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Until the other day, I thought there was no misunderstanding of the term “creditor.” After all, that term pervades consumer finance transactions and the governing laws and regulations.  And, I thought that its meaning was well understood. However, I have learned that there is some confusion out there that bears explanation.

The consumer finance laws of most states, and certainly the federal consumer finance laws use the term “creditor” frequently.  In consumer transactions—that is, those for personal, family, or household use—the term refers to the person or entity who or which regularly extends credit in connection with a consumer loan, a sale of consumer goods or residential real property, or the sale of other consumer related goods or services.  Seems pretty straight forward but looks can be deceiving.

The analysis should begin with a definition of “credit.”  The federal Truth-in-Lending Act defines “credit” to mean the right granted by a creditor to a debtor to defer payment of debt or to incur debt and defer its payment. I know that sounds circular, but I am not making this up.

Under Alabama law, a creditor is not only one who regularly extends credit, but also one who regularly arranges for the extension of credit; and, whether extending the credit or merely arranging for the extension of credit, the charging of a finance charge is a required element.  

But, this charging of a finance charge requirement is not an element under the federal Truth-in-Lending Act.  There, the extension of credit need not include assessing a finance charge if the credit extended is repayable in more than four installments.

And, under federal and state law, there is often a numerosity test before the various laws and regulations apply to one who would otherwise be a “creditor.”  That is, unless and until a creditor extends or arranges for the extension of credit a certain number of times, the laws and regulations governing creditors may not even apply.

“Creditors” may be direct lenders, direct sellers, or indirect lenders.  They may be banks, credit unions, finance companies, furniture dealers, retailers, department stores, auto dealers, pawnshops, or individuals.  And, creditors may even be assignees of any of the foregoing.  

So, when I commit all of this to paper, it becomes clearer to me why there can be a misunderstanding of the meaning of “creditor.”  

Let’s not even start on defining “debtor.” That term is used almost as often as “creditor,” but you will rarely find it defined!

Please note: This is the one hundred twenty-second blog in a series of Back to Basics blogs, in which relevant and resourceful information can be easily accessed by clicking here.