or other high interest loan-which only makes the problem worse. The chain of command can assist service members to deal with financial hardship and can provide appropriate referral to other helpful agencies, including the Navy and Marine Corps Relief Society, the installation MCCS financial consultants, and the military legal assistance office. The Legal Assistance Office, in turn, can explain the applicable law in a particular situation, advocate for the service member, engage public enforcement agencies as appropriate, and provide referral for litigation.  This article does not specifically address the complexities of student loans, which are discussed in detail in the Student Loan Guidebook for Servicemembers and their Advocates.    

2. Secretary of Defense Policy and Predatory Lending. Through the Military Lending Act (MLA) [10 U.S.C. 987] Congress gave the Secretary of Defense sweeping authority to regulate loans made to service members and their dependents. The Secretary’s regulation prohibits a number of harmful practices, the most important of which is charging an annual interest rate in excess of 36%. The initial implementing regulation used this authority sparingly, outlawing payday loans, refund anticipation loans, and car title loans and not even all of those. However, the more recent implementing regulation [32 CFR 232] covers virtually all credit except that which it expressly excluded. Mortgages are excluded from coverage; so are loans made to purchase personal property in which the loan is secured by that property. For example, excluded from MLA coverage is the typical auto loan extended to purchase the vehicle, and which provides that the lender can repossess the vehicle upon default. (Complex rules outside the scope of this article pertain to credit card transactions.) Contracts that violate the MLA are void and unenforceable. Lenders who violate the MLA are subject to pay damages in an amount not less than $500 per violation, as well as punitive damages, court costs, and attorney fees of the prevailing plaintiff. Lenders who knowingly violate the Regulation commit a Federal misdemeanor, punishable by a fine and up to a year in prison. The law also allows states to provide additional protections and a lower maximum interest rate. 

The following is a non-exhaustive list of practices are prohibited with respect to any loan covered by the MLA:


-Charging a Military Annual Percentage Rate (MAPR) in excess of 36%.  The MAPR includes the interest on the loan calculated at an annual rate. In addition, it includes certain other products that the debtor buys in connection with the loan, such a credit insurance, a debt cancellation policy, or other credit related ancillary products. This rule ensures that a lender cannot evade the interest limits by charging a nominal interest rate of 36% or less and then requiring the borrower to purchase other expensive products.  The MLA does not prohibit states from imposing a lower limitation on interest rates and many do, including North Carolina.  


-Requiring the borrower to waive any state or federal right to legal recourse, including any rights under the Servicemember Civil Relief Act.


-Requiring the borrower to waive the right to trial in favor of arbitration or to impose onerous legal notice provisions in the case of a dispute.


-Demanding unreasonable notice from the covered borrower as a condition for legal action.


-As a condition of extending credit, requiring the debtor to establish an allotment to repay the obligation. Service relief societies are exempt from this provision.


-Prohibiting the borrower from prepaying the debt or charging a prepayment penalty.


-Rolling over the proceeds of one loan to cover the next loan. For example, Bradley borrows $1,000 to be paid back in six months. At the end of six months, the loan is not completely repaid, so the same lender keeps the payments Bradley has already made and initiates another $1,000 loan to repay the first loan. Or, in the complicated regulatory language, loans are prohibited where:  

“The creditor rolls over, renews, repays, refinances, or consolidates any consumer credit extended to the covered borrower by the same creditor with the proceeds of other consumer credit extended by that creditor to the same covered borrower. This paragraph shall not apply to a transaction when the same creditor extends consumer credit to a covered borrower to refinance or renew an extension of credit that was not covered by this paragraph because the consumer was not a covered borrower at the time of the original transaction. For the purposes of this paragraph, the term "creditor" means a person engaged in the business of extending consumer credit subject to applicable law to engage in deferred presentment transactions or similar payday loan transactions (as described in the relevant law), provided however, that the term does not include a person that is chartered or licensed under Federal or State law as a bank, savings association, or credit union.”


3. Marine Corps Installations (East) Predatory Lending Policy. MCIEAST-MCB Camp Lejeune Order 5801.1 provides policy guidance concerning predatory lending and how to combat it. The Order encourages leaders to report predatory lending practices to proper military authorities. It directs that installation facilities and publications will not be used to support predatory loans or predatory lenders. In appropriate cases, action may be taken to place predatory lenders off limits to military personnel. One of the prime means of combating predatory lending is to prevent it through the education of our commanders, their staffs, and our service members and dependents. This article supports that educational effort.

4.  Pre-Service Obligations and the SCRA.  The Servicemember Civil Relief Act (SCRA) is a federal law designed to ensure that service members are not disadvantaged in their civil affairs because they chose to defend the nation.  One provision of the SCRA relates to pre-service financial obligations (50 USC 3937). Upon request of the service member, whose military service materially affects ability to pay, the creditor is obligated to either (i) reduce the interest on the pre-service obligation to 6%, or (ii) go to court and convince the judge that military service of the debtor did not materially affect ability to pay.  It is exceedingly rare for creditors to take this second option. Unfortunately, it is not exceedingly rare for creditors to ignore valid requests of service members. For example: In an enforcement action initiated by the Office of the Comptroller of the Currency, on 9 May 2015, Bank of America was ordered to pay a $30 million penalty for mishandling over 73,000 service member accounts, by failing to reduce interest rates and perpetrating other violations of the SCRA. In April 2011, a class action lawsuit, Rowles v Chace Bank, with Chace agreeing to pay $27 million for alleged illegal debt collection and violations of the SCRA, including the failure to reduce pre-service interest.   On May 13, 2014, the U.S. Department of Justice settled its case against Sallie Mae, the big federal student loan servicer, with the defendant ordered to pay $60 million compensation for violating service member SCRA rights. Subsequently, the Department of Education has issued new rules that require all federal student loan servicers to reduce pre-service interest of service members, even if they do not receive any service member request to do so.   


5.   Cooling Off. The Federal Trade Commission’s cooling off rule (16 CFR 429) provides that, in transactions covered by the Rule, a person who sells consumer goods or services must provide the buyer with a written notice of a three day right to cancel. However, this trade regulation rule applies only to “door to door sales,” and is therefore very rarely applicable to motor vehicle sales. A door to door sale is defined by the Rule as a sale or lease of consumer goods in which the solicitation and the buyer’s agreement to purchase occur “at a place other than the place of business of the seller (e.g., sales at the buyer's residence or at facilities rented on a temporary or short-term basis, such as hotel or motel rooms, convention centers, fairgrounds and restaurants, or sales at the buyer's workplace or in dormitory lounges)…” The Rule covers such door to door sales made at the buyer’s residence if the purchase price is $130 or more and at other places where the purchase price is $30 or more. The Rule does NOT cover the vast majority of consumer transactions, and does not generally cover motor vehicle sales, which are usually made at the motor vehicle dealership. North Carolina has a cooling off statute for home solicitations but it does not apply unless the solicitation in made and the contract signed at the buyer’s residence (NC Gen Stat 25A-38 / 39).  North Carolina law also has cooling off statutes concerning other specific products or services, such as life insurance (11 NCAC 12.0447), timeshares (NC Gen Stat 93A-45), credit repair services (NC Gen Stat 66-224), discount buying clubs (NC Gen Stat 66-133), camping memberships  (NC Gen Stat 66-240), and various prepaid entertainment (including health clubs, dance lessons, and dating services) where the buyer must pay a fee prior to using the service (NC Gen Stat 66-121), but none of these include motor vehicle sales.

6.  General Information. Here’s how payday loans work. For a hefty fee, the payday lender cashes your check and agrees not to present it to your bank for payment until your next paycheck. This is not a fix that works. If you are going to the payday lender for cash to make ends meet, the payday loan-a loan with a triple digit interest rate-is far more likely to be a self-inflicted wound than the solution to your financial problems. Furthermore, many of these payday loan operations require you to give the lender access to your bank account by means of a check or routing number or some special permission to debit your bank account. Giving this ability to a creditor to raid your account can be just as big a problem as the high interest loan itself. If you are even considering going to the payday lender to pay your bills, you have a serious problem, and the sooner you recognize it the better.

7.   Typical Payday Loan Scenario

          a.   Lance Corporal Jones rents a house he can barely afford, and then he gets talked into buying a household full of expensive furniture and a computer and other consumer electronics, all on credit. He buys a car he can't afford that has no warranty, financing the deal at about twenty percent interest. He spends too much money on fast food and personal entertainment. He has no idea how much he spends a month, and one day he finds that he doesn't have enough money to pay all his bills. He starts making monthly installment payments late and sometimes not at all. The furniture and electronics sellers threaten to sue him and harm his credit. They threaten to tell his command that he’s a deadbeat. Maybe that car he bought breaks down and needs to be repaired. The landlord threatens to evict him; the auto financer threatens to repossess his car.

Instead of taking advantage of free MCCS financial counseling available,
Instead of seeking assistance from Navy and Marine Corps Relief,
Instead of getting a free and confidential legal assistance consult to learn his legal rights,
Instead of exploring other lower cost financing that may be available,
Instead of doing anything that might actually help, Lance Corporal Jones panics and goes to a payday lender. With no money in his account, he writes a check for $300 to the payday lender (or obtains some other high interest loan.) The payday lender promises to delay presenting that check to Jones' bank for two weeks, or until Jones' next payday. For this two week loan, the payday lender charges fifteen percent of the face amount of the check, or $45. Figured as an annual percentage, that comes out to 390% interest!

Three hundred and ninety percent interest!!!

          b.   Lance Corporal Jones has just made his financial situation worse by adding another $45 to his bills. He can’t even pay all the bills he already has, let alone an additional $45. Even worse, experience shows that Lance Corporal Jones will probably take out another payday loan to pay off the first one. And he will do it again when the bills come due the following month. And so on and so on. Lance Corporal Jones may become a credit junkie, coming back over and over again for his quick fix of payday loan cash, in a death spiral of additional debt and borrowing. In the long run, the payday loans crush whatever chances our hypothetical LCpl Jones may have had of straightening out his finances, so he gets evicted and his car gets reposed and his credit is destroyed despite those payday loans.

8.    Illegality of Payday Loans. You may be asking yourself, how can such incredibly high interest rates be legal? Mostly, they are not. Many states, including North Carolina and Georgia, make payday loans illegal. Further, the Federal Military Lending Act [10 U.S.C. 987] and its implementing regulation issued by the Secretary of Defense [32 C.F.R. 232] make it illegal nationwide to issue loans to service members or their dependents with an annual interest rate in excess of 36%. Payday loans are always in excess of this rate.   

9.   Payday Loan Disguises and Evasions. Because payday loans are illegal in some states and are unlawful nationwide when offered to service members and their dependents, purveyors of payday lenders sometimes attempt to dress up their product so that it appears to be something that it is not.  Some of these evasions are listed below:


          a.   Sham Purchases. One attempted evasion is to pretend that the payday loan is not really a loan at all, but is rather a purchase of some product. For example, the payday lender may sell you catalog coupons or phone cards or some other small item at the same time he makes you a payday loan. In a typical transaction, the lender requires you to purchase a $15 phone card for $30. In addition, he requires you to purchase the card with a $100 check and gives you “change” of $70.  You may be required to give the lender the ability to take money out of your bank account. If you want two $15 phone cards, you pay $200, three cards, $300, and so on. The lender agrees not to cash the check or to draft your account until your next payday. Although the lender will claim that this is not a loan at all, it is essentially a payday loan, except that in addition to exorbitant interest, you also have to buy an overpriced phone card or worthless coupon that you didn’t want as well. It’s a payday loan, thinly disguised to look like a sale of a coupon or phone card.

          b.   Internet Evasions and “out of state” transactions. Other payday lenders have gone to the internet, or have taken other steps to state consumer protection laws. Sometimes the payday lender uses a combination of brick and mortar store as well as the internet. You enter their sales office and are asked to sit down at an internet terminal. The payday lenders (and sometimes other lenders as well) may ask you to claim some phony, out-of- state residence on your loan application, or make you sign some document saying that the transaction is occurring in some other state with lax consumer protection laws, or that the law of some other state applies- probably Nevada, which has no interest rate cap. For years, payday lenders attempted to evade state regulators by claiming that their affiliation with some out of state bank shielded them from state scrutiny. That supposed justification has come under considerable fire from courts, banking commissions, and state attorneys general. Some payday lenders have attempted to enter into agreements with Native American tribes in a new attempt to avoid state regulators. With the opportunity to earn 400% interest and higher, you can be sure that payday lenders will continue to dream up ingenious schemes in an ongoing effort to avoid state regulations.

          c.   False Statements under the MLA. Do not be surprised if payday lenders suggest that military borrowers fraudulently state that they are not active duty military or dependents, an obvious attempt to evade the civil and criminal sanctions of the Federal Military Lending Act.

10.   General Information. When you obtain a personal loan, you agree to pay the funds back, at a specified interest rate, usually by making monthly payments. The personal loan differs from a consumer credit transaction, which involves the making of the loan in connection with the purchase of a specific product, such as a car. And more to the point, the personal loan is not secured by the property purchased; that is, the lender cannot repossess any purchased item due to nonpayment. This section addresses personal loans; later sections address motor vehicle or other consumer credit loans. Payday loans are by no means the only type of high interest, predatory personal loans to watch out for. In fact, in many places, state and Federal enforcement agencies have all but wiped out payday lending. Instead, you see the phenomena of high interest personal loans, especially catering to junior active duty service members. Typically, these institutions will loan $500 to $3,000 to service members at high interest rates and with extra fees. The debtor is required to pay back the loan over six to twelve month period. There are often additional, costs. The lender may require that dubious add-ons be financed at the same high interest rate as the original loan. In fact, it is likely that the contract will already be written up with extra costs baked in, which the lender will not explain or, if questioned, will state that these features are standard, or free, or come free with the loan, anything to make sure you do not opt out. When all these junk fees are added in, the effective interest rate of the loan may be significantly higher than the rate listed on the contract and may exceed the state or federal interest rate limit. These are some of the features to watch out for in this type of loan:

11.     High Interest Rates. Interest rates will often hover around 36%, or whatever the highest rate allowable in that state. Some of these lenders, like the payday lenders, will encourage you to make the loan over the internet, or to sign a contract or statement acknowledging that the loan is being made in some other state, one with anti-consumer laws and no interest rate caps. These tactics are used to attempt to escape state interest rate limits where the loan is being made.   

12.   Ancillary Credit Related Products.   Sellers of personal loans may try to sell you additional products of dubious value in connection with the loan. They may even state that the purchase of these products is required in order to obtain the loan (sometimes in conjunction with a written declaration stating that the purchase was completely voluntary). You may be pushed to quickly sign a loan contract that includes all these extra “optional” cost. Be wary of purchasing these products, which are often of dubious value and may make the loan significantly more expensive.  Such products include:


          a.   Credit Life Insurance. The lender may advise that, since you may die in the six or so month period of the loan, you must buy a credit life insurance policy from the lender. With a credit life plan, the only thing your premiums buy is a policy that pays off the loan in the event that you die before the end of the loan term. Be especially wary of a lender that, on the one hand, refuses to give you a loan unless you purchase a credit life policy, but on the other hand wants you to sign a statement acknowledging that your decision to buy the policy was completely voluntary. In fact, that is a common theme with many types of consumer frauds, a disconnect between what the words on the contract and the words coming out of the seller’s mouth.  

          b.   Disability Loan Insurance. The lender may also say that a serious injury during the loan period could cause you to lose your job and therefore your ability to pay off the loan. You are therefore enticed or required to purchase additional insurance to cover such disability, generally financed at the same ridiculously high rate as the rest of the loan. Such a provision is particularly ill advised for service members, who do not lose their employment due to illness or injury; or if so, the medical discharge process is likely to be lengthy and, in addition, result in some disability related pay. 

          c.   Collateral and collateral insurance. Another red warning flag is when a lender requires you to identify some collateral to pledge against the loan. Nonpayment could then result in the lender seizing the pledged property.  The lender then requires you to purchase insurance on the collateral. Collateral insurance is different than the common purchase money security instrument situation; for example, when you sign a loan to buy a car, the loan document says that the lender can repossess the car if you don’t pay. No, the collateral insurance red flag situation is when the lender asks you to pledge property that is completely unrelated to the loan. For example, you obtain a personal loan to pay outstanding bills and the loan contract gives the lender the authority to seize your stereo or CD collection or whatever property you have pledged, unless you make all the payments on time. The lender probably doesn’t care much about seizing that property; but will require you to pay another absurd cost: property insurance on the pledged items.

13.   Additional red flags and troublesome practices. Here are some additional warning signs, red flags suggesting that the lender is not entirely truthful, or that the loan you are applying is not be in your best interest:

          a.   Pretended Affiliation with the Navy, Marine Corps, Department of Defense or other Government Agency. Be wary of the lender that falsely pretends to be a government agency, or pretends that it is endorsed or approved by the Navy, Marine Corps, or Department of Defense. For example, you may get a letter in the mail from a mortgage company that pretends to be the Veteran’s Administration, telling you it’s time to refinance your home. As another example, in June 2012 the NC Attorney general sued an on line entity, “GIBill.Com,” alleging that it pretended to be an arm of the U.S. Government while steering callers to for profit schools. The suit resulted in closure of the site, and $2.5 million compensation.  Also, it is a virtually certainty that your local, off base maker of short term loans to junior troops is not approved or endorsed by any government agency. This is true no matter how many pictures they show you of their employees attending military functions, or how many flags they have in the office or on their internet site; no matter how many of their employees are retired military.

          b.   SCRA Waiver. A federal Law, the Service Member Civil Relief Act, provides many important protections to service members. SCRA rights can be waived, so long as the waiver complies with the legal requirements for such waiver. However, you should be wary of signing any contract that requires you to waive any of these protections. One of these protections is that, if you are sued and cannot be present in court because of your military duties, such as a deployment, you can delay your case until you are able to be present. In other words, the SCRA protects you from losing your case because military duties prevent you from showing up to court.   


          c.   Forced Arbitration.  Increasingly, contracts of all sorts require you to give up your right to sue the other party in court, and the right to be a member of a class action lawsuit. Instead, you are required to go to some arbitrator to resolve disputes. Such arbitration is called “forced,” because the consumer, the weaker of the two parties, is not allowed to engage in the transaction without an arbitration provision.  The arbitration requirement is imposed even before any dispute arises. The contract may even require a specific arbitrator, or allow the other party to choose the arbitrator. Arbitration rights to obtain witnesses, to see the other side’s documents, to object to unreliable evidence, and to appeal, are substantially more limited than at a trial. The hearing may even be located in a distant location, or it may be conducted only over the phone. SCRA rights, including the right to delay the hearing when military service materially affects your ability to attend, apply to every civil court and administrative agency hearing, but do not apply to arbitration.  The right to be a member of a class action may be especially important where it would be impractical to sue individually. For example, suppose that you wish to contest a $10 per month additional fee imposed by your internet service provider. Are you really going to hire an attorney and go through lengthy and arduous litigation to pursue the matter? Probably not.  On the other hand, if given the opportunity, you might very well wish to join ten thousand others in a class action lawsuit suing the internet service provider. You don’t need to pay any up-front fees to any attorneys in such lawsuits; the lawyers are paid a percentage of the proceeds from any court judgement or settlement.  Such forced, or pre-dispute arbitration provisions are prohibited in contracts covered by the Military Lending Act. They are also prohibited in lending contracts to service members in grade E4 or below that are covered by the military provisions of the North Carolina Consumer Finance Act (NC Gen Stat 53-180.1).   


          d.   Giving Account Information. Be extremely wary of any lender that says you are required to provide a blank or post-dated check, to give them any permission to take money out of your account, or to give them your MyPay password or any access whatsoever to your military pay. Requests for personal banking information coming over the internet, Instagram, or Facebook are no more likely to be legitimate. During the summer of 2018, many service member were fooled into providing such personal banking information in response to Instagram solicitations that advised of loans specifically designed for service members that would increase credit scores. Victims were asked to provide banking information to verify eligibility and account information. Using this information, the scammer then obtained loans and stole from the victims.  In another example, the Consumer Finance Protection Bureau, as well as the states of North Carolina and Virginia sued Military Credit services (MCS) and Freedom Acceptance Corporation.  The defendants were accused of several illegal practices, including extracting payments from debtor bank and credit card account when not authorized to do so.  As a condition of being extended credit, the defendants required buyers to consent to have their accounts debited if they defaulted on any payment.  However, the defendants raided buyer accounts even when there was no default. On January 9, 2015, in federal court for the Eastern District of Virginia, the case was resolved, with the defendants ordered to pay a $100,000 penalty, to pay over $2.5 million in compensation, to refrain from various unfair practices, and to fix credit reports that they had unfairly harmed.    

          e.   Disconnect between sales pitch and contract. Of course, you should carefully read the contract and if there is any disconnect between what the seller is telling you and what is written on the page, don’t sign.  Do not sign any “Statement of Understanding” that is completely at odds with what the seller told you. 

14.  North Carolina Interest Rate Limitations:  

          a.   In general, unless otherwise authorized by law, the maximum interest that a North Carolina lender may charge is the greater of the current rate for U.S. Treasury Bills plus 6% or 16%. Since the Treasury bill rate for the last several years has been very low, the maximum rate for non-excepted loans is 16% [NC Gen Stat 24-1.1].   However, there are several exceptions, the most important of which are described below. Maximum rates concerning mortgages and loans to other businesses are outside the scope of this article.

          b.   Personal Loans. Personal loan lenders required to be licensed by the North Carolina Commissioner of Banks, such as Omni Finance, may charge interest rates authorized by the NC Consumer Finance Act (NC Gen Stat chapter 53, Art 15.  53-164 et seq.) The CFA (at 53-176) provides that such lenders may lend up to $15,000 and may charge interest rates as follows:



For loans over $10,000                                                           18%


For loans of $10,000 or less:

      Unpaid balance up to $4,000                                            30%

      Remaining balance (if any) exceeding $4,000

       but under $8,000                                                              24%

      Remaining balance (if any)                                               18%                


In other words, on covered loans, the lender can charge 30% on the first four thousand borrowed, 24% on the next $4,000, and 18% on the rest. As a practical matter, these types of loans are often $4,000 or less, allowing the lender to charge the maximum rate of 30%.  In addition to the above mentioned interest, the CFA also allows lenders to charge a $25 “processing fee” on loans of up to $2,500 and a 1% processing fee up to $40 for loans over $2,500. Since these fees are folded into the loan, the actual interest charged may lawfully be slightly over the limits otherwise applicable under the CFA.   Note that the above interest limits apply only to personal loans issued by lenders required to be licensed by the North Carolina Commissioner of Banks. 


          c.   Retail Installment Sales. Interest rates for North Carolina consumer credit installment sales (such as the purchase of consumer electronics or a motor vehicle) are regulated by the North Carolina Retail Installment Sales Act [NC Gen Stat 25A et seq]. The Act limits finance charges as follows:

 Loan Amount             Maximum Annual Finance Charge


Under $1,500                                      24%


$1,500 or more

but less than $2,000                            22%


$2,000 or more,                                   20%

but less than $3,000


$3,000 or more                                    18%


          d.    Maximum Motor Vehicle Loan Interest Rates Under the North Carolina Retail Installment Sales Act. 


If the vehicle loan is repayable in not less than six monthly installments, the maximum rate of interest is the greater of the amount in the table at sub-paragraph (c) above or the rate set out below:


Vehicle Age                            Maximum Annual Finance Charge


1 & 2 model years old                                     18%

3 model years old                                            20%

4 model years old                                            22%

5 model years old and older                           29%


15.  North Carolina Consumer Finance Act: Military Provisions.


          a.   Summary. The gist of these provisions (NC Gen Stat 53-180.1) is to notify the CO when a junior service member applies for or signs a covered personal loan. The CO then has the opportunity to review the loan with the member, or to have the member contact legal and / or financial advisors to explain and discuss it.  The member has 30 days to cancel the loan by returning an amount equal to the borrowed funds. Specifics are discussed below. 


          b.   Details. The CFA prohibits covered lenders from extending credit to a service member in the rank of E4 or below unless certain requirements are met, including the requirement (a) that the lender notify the borrower’s commanding officer verbally or in writing of the loan, (b) that the lender mails the CO or Executive Officer a copy of the loan contract, within five days of its consummation, (c) that the lender provide the borrower with the names and addresses of the following agencies that enforce lending laws: the NC Commissioner of Banks, the Consumer Protection Division of the NC Department of Justice, and the federal Consumer Finance Protection Bureau. In addition, forced arbitration provisions are unenforceable against a covered service member or dependent thereof.  The lender is prohibited from knowingly pursuing debt collection against a deployed service member or the service member’s dependents. Finally, the service member has 30 days to cancel the contract by returning an amount equal to the borrowed funds.


16.   In this kind of loan, the debtor is not taking out a loan to purchase a car. Instead, the debtor pledges a car he has completely paid off as collateral for a short term loan for a relatively small amount of cash. The loan must be repaid within thirty days. The annual interest rates can exceed several hundred-I say again several hundred- percent. If the loan is not paid in full at the required time, which happens frequently, the lender will either make another loan at the outrageous interest rate, or take the car and sell it. The Military Lending Act makes it illegal to offer such loans to service members or their dependents. North Carolina law also prohibits such transactions. Anyone so desperate or foolish to even be considering such a loan should run, not walk, to their nearest MCCS financial counselor.

36.   Generally. 


          a.   Repossession Generally.  Repossession is the right of a creditor to physically seize property and remove it from its owner.  The right to repossess arises from a contract; typically a contract to finance the item to be seized and which specifically provides that the contract is secured by the property; that is, there is a right to repossess upon default of the borrower.  Without such a contract, there is no right to repossess.  As a common example, buyer B obtains a loan from car dealer D to purchase the vehicle. The purchase and finance document specifically says that the loan is secured by the vehicle and that the lender can repossess upon default. The term default is defined in the contract to include not only non-payment, but such other items as failure to maintain proper insurance.  Upon default, D has the right to repossess, as spelled out in the contract.  In general, a creditor with a contractual right to repossess may do so without a court order so long as it can be done without a breach of the beach. However, in some circumstances, military regulations or federal law require a court order or impose other restrictions.   


           b.   Liens Generally. A lien is a creditor’s claim on property; for example, a lender’s claim on a motor vehicle, or an auto mechanic’s claim on a vehicle as a result of work performed on the vehicle, or a seller of water purification system’s claim on the house to which the device was affixed.  The lien continues until the lienholder’s claim is paid.  The practical effect of such liens is that the property owner will be unable to sell the property until the lien is paid. Liens are principally governed by state law. This article, however, addresses only the following lien issues (i) limits on lien enforcement imposed by the Servicemember Civil Relief Act, (ii) mechanics liens under North Carolina law, and (iii) some issues arising concerning fixture liens.


37.   Voluntary Repossession.  For whatever reason, service members and other consumers

finance purchases and then find that they are unable to keep up with the payments.  In such cases, creditors may request that the debtor voluntarily relinquish the property, sometimes falsely suggesting that such voluntary repossession will wipe out the remaining debt.  In many, perhaps most, cases, repossession does NOT result in elimination of the debt.  Instead, here’s an example of what happens:  Lance Corporal Smith purchased a vehicle for $20,000, financing the entire amount.  Two years later, he still owes $16,000, he misses three payments, and the creditor requests that he turn over the vehicle. He complies with the request, expecting to be relieved of any further debt.  Instead, the creditor auctions off the vehicle for $5,000, $11,000 short of the loan payoff. LCpl Smith now owes $12,000 on the car he no longer has, in addition to the costs of the auction. Military debtors and their dependents are therefore encouraged to explore their options with financial and legal advisors prior to agreeing to voluntary repossession.


38.   Military Limitations on Repossession.  In order to ensure good order and discipline, installation commanders often prescribe regulations that circumscribe on base commercial activities, including repossession. Marine Corps Base Camp Lejeune Order 5370.4H is typical. 

It provides a point of contact and prescribes a process to serve court orders on debtors, and to facilitate appropriate authorities to repossess property pursuant to a court order. Creditors who do not have a court order of repossession are prohibited from repossessing property unless the creditor complies with certain requirements; generally, that the creditor provides written notice of intent to repossess to the designated installation official, that the official communicates such intent to the debtor, that the debtor has the opportunity to consult legal counsel, and that the debtor consents to the repossession. The knowing violation of this regulation may be sanctioned by administrative action; for example, debarment from the installation; or by federal prosecution. It is a federal offense punishable by a fine and up to six months imprisonment to enter a military installation (i) after being debarred therefrom, or (ii) “for any purpose prohibited by law or lawful regulation (18 USC 1382). 

39.   Federal Law Limitations on Repossession.  The vast majority of repossessions do not require a court order; only a contractual right to repossess and compliance with state law; i.e., refrain from breach of the peace. Base commanders may prescribe additional requirements for repossession occurring on their installation.  In addition, the Servicemember Civil Relief Act (SCRA) provides that a contract entered into prior to military service may not be enforced through repossession without a court order (50 USC 3952).  Example: John Smith signs a finance contract to purchase a motor vehicle.  Smith enlists in the Marine Corps a month later, and then misses the next three car payments. The lender can repossess the vehicle, but only with a court order. Violators may incur civil liability. In addition, the knowing violation of this law is a crime punishable by a fine and up to a year in jail. Far too often, lenders either through ignorance, negligence, or willful disregard, violate this law.  Victims are encourage to seek legal assistance. Aggrieved consumers can sue violators of this provision of the SCRA; so can agencies of the United States. For example:  the U.S. Department of Justice sued Santander Consumer USA, alleging that the defendant repossessed over 1,100 motor vehicles in violation of   the SCRA. On February 25, 2015, the Federal District Court in the Northern District of Texas ordered the defendant to pay a fine of $55,000, to pay restitution in excess on $9 million, and to take detailed steps to prevent further violations.  As another example, the U.S. Department of Justice sued Wells Fargo, alleging that the defendant repossessed 413 service member cars in violation of the SCRA.  The case was resolved, with the defendant being ordered to change its business practices and to pay over $4 million in restitution. Wells Fargo was also fined over $20 million by the Office of the Comptroller of Currency in this incident.  Servicemembers and their dependents are encouraged to discuss SCRA / repossession issues with their military legal assistance counsel and to complain about such matters to the U.S. Department of Justice at

40.   North Carolina Repossession Requirements.  North Carolina law does not require the creditor to obtain a court order prior to repossession, or even to provide any prior notice of default. All that is required is that the creditor has a right to repossess established by a contract, that the contract was breached, and that the repossession is conducted in such a way as to avoid a breach of the peace. (NC Gen Stat 25-9-609). Thus, in order to avoid a breach of the peace, the repo man will generally attempt to take the vehicle while its owner is either not present or at night while the owner is asleep. After the property is repossessed, the creditor must notify the debtor, and may sell the property in any “commercially reasonable manner” (NC Gen Stat 25-9-610).  Prior to sale, the creditor must provide the debtor with notice of intended disposition (NC Gen Stat 25-9-611). The debtor has the right to buy the property back prior to the sale by paying the entire amount still owed, expenses of the creditor, and attorney fees (NC Gen Stat 25-9-623).


41.  Federal Lien Enforcement Limits.  In most cases, the enforcement of a lien, that is, the selling of the property subject to the lien, does not require a court order.  However, the Servicemember Civil Relief Act (SCRA) prohibits the enforcement of a lien on the property or effects of a servicemember during any period of military service and for 90 days thereafter without a court order (50 USC 3958). While the SCRA section heading is titled “Enforcement of Storage Liens,” the text of the statute is much broader, encompassing “a lien for storage, repair, or cleaning of the property or effects of a servicemember or a lien on such property or effects for any other reason.”  Violators may incur civil liability. A knowing violation of this section of the SCRA is a crime punishable by a fine and up to a year in jail.  Example:  Private Brown brings his vehicle to Joe’s Garage for repairs.  Joe works on the vehicle and thereafter Private Brown is either unable to pay or refuses to pay, alleging that Joe’s overcharged him or performed the work negligently. Joe threatens to, and does, sell the vehicle, scrupulously following all the required state procedures. However, Joe did not obtain a court order for the sale of the vehicle. Joe has just violated the SCRA.  Aggrieved consumers can sue those who violate this provision of the SCRA violators; so can agencies of the United States. For example:  the U.S. Department of Justice sued the City and County of Honolulu, Hawaii, alleging that the defendant, through its agents, repossessed and sold over 1,100 service member vehicles they determined to be abandoned without first obtaining a court order, thereby violating the SCRA. The case was resolved on February 15, 2018, with the defendant agreeing to provide compensation to several named service members and to set up a $150,000 victim compensation fund, and to establish procedures to ensure future compliance with the SCRA.  This case originated on tips from Navy and Marine Corps legal assistance attorneys. Servicemembers and their dependents are encouraged to discuss SCRA / lien enforcement issues with their military legal assistance counsel and to complain about such matters to the U.S. Department of Justice at


42.  Mechanics Liens. 


          a.   Generally. A mechanic who performs work on your car is given a mechanic’s lien; that is, the right to keep (and ultimately sell) your car if you don’t pay the bill (See, e.g., NC Gen Stat chapter 44A). Unfortunately, unscrupulous mechanics sometimes use this law as a sledge hammer to force you to pay for negligent, unauthorized, overly expensive repairs. Pay up, says the mechanic, or I sell your car in 30 days.


          b.   North Carolina Vehicle Sale Procedures.  The mechanic’s threat to sell the vehicle in 30 days is misleading.  The law sale process is summarized as follows: North Carolina law provides that if the mechanic’s bill isn’t paid in 30 days, the mechanic can notify the Department of Motor Vehicles (DMV) of intent to sell. The DMV then notifies the car owner of the sale and the right to contest it in court. If the court allows the sale, the mechanic can then sell the car in a public or private sale. If the mechanic chooses to sell at a private sale, he mechanic is not allowed to purchase the vehicle. The car owner can demand a public sale instead. If the mechanic sells at a public sale, he must advertise the sale for two weeks in advance and, if the value exceeds $3,500, post a notice at the county courthouse as well. The proceeds of the sale are first used to pay off the lien, sale, and storage, with the remainder, if any, provided to the vehicle owner.   Without possession of the car, and faced with the threat that the vehicle will be sold, consumers may well decide to pay the outrageous fee to obtain possession of the vehicle, and then sue the mechanic afterwards. North Carolina law provides an alternative; which is to sue the mechanic for possession of the vehicle, paying the charges demanded to the court. Once in possession of the vehicle, the consumer can litigate the mechanic’s claim without risking loss of the vehicle.   Of course, any litigation can be risky, may take some time, and likely will require the hiring of require knowledgeable legal counsel.   


          c.   Federal Limits on Enforcement of Mechanic’s Lien.  In addition to all of the state lien enforcement requirements, there is an important federal requirement; if a service member is the owner of the vehicle, it can not be sold without a court order (50 USC 3958). Regardless of state procedures, regardless of the service member’s failure to demand a court hearing, the mechanic can not sell the vehicle absent a court order. Either through negligence or willful disregard of the law, mechanics sometimes violate this requirement of the Servicemember Civil Relief Act. In such cases, service members are encouraged to contact their military legal assistance attorney and to complain on line to the U.S. Department of Justice .


 43.  Fixture Liens.  If you purchase a home fixture, that is, an item that has a significant attachment to your home, such as a new roof, or a water purification system, on credit, you may find to your surprise that you are unable to sell the home.  The creditor has filed a fixture lien against the home and, until it is paid in full, you will be unable to sell the house. The filing of a fixture lien is not illegal; however, consumers who purchase fixtures need to be aware of this possibility, especially if you intend to sell the home in the near future.    For example, legal assistance offices within the region have received several complaints of home owners who were dissatisfied with the water purification systems they purchased and financed, and then found out that they could not sell the home without first paying off the fixture lien.

17.   General. Consumers, especially junior troops, sometimes find that they don’t have enough money to pay up front for the things they want: that computer or big screen television, special tires rims, jewelry, or a living room suite. So the seller allows them to take the item home as long as they agree to make monthly payments that cover the cost of the item as well as interest and other fees. It is especially common in military towns to see sellers heavily marketing expensive items and payment plans, focusing almost entirely on monthly payments rather than interest and total cost. Sometimes the seller charges far more for the item then other retailers, knowing that those of limited means cannot buy the item elsewhere because other stores require all the payment up front.  Thus, the credit consumer pays more for the base price, in addition to the interest and fees. If you are buying items this way, you may want to reconsider whether it would be wiser to put that purchase off until you can really afford it, or maybe not make that purchase at all.  See paragraph 14c above concerning maximum interest on consumer credit sales.

18.   Problem Contract Provisions. But if you do decide to finance your purchase, read the loan contract very carefully. Watch out for all the warning signs and hidden costs. Look for special conditions: Are you required to keep the property in the state? Are you required to insure the property? What is the interest rate claimed? What is the real interest rate when all the extra fees are included? Do they claim that the loan is governed by some other state’s law? Are you required to hire some agent that the seller can contact instead of you if the seller wants to sue you? Are you required to join some silly buying club offering merchandise out of a catalog, or selling some long term deal on the purchase of photo development services? Don’t be surprised if you don’t completely understand your loan contract. Financing contracts are some of the most difficult to read, anti-consumer contracts you will ever find, with acres of fine print. Most of that fine print lists all the different ways you can default and all the actions the creditor can take against you if you do. These contracts are written by lenders for lenders, and if you don’t understand the contract, don’t sign it. Get someone you trust…not the seller… to explain it to you first. Some of the problematic contract provisions exposed through litigation are explained below.  

19.   Choice of Venue Provisions.   Sometimes the retail installment sales contract claims that if there is a dispute, a court in some distant location is required to hear the case.  Thus, according to such contracts, if you purchase a defective product in Jacksonville, North Carolina, or have any other complaint against the seller, you have to sue in some distant state. Even worse, such a provision purportedly allows the seller to sue you in some distant state, and if you don’t show up for trial, you are going to lose, regardless of the strength of your case.  The creditor may then use that judgement to make an application to the Defense Finance and Accounting Service for involuntary allotment of your military pay. Such provisions are illegal, a violation of North Carolina’s debt collection law. NC Gen Stat 75-55(4) prohibits the collection of debts by 


“Bringing suit against the debtor in a county other than that in which the debt was incurred or in which the debtor resides if the distances and amounts involved would make it impractical for the debtor to defend the claim.”

Such action is also a violation of the North Carolina Unfair and Deceptive Acts and Practices statute (NC Gen Stat 75-1.1) which provides that “Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are declared unlawful.” Finally, such actions are likely a violation of the Federal Consumer Finance Protection Act. In their lawsuit against Military Credit Services and Freedom Acceptance, the attorneys general of Virginia and North Carolina, and Consumer Finance Protection Bureau alleged that provisions in the defendant’s sales contracts required that any lawsuit to resolve a dispute had to be filed in Virginia, regardless of where the buyer lived or where the contract was signed. The January 9, 2015 federal court order directed the defendants to refrain from filing such distant forum lawsuits.  


20.    Undisclosed Interest. In accordance with the federal Truth in Lending Act (15 USC 1601 et seq), lenders are required to disclose the real cost of borrowing.  Sometimes, people violate this law by hiding costs or misleading consumers about interest.  For example, if a lender requires the borrower to pay on line, or by allotment, and then charges a fee for such service, then that fee must be calculated into the interest rate that is disclosed. In fact, that was precisely the situation in the case of the Military Installment Loans and Educational Services (MILES). The Consumer Finance Protection Bureau took enforcement action against the entities that operated the MILES program for failing to tell consumers the costs associated with the required allotment, and then failing to calculate those fees into the disclosed interest rates.  The case was resolved in a CFPB administrative proceeding June 26, 2013, with the defendants ordered to cease their illegal practices and to pay over $3 million compensation.  As another example, suppose that company X says that he will sell a computer for cash for $1,000, but if you buy on credit you need to pay 10% interest and the base price of the computer increases to $1,400. That extra $400 to the base price must be included in the cost of credit, calculated into the interest rate, and disclosed to the consumer. Historically, some consumer electronics companies marketed heavily to military service members and had complicated arrangements with finance companies, resulting in the disclosure of nominal interest rates when the actual interest rates were over 100%.


21.  Improper disclosures of closed ended credit. 


     a.   Closed and Open Ended Credit Transactions. With closed ended credit, the consumer receives credit solely for the purchase of a specific item; for example, a motor vehicle, or a home.  The credit is extended to buy that item and no others. Numerous disclosures are required under federal Truth in Lending Act (15 USC 1601) for closed ended credit, including the number of payments required, the amount of the monthly payments, the interest rate, the total cost of borrowing, and a statement of how much the deal is going to cost after all the payments have been made. Such disclosure of just how expensive the deal is can be quite an eye opener. Revolving, or open ended credit, occurs when you have the ability to make additional purchases at will on a line of credit, as with a credit card. Like closed ended credit, open ended credit disclosures, such as the interest rate, are required by TILA. But TILA does not require lenders in open ended credit transactions to disclose the total cost of the credit and the total cost of the purchase after all the payments have been made. There is no such requirement for open ended credit, nor can there be.  How can you disclose the total cost of the credit when new credit is extended whenever the consumer makes another purchase? How do you disclose the total of all the payments if the consumer can continue to buy items and incur new costs? Sometimes, to evade the shocking disclosures required of closed ended credit, lenders pretend that closed ended credit is really an open ended credit transaction. 


          b.   Pretending close ended sales are open ended credit. Sometimes creditors don’t want to tell the consumer just how expensive the total deal is going to be, fearing that they will lose a sale. So, they pretend that a close ended credit sale is actually the extension of open ended credit. For example, you may be sold a computer or water purification system on credit. You have no ability to use the credit extended to purchase any other products. Nonetheless, the paperwork for those sales pretends that you have been given revolving credit, as if you can make other credit purchases. After the sale, you may even receive a letter telling you that your open ended credit – which you never had in the first place – has been closed.  The bottom line is that unscrupulous sellers pretend that you have been given open ended credit so that they can avoid making the shocking disclosures 


22.    Debt collection provisions: access to bank /credit card.  Make sure you understand all the documents that you are signing. Sometimes, as a condition of extending credit, a lender will requires the borrower to grant access to the borrower’s bank account, or credit card account.  If a payment is not made on time, the creditor can pull payments from these accounts. Such provisions can be very problematic.  Creditors may be unscrupulous or, more likely, may make mistakes. In fact, many such mistakes have occurred, with creditors debiting the consumer’s account when not authorized by contract, or taking too much from the account. Such unexpected withdrawals from a bank account can result in an overdrawn account, or nonsufficient funds checks and related costs. Further, especially if you are living paycheck to paycheck, don’t you want to determine which bills get priority, rather than leaving it to the creditor?

23.  Background.  Most service members and dependents pay income tax through tax withholding from their salary; that is, the Federal and state governments take a bite out of each paycheck to pay the year’s income taxes. After completing your annual tax return, you may find that you have paid the government more money than you owe and you are therefore due a refund. A large tax refund is particularly likely for deploying service members, since all or virtually all of the income earned in the combat zone is tax free.
If you file electronically, you will receive your refund from the IRS within seven to fourteen days, depending on when in the processing cycle your return is received by the IRS. Many commercial tax preparation services allow you to get your refund money more quickly by selling refund anticipation loans (RALs). For a fee, the preparer provides you with funds equal to the amount of your anticipated refund either immediately (for an extra fee) or within a day or two. In effect, the tax preparer gives you an extremely short term loan. The RAL is a bad deal.

24.  RAL Costs

          a.   Interest Rates. The RAL is, essentially, a loan lasting until you receive your refund. Since the IRS provides refunds quickly for electronically filed returns, the loan period is, at most, fourteen days for e-filed returns. You pay for this loan, this privilege of getting your money a few days sooner from the lender than you would otherwise get bit from the IRS. When figured on an annual basis, these basic RAL fees amount to interest rates of two hundred sixty percent or higher. Some tax preparers offer RALs at an advertised APR of 36%, the maximum rate authorized under the MLE, still an enormously high rate of interest and a foolish financial decision. Furthermore, if the tax preparer isn’t properly figuring in various additional fees being charged, the actual interest rate may be higher than the advertised rate.

          b.   Tax Preparation and Electronic Filing Fees. Service members and their dependents are eligible for free tax preparation and electronic filing at their installation tax center. If you are going to the commercial tax preparation service to obtain a RAL, that probably means that you are not getting your taxes done free at the Base Tax Center and are needlessly paying hundreds of dollars on tax return preparation and electronic filing.

          c.   Instant Refund Fee. If you want your money immediately, you may have to pay an additional fee. Otherwise, you get your loan in a couple of days.

          d.   Account Set Up Fee. In order to facilitate the transfer of the refund to the lender and/or the payment of the loan to the customer, the customer may be charged a fee for setting up a special account. If the customer has direct deposit, the fee may be reduced somewhat. Additional fees may be imposed for processing state refunds as well as Federal refunds.

25. RALs Gone Bad. The RAL is a bad deal to begin with, but if you don’t get the refund that you anticipate, it gets even worse. Some consumers have complained that the refund check was not deposited into their account as anticipated, or that they paid tax preparation fees and electronic filing fees and then were turned down for the RAL. In addition, there is no guarantee that you will get a refund, even if your tax return says you should. The IRS may disagree with the manner in which you prepared your return, or the refund might get sent to an incorrect address, or perhaps your home state intercepts and seizes your refund to satisfy back taxes or child support in arrears. If these or any other things prevent you from obtaining the anticipated refund, you still need to pay the lender back for the RAL, with interest, except now you don’t have a refund check from the IRS to do it with. Sometimes tax preparers go so far as to offer RALs even before the taxpayer receives a W2 or prepares any return. In these cases, the lender estimates the refund by using past year’s return, or a final pay stub or military leave and earnings statement (LES). Buying a RAL without first preparing a tax return greatly increases the likelihood of additional mistakes and difficulties.

But the bottom line is this

RALs are a terrible financial choice,

ALL RALs are prohibited within MCIE, and

It is illegal for lenders to make RALs in excess of 36% to service members or dependents.

26.  RAL Variations: Deferral of Tax Return Preparation Costs.  Since RALs in excess of 36% are prohibited under the MLA, some tax preparers have tweaked their product in an attempt to evade coverage. In the most prevalent variation, the tax preparer charges for the preparation of the tax return, but you don’t have to pay that cost until you get your refund check.  A fee for deferring the payment is taken from that check, as well. The scheme can be viewed as a short term loan. You receive credit (deferral of paying the tax preparation costs) for a period of time (the 10 days or so it takes to get your refund check) for which you pay a fee. The fee can be viewed as interest. Calculated on an annual basis, it can be quite steep.  For example:


Cost for tax prep is $200. You defer payment for 14 days. The cost of doing so is $30, or 15% of the face amount of the credit.  That’s 15% for at most a two week period.  There are 26 two week periods in a year, so the annual percentage is 15 x 26 = 390%.  Do you really want to pay such a fee just to delay payment of tax prep fees for a few days? Are you that strapped for cash?  If so, you should probably consult a financial counselor…and you should and getting your taxes done for free on base.

27. General Information. Many of you may be thinking “I’m not foolish enough to get a payday loan or refund anticipation loan. My finances aren’t so bad that I’ll be asking for a high interest personal loan. That isn’t me.” Well, perhaps not. But the likelihood is great that you will be financing an automobile purchase. Most service members, certainly most junior troops, cannot simply write a check to buy a car. Unfortunately, motor vehicle financing is a target rich free fire zone for cheats, deceptive salesmen, and predatory lenders. In this author’s view, the vast majority of dealer financed loans involve at least some level of deception.  Other aspects of the transaction, the purchase itself, the trade in, and after-market products such as extended warranties are also problematic, but largely outside the scope of this article, which focuses on financing.   See paragraph 14d above concerning maximum interest rates on motor vehicle sales.


28. Deceptive, Unethical, Unfair Vehicle Financing Practices. Deceptive, unethical, or illegal practices perpetrated by car salesmen in the financing of vehicles are very common. They include, but are not necessarily limited to, the following:

          a.   Interest Rate Mark Up.  The lowest interest rate that you qualify for based on your credit history is called the “buy rate.” In probably the most common deceit, the dealer misleads you about the buy rate, sells you a loan at a higher rate, and receives extra compensation from the lender for locking you into a more expensive loan than you deserve. For example, the dealer calls your credit union and learns that you qualify for a loan at five percent interest. Then the dealer tells you that you qualify only for a loan at nine percent interest, greatly increasing the cost of the vehicle over the lifetime of the loan.  Or, if the dealer himself is financing the loan, he simply tells you, or implies, that the lowest rate you qualify for is nine percent. Avoid this extra cost by insisting that you personally talk to your lender, or better yet, get your loan in person at your bank or credit union. Or get pre-approved by a financial institution before going to the dealer finance office.

          b.   Yo Yo Sales. In this predatory trick, you sign the purchase contract, give the dealer your trade in and maybe make a down payment as well. The seller lets you drive the car off the lot even though your financing is not “final.” A day or so later you get an ominous call from the dealer; “there’s a problem with financing.” He jerks you and the new car back to the dealership, like a yo-yo on a string. He says that those low rates aren’t available to you, but how about a terrible loan at a terrible rate? You tell him to cancel the sale because he isn’t fulfilling his promise to get you the original loan. You demand refund of your down payment back and the return of your old car. The dealer tells you you’re not getting that down payment and besides, he’s already sold the trade in car. This practice is an illegal trick. It is a fraud designed to give the dealer a second opportunity to negotiate a deal with you. Contact your legal assistance officer, the consumer protection section of the state attorney general, and the DMV fraud inspector [In Onslow County, NC, (910) 455-8835]. Better yet, don’t ever drive a car off the lot until financing has been completed and finalized.

          c.    Bait and Switch Financing. The advertisement says that wonderful cars are available at great prices and interest rates. However, when you get to the car lot, you are told that you don’t qualify for that low interest rate or for that large a loan, but how would you like to buy this jalopy at 22% interest?

          d.   Fraudulent Financing Applications. The salesman wants to sell you a car. But what happens if you don’t qualify for a loan, because you have insufficient income or because you don’t even have a valid driver’s license? The crooked salesman, hell bent on making a sale, may take your driver’s license or LES or other documents, white out the parts he doesn’t like, and type in phony information, magically changing your driver status or increasing your rank and income.  Sometimes the inability to qualify for a loan is based on a mismatch between the value of the vehicle and the amount of the loan.  What lender wants to make a $25,000 for a vehicle worth $15,000?  In such cases, an unscrupulous dealer might lie to the lender about the car (or ask you to lie to the dealer about the car), falsely adding features to puff up its value.  Phony financing; what could possibly go wrong? First, there’s probably a good reason you don’t qualify for the loan-like you can’t afford it. Secondly, the deal is all based on fraud. There can be problems if the lender finds out. Maybe the lender decides to cancel the loan because the application was all a lie. Then where are you? Thirdly, if you yourself knowingly assist the dealer to perpetrate this fraud, you may have civil or criminal liability, or both. Finally, if the inability to obtain a loan is based on a mismatch between the value of the vehicle and the amount of the loan, that’s a pretty good indication that you are paying far too much for the vehicle.  

          e.   Product Packing. In this scam, the salesman tells you what your interest rate is, and then, when he calculates the monthly payments, he adds in additional products that greatly increase the cost: credit life insurance, disability insurance, GAP insurance, an extended service contract. Maybe he doesn’t even tell you about these products and asks you to rush through a contract that already charges for these ad-ons.  Or he doesn’t tell you how much each of these items added to the cost, or he simply says they are extras that come with the car, never telling you that they are options you can choose not to buy. In some cases, the dealer makes more money selling the loan than selling the car, charging add-on prices far in excess of the dealer’s cost or the cost the consumer would have to pay by purchasing them elsewhere.


          f.   The Kill Box.  How would you like to buy a car that the lender can render inoperable with the press of a button? I didn’t think so. The starter- interrupt device, or “kill box,” allows a lender who thinks that you defaulted on the loan to remotely stop the car from starting, preventing you from getting to work, or home, or to the hospital to attend to a medical emergency. You are stranded at the last place that you parked the car. With the kill box, your late payment, temporary inability to pay, or even a record keeping error by the creditor, can cause massive, immediate hardship. The kill box is also typically used in conjunction with a GPS tracker, telling the lender where the vehicle is located so that he can send someone out to repossess it.  The kill box may also interfere with the vehicle’s electrical system, even when not engaged. Lenders argue that these tactics increase their ability to repossess a vehicle, thereby allowing them to make a loan to customers who might not otherwise qualify.  

Consumer advocates argue that such heavy handed tactics lead to loan churning, the repetitive sale, financing, and repossession of the same car over and over to new suckers.


          g.   Concealing the interest rate.   As discussed above at paragraph 18, lenders sometimes fail to disclose the actual interest rate.  For example, suppose the dealer says that if you pay cash, a truck will cost $14,000, but if you finance the deal, the price of the truck is increases to $16,000. The contract lists an interest rate of 10%, but that rate doesn’t include the $2,000 more that borrowers pay over cash customers. The failure to disclose this cost of financing, and the failure to include it when calculating the interest rate is a violation of the federal Truth in Lending Act.    


          h.   Obtaining a Loan to Qualify for a Loan. The dealer may tell you that you do not qualify for a loan large enough to make the purchase, or that you need to provide a significant down payment in order to qualify. The dealer then suggests that you obtain a high interest personal loan to qualify for the larger auto loan. So, you get a $3,000 loan at about 30% APR and rush back to the dealer to make a down payment, possibly even before that loan appears on any credit report.  So, based on your income, assets, credit report, and debt to income calculations, you were considered a bad risk to pay back a $15,000 auto loan at 10%. Now you have an even more expensive loan, a $12,000 auto loan at 10% and a $3,000 personal loan at 30%. You have that car - for now - but there’s a substantial probability that you are going to default on one or both of the loans, and / or have the vehicle repossessed.


29.   Guaranteed Asset Protection. 


          a.   General Description. Guaranteed Asset Protection (GAP) compensates the motorist / borrower for the difference between the balance remaining on the vehicle loan and the insurance compensation for the wrecked car.  Example: X purchases a motor vehicle for $22,000, paying $2,000 down and financing the remainder. Three years later, X is involved in a motor vehicle accident and his insurance company declares his vehicle a total loss. As a result, the insurance company pays X $13,000, the Blue Book value (minus deductible) of the now three year old car. However, at the time of the wreck, X still owes $16,000 on the vehicle loan; there is a gap of $3,000 between the insurance compensation and the loan balance. GAP, sometimes called GAP Insurance, pays this difference.         


          b.     GAP Problems.  After the buyer chooses a vehicle, he will then see the Finance and Insurance (F & I) Manager. Unbeknownst to the buyer, the F & I manager generally works on a commission; the more costs and extra products (such as GAP, credit insurance, extended service plan) he is able to pack into the loan, the more he takes home in his pocket.  Sometimes GAP is listed on the motor vehicle finance contract whether the buyer wants to purchase it or not; the product is sold with little or no explanation by the salesman.   In the worst cases, the buyer has no idea that what GAP is, its cost, or that it has been packed into the loan. In some cases, GAP is inappropriate; for example, when the buyer pays a large percentage of the cost up front.  Sometimes, GAP is a good idea, but car dealers charge far too much for it. Dealers often charge far more for GAP and other add ons than a free and fair market would suggest; making very little payout as compared to the cost of the product.   In general, the buyer would be better off purchasing the GAP policy from someone other than a car dealer, if at all.

30.   General Information. Debt collection is regulated by Federal law, state law, and Marine Corps Regulation. These laws and regulations are routinely violated, in part because people do not know their rights. Aggrieved consumers are urged to report violations to Legal Assistance Office, and on line to the North Carolina Attorney General and to the Consumer Finance Protection Bureau. Those in the chain of command receiving unlawful debt collection phone calls or unlawful debt collection correspondence are urged to report such unlawful actions and to provide the Marine concerned with a copy of relevant correspondence.


31.   Federal Debt Collection Law.


          a.   Federal Fair Debt Collection Practices Act. The FDCPA (15 U.S.C. 1692 et seq) regulates the practices of debt collectors; generally, people hired by creditors to collect their debts. The FDCPA prohibits debt collectors from engaging in certain practices, including, but not necessarily limited to, the following:

-Misrepresenting the amount or anything else about the debt
-Contacting the debtor at the place of employment if the debtor knows that the employer prohibits the receipt of such calls there.
-Calling at an inconvenient time, such as before 8 a.m. or after 9 p.m.
-Contacting the debtor after the debtor requests that such communications cease;
-Providing debt information to third parties, such as a military commander or other person in the chain of command, without the written permission of the debtor given directly to the debt collector;
-Failing to accurately identify himself on the phone as a debt collector, or using obscene or profane language, or making repeated calls with the intent to annoy the debtor,
-Threatening arrest, imprisonment, garnishment of wages, or other actions unless lawfully authorized. [In North Carolina, wages can be garnished for family support, but NOT for ordinary consumer debt. See Harris v Hinson 87 N.C. App 148, 360 S.E. 2d 118 (N.C. App. 1987)].]
-Misleading the consumer about the amount of the debt, or implying that the consumer must pay additional charges-such as interest or a debt collector fee- unless such charges are authorized by law.
-Threatening to repossess property, such as a car, unless there is some lawful right to repossession, such as court authorization or a permission granted in a loan contract
-Within five days of the initial communication, the collector must provide written notice indicating the amount of the debt, the name of creditor, and a warning that the debt will be considered valid unless the consumer objects within 30 days. If the consumer does object in writing, the collector must cease collection efforts until he has obtained verification of the debt and provides such verification to the consumer.

A collector who violates the statute can be sued and may be ordered by the court to pay damages of $1,000 and any actual money damages suffered by the consumer. Additionally, the court may order the offending debt collector to pay the plaintiff’s reasonable attorney fees.


          b.   The Consumer Finance Protection Act.  The Consumer Finance Protection Bureau (CFPB), created by the Wall Street Reform and Consumer Finance Protection Act (12 USC 5481 et seq) is empowered to take action to prevent unfair, deceptive, or abusive acts or practices, and to sue perpetrators of such actions (12 USC 5481 et seq).  Accordingly, the CFPB can, and has, taken enforcement action to address unfair, deceptive, or abusive debt collection practices.  Such practices include, but are not necessarily limited to: using access to the debtor’s bank account to take more funds than are owed,  providing false information to debtors and their commanders about the consequences of nonpayment, and contacting commanders based on “consent” provisions that are buried in the contract and not conspicuously disclosed.     


32.   State Debt Collection Statutes. States typically also have their own laws regulating debt collection. The Federal Fair Debt Collection Practices Act specifically authorizes states to make laws with greater consumer protections than provided by Federal law, and some of the states have done so. For example, North Carolina has a statute that applies to creditors (people trying to collect their own debts) [NC Gen Stat 75-50 thru 56]; as well as to debt collectors (people hired to collect other creditor’s debts) [NC Gen stat 58-70-1 thru 130]. The practices prohibited by state law are very similar to the practices prohibited by Federal law. Note, however, that North Carolina law is broader than the federal FDCP, applying to creditors as well as debt collectors.

The North Carolina Attorney General may sue to enforce North Carolina debt collection statutes. Aggrieved consumers may also sue to enforce the statute, and may recover up to $2,000 from collectors violating it.

33.   Marine Corps Debt Collection / Indebtedness Policy.

          a.   General / Governing Regulation. Marine Corps policy concerning debt collection is set out at volume 10 of Marine Corps Order 5800.16, the Marine Corps Legal Support and Administration Manual (LSAM).  


          b.   Policy.  Marines are expected to manage their personal financial affairs satisfactorily and to pay their financial obligations in timely manner.  Enforcement of private obligations is a matter for civil authorities; however, indebtedness may have an adverse impact on security clearance (32 CFR Part 147). Furthermore, financial mismanagement that rises to the level of “dishonorable failure to pay just debts,” as defined in the Manual for Courts Martial, may result in administrative or disciplinary action, including non-judicial punishment, court-martial, or administrative separation. In this context, “dishonorable” conduct involves far more than merely making a mistake:  


More than negligence in nonpayment is necessary. The failure to pay must

            be characterized by deceit, evasion, false promises or other distinctly culpable

circumstances indicating a deliberate nonpayment or grossly indifferent attitude

toward one’s just obligations.  For a debt to form the basis of this offense, the

accused must not have had a defense, or an equivalent offset or counterclaim,

either in fact or according to the accused’s belief, at the time alleged. The offense

should not be charged if there was a genuine dispute between the parties as to

the facts or law relating  to the debt which would affect the obligation of the

accused to pay.  The offense is not committed if the creditor or creditors involved

are satisfied with the conduct of the debtor with respect to payment. The length

of the period of nonpayment and the denial of indebtedness which the accused

may have made may tend to prove that the accused’s conduct was dishonorable,

but the court-martial may convict only if it finds from all of the evidence that the

conduct was in fact dishonorable. ” emphasis added (MCM 2016, Part IV, Para 71c)


          c.   Directing Payment / Diverting Pay. Unless otherwise specifically authorized by statute, the Marine Corps has no authority to compel a Marine to pay a debt. Creditors who have obtained a court order may pursue garnishment or involuntary allotment through the Defense Finance and Accounting Service (DFAS). Commanders may administratively refer the indebtedness complaint to the Marine.


          d.   Standards of Fairness. The Order directs that Marine Commanders will NOT assist in the collection of a debt where the creditor:

-Does not first make a good faith effort to collect the debt directly from the Marine;
-Makes obviously false, misleading, or exorbitant claims;
-Violates the applicable federal or State law. Commanders are encouraged to report violations to the Installation Inspector and the Officer in Charge of legal assistance.


          e.   Communication of Debt Information to Commanders and Other Third Parties. In most cases, the communication of any debt information by a debt collector to the command, without first reducing the debt to a court judgment or obtaining the valid consent of the debtor to engage in such communications, violates Federal law. In some states, including North Carolina, communication of debt information to the command by a debt collector or the creditor (the person to whom the debt is owed) also violates the law… unless the creditor has first obtained a judgment from a court or has obtained valid, written consent from the debtor. For many years, North Carolina law not only required the debtor’s written consent to contact third parties about debt collection, it also required that such consent occur after default. This requirement assured that lenders could not lawfully coerce buyers into giving such consent by making it a condition of extending credit; i.e., putting such “consent” provisions into the loan contract. On August 5, 2015, that law was changed, eliminating the North Carolina state requirement that the written consent occur after default.  Failure to make such a consent provision conspicuous is still a violation of the Consumer Finance Protection Act, and likely North Carolina law as well.  


          f. Processing Complaints of Indebtedness.  Debt collection complaints to the command must (i)be in writing, (ii) include information sufficient to identify the Marine and his unit; (iii) include a copy of the contract or other instrument establishing the obligation to include a copy of applicable consumer credit disclosures given to the Marine during the credit transaction; (iv) include evidence of attempts to contact the Marine before asking for command assistance; (v) provide the Marine’s written consent authorizing contact with third parties regarding the matter. Noncomplying complaints, or complaints that otherwise violate state or federal debt collection law, will be returned to the creditor without further action.  Complaints alleging indebtedness of a Marine who is no longer a member of the command will be forwarded to the Marine's new command. If the individual has been separated from the Marine Corps, the correspondence will be returned to the sender so informing the party. The creditor may be informed of the Marine's new military address (except in the case of deployed unit), but the permanent (home) mailing address not be disclosed. Commanders receiving a complaint that meets the requirements of the volume 10 of the Marine Corps Legal Services Administration Manual shall (i) review the evidence submitted; (ii) advise the Marine that just financial obligations are expected to be paid in a timely manner, and that failure to pay just debts may lead to administrative or disciplinary action within the Marine Corps and to civil action by the creditor seeking a judgment from a civilian court for the amount of the debt; and (iii) advise the Marine of the opportunity to seek legal assistance and financial counseling with regard to resolving the indebtedness. Commanders should consult the appropriate Staff Judge Advocate when the Marine is suspected of criminal conduct. Questioning the Marine when criminal conduct is suspected requires that the Marine be advised of his or her rights under Article 31(b), UCMJ. After discussing the complaint with the Marine, the Commander may inform the creditor, without commenting on the merits of the claim, and that the complaint was brought to the Marine’s attention.


34.   Debt Buyers.


          a.   Generally.  Debt buying firms purchase large bundles of debts deemed uncollectible by the creditor or previous debt collector.  Their business model is to buy such debts for pennies on the dollar, turn up the heat of debtors, and squeeze out a profit. In too many cases however, debt buyer collection efforts are abusive and illegal.  Alarmingly, in addition to all of the old abuses, such as harassing calls and illegal threats, debt buyers resort to a new abuse, the fraudulent lawsuit. Debt buyers often have very little information about the debt, yet file lawsuits against alleged debtors anyway. In some cases, debt buyers who have almost no information about the debt, including the amount, and no records to substantiate it, nonetheless file debt collection lawsuits, in some cases hundreds of thousands of such lawsuits a year. Debt buyer lawsuits are filed so quickly and inaccurately and with so little prior review that the amount claimed may be wrong and even the wrong person sued.  The lawsuit may even be filed after the statute of limitations on collecting the debt has run. Nonetheless, if the defendant fails to respond to the lawsuit or show up for the hearing (which may be in a distant location), the debt buyer is likely to win a court judgement, regardless of the weakness of its case.  For example, the Consumer Finance Protection Bureau took enforcement action against Portfolio Recovery Services, alleging that the defendant debt buyer violated numerous statutes, in numerous ways, including making misrepresentations to consumers and to courts, and filing some 3,000 debt collection lawsuits a week with very little, if any, review of the underlying facts for accuracy. The matter was resolved in an administrative proceeding on September 9, 2015; the defendant ordered to pay a penalty of $8 million, to provide restitution in the amount of over $19 million, to withdraw numerous ending lawsuits, to take action to repair credit reports of aggrieved consumers, and to follow a comprehensive compliance plan to ensure that the defendant did not repeat its mistakes.


          b.   “Sewer Service.”  Sometimes, the defendant doesn’t even know about the debt buyer lawsuit until it’s all over. The first time the defendant may become aware of the lawsuit is when his wages are garnished, a lien placed on his property, or a bank account seized.  Debt buyers sidestep existing requirements to serve the defendant with a copy of the complaint. They send court notices to account addresses at which the defendant consumer no longer resides, and the courts receive thousands of fraudulent affidavits falsely claiming service on the defendant. The process is so rampant it even has a name, “sewer service;” throwing the defendant’s notice in the sewer and then claiming it was delivered.


          c.   Debt Buyer Statutes. Some states, including North Carolina, have passed legislation to help limit this abuse, requiring debt buyers who initiate lawsuits to provide advance written notice to the debtor, to refrain from filing suits after the statute of limitations has run, and to include certain evidence in the initial court filing [NC Gen Stat 58-70-115(4) thru–(7) ].


          d.   Protect Yourself from Debt Buyer Lawsuits.  Consumers can take some common sense steps to protect themselves: 


-Never ignore any court process, even if it is obvious to you that you do not owe the debt. The plaintiff will win if you ignore it. Seek legal help immediately. 


-If the debt buyer continues to pursue the case even after you have provided evidence that you are not the debtor, make sure that you have legal counsel show up at the hearing and, if required, you should show up as well.  If you contest, it’s likely that the debt buyer will not be able to prove its case even if you owe the debt.  


-Demand validation from debt collectors; that is, demand documentation of the existence and the amount of the debt, a right you have under the Federal Fair Debt Collection Practices Act.


-Have your attorney ask the judge award you the costs of the frivolous litigation, including attorney fees. Consider suing the debt collector for any damages (including statutory or treble damages which may be authorized).


-Provide law enforcement with evidence that the debt buyer filed a false affidavit to the court concerning service of legal process.


-Complain to the FTC Military Sentinel, the North Carolina Attorney General, and more importantly, to the Consumer Finance Protection Bureau (CFPB). 


35.   Zombie Debt Collectors. In a dismaying development, the debt collection business is becoming increasingly infiltrated by so-called “zombie” debt collectors. These collectors purchase for pennies on the dollar, old, unsubstantiated or poorly substantiated debts that more legitimate organizations discarded as uncollectible. Their business model, like that of debt buyers, is to buy up a huge inventory of such debt and then use the most oppressive practices to collect on at least some of them, thereby turning a profit. The zombie debt collector’s specialty is the attempt to extract money on debts so old that lawsuit to collect them is barred by the statute of limitations.  These debt collectors attempt to revive these old, dead debts by getting consumers to sign a promissory note or otherwise acknowledge the debt, thereby resetting the clock and giving it new life. In some cases, zombie debt collectors attempt to squeeze consumers for old “debts” that never existed in the first place. Consumers contacted by such zombie debt collectors should never acknowledge the debt verbally or in writing and should seek legal assistance.