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Avoid finance charges and other creative ways to charge interest
January 18, 2021
Avoid finance charges and other creative ways to charge interest
            Alarm companies can often be quite creative getting into trouble.  I’ve warned against any transaction structure where Truth and Lending Laws may be violated.  That would include outright financing an installation, installment sale and deferred payment plan.  These types of transaction, coupled with differential in pricing based on credit worthiness invite trouble.  
            Alarm contracts have enough to worry about without trying to comply with the myriad laws of financing.  Stay clear of financing.  
            If you want to defer payment then enter into a Lease transaction.  You will always own the equipment.  This is especially attractive for commercial subscribers.  The All in One agreements come in both sale and lease format.  If you’re not leasing, or you use to and you have moved away from that model, consider getting back into leasing your systems.  The article below by Jesse Kirschenbaum,Esq should capture your attention.  The matter was reported in December 2020, so it’s current.
Disguised finance charges 
            A prominent security company just settled a case in Arkansas after being sued by the Consumer Financial Protection Bureau (“CFPB”) and the Arkansas Attorney General alleging the company violated the Fair Credit Reporting Act.  As is common in the security industry, this company was entering into long term contracts with its subscribers and charging a monthly monitoring fee and an initial activation fee.   Subscribers were given the option to defer the activation fee and to pay it in installments along with the monthly monitoring fee.  The company charged a different activation fee for each subscriber based on their credit score. 
            This is what got the company into trouble as offering subscribers the right to defer the activation fee is considered an extension of credit under the Fair Credit Reporting Act.   As such, charging higher activation fees to subscribers with lower credit scores is treated the same as credit card companies approving customers with bad credit but charging higher interest rates than customers with good credit.  This practice is regulated by the Fair Credit Reporting Act and requires companies that utilize this practice to provide a notice to all affected customers.  This notice must include information about the customer’s consumer report, the identity of the provider of the report, and the customer’s rights under federal law to obtain a copy of the report and to dispute its accuracy, among other things.
            In this case, the company never provided customers this notice as it was legally required to since it was charging higher activation fees to subscribers it considered higher risk based on their credit score.  Under the terms of the settlement the company must now provide the required notice to its subscribers going forward and will pay a $600,000 penalty.  
            Hopefully this case will serve as a warning to others in the industry that charge varying activation fees based on credit history.  Those companies that do should start sending out the notice required by the Fair Credit Reporting Act or expect the CFPB and state attorney general to come knocking.
 Jesse Kirschenbaum, Esq.
Kirschenbaum & Kirschenbaum, P.C.
 (516) 747 - 6700 x. 329

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Ken Kirschenbaum,Esq
Kirschenbaum & Kirschenbaum PC
Attorneys at Law
200 Garden City Plaza
Garden City, NY 11530
516 747 6700 x 301