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FEDERAL RESERVE BANK OF NEW YORK No. 8599 LCircular July 11, 1979 •] HANDBOOK OF CONSUMER TERMS To All Financial Institutions, and Others Concerned, in the Second Federal Reserve District: Enclosed is a new booklet entitled “Consumer Credit Terminology Handbook,” issued as part of this Bank’s Consumer Credit Information (CCI) Program. This collection of consumer credit terms and definitions is offered as a guide for consumers using credit. It is not intended to provide legal interpretations. Limited supplies of the handbook are available, without charge, from our Public Information Department. Large orders of the handbook should be requested in writing. CCI materials are intended as a resource to help creditors and borrowers understand their rights and responsibilities. Comments are welcome and should be directed to the Public Information Department. P aul A. V olcker , P re sid e n t. C onsum er C redit Term inology H andbook Preface In today's m arketp lace e veryo n e u se s cre d it at one time or another. . . charging m erch an d ise at a departm ent store, buying g a s with a cre d it ca rd or taking a p erso n a l loan at a local bank. B e c a u s e the u se o f cre d it generally re su lts in the u se o f form s, resp o n sib le co n su m ers should w atch for m eaningful information which, the law sta tes, m ust appear in cre d it co n tra cts. This information will not only tell you the co n ditions and c o s t o f the cre d it you a re applying for, but will enable you to co m p a re the con di tions and c o s ts o ffe re d by other lenders. In other words, you may be able to get a better buy for your money. O f co u rse, in o rd er to und erstand cre d it co n tracts, one m ust b e familiar with cre d it term inology This booklet w a s d e sig n ed to a ssis t you in your future cred it dealings. 1 Adverse Action—(1) refusal to grant credit in the amount or under terms requested or (2) ter mination of an account or (3) refusal to in crease the amount of an existing credit line when the applicant requested it in accordance with the creditor’s procedures or (4) an un favorable change in terms that affect only some of the debtors. Amortize—provision for repayment of a loan in periodic payments over a stated period of time. Annual Percentage Rate (APR)—finance charge over a full year, expressed as a percen tage, reflecting all costs of the loan as required by the Truth in Lending Act. Appraisal—an estimate of value of property. Appraisal Fee—charge for estimating the value of collateral being offered as security. Asset—something of value that can be used to repay debt. This collection of consumer credit ter minology is not intended to offer legal inter pretation. Its purpose is to assist con sumers in everyday credit transactions. Balloon Payment—any payment which is more than twice the amount of any other regularly scheduled equal payment. Billing Cycle—tim e in te rv a l—often a month—between regular periodic billing statement dates. 3 II Billing Error—mistake in a periodic statement due to a charge made by someone not authorized by the cardholder, an error in arithmetic, failure to reflect a credit, a charge for which the cardholder requests clarification or other instances defined by the Fair Credit Billing Act and Regulation Z. Cash Discount—price reduction offered by merchants to customers paying in cash or by check instead of by credit card. Charge Account—line of credit that may be used repeatedly up to a certain specified limit. Closing Statement—an accounting of funds in a real estate sale. Collateral—something of value pledged to assure loan repayment and subject to seizure upon default. Co-maker or Co-signer—a person, other than the borrower, who signs a note in order to give additional protection to the creditor granting the loan, because of the uncertain credit quali ty of the borrower. Community Reinvestment Act (CRA) State ment—a description available for public in spection at each bank office indicating, on a map, the communities served by that office and the types of credit the bank is prepared to extend within the communities served. 4 Comparison Shopping—evaluation of a lender’s annual percentage rate (APR), which tells borrowers the relative cost of credit, against the APRs quoted by other lenders. Conditional Sales Contract—document used in installment sales credit arrangements, which withhold ownership title from the buyer until the loan has been paid in full. Contract—agreement between two or more parties. Certain legal formalities must be met. Contractual Liability—obligation to repay all debts made in accordance with a contract. Credit—an arrangement to receive cash, goods or services now and pay for them in the future. Credit Application—a form filled out by a bor rower wanting credit, or an interview, which seeks information about an applicant regard ing residence, employment, income and ex isting debt. Credit Bureau—a reporting agency which as sembles credit and other information on con sumers to supply such information to others concerning a consumer’s creditworthiness, credit standing and/or capacity. Credit Card—a plastic card issued by a 5 creditor, representing a type of charge ac count which allows individuals to obtain cash, goods or services, according to (and within the dollar limits of) an established credit ar rangement. Credit History—a continuing record of a bor rower’s debt commitments and how well these have been honored. Credit Investigation—an inquiry undertaken by a lender to verify information supplied by a borrower on a credit application. Credit Life Insurance—insurance covering the unpaid balance of a loan in the event of a bor rower’s death. Creditor—a person or a business who, in the ordinary course of business, regularly extends or arranges for the extension of consumer credit or lends money. Credit Rating—evaluation previous credit experience. of a person’s Credit Scoring System—a statistical measure used to rate credit applicants on the basis of various factors relevant to creditworthiness. verted into cash on short notice, such as stocks and bonds and savings deposits in a bank. Debt Collector—anyone, other than a creditor or his attorney, who regularly collects debts for others. Declining Balance—the decreasing amount owed on a debt as monthly payments are made. Default—failure to perform that which is re quired by the terms of a credit agreement. Delinquent—a credit account which is past due and for which no satisfactory repayment arrangement has been made. Discharge of Lien—recorded release of a lien when debt has been repaid. Disclosure—information lenders must give to borrowers before a credit contract is signed. Discretionary Income—what remains of disposable income, after essential living costs are paid. Creditworthiness—ability to repay debts. Disposable Income—take-home pay or net pay. Current Asset—assets which may be con Down Payment—a cash sum required at the 6 7 outset of a credit transaction, which together with the outstanding loan balance comprise the total cost. Due Date—a day of the month by which payment must be made. Durable Goods—commodities which serve consumers over an extended period of time, such as cars. Elderly Applicant—a person aged 62 or more, as defined in the Equal Credit Opportunity Act. Electronic Fund Transfer—movement of funds initiated other than by check. With drawals or transfers at automated teller machines and debits to accounts at point of sale are EFTs. Empirical Credit System—credit scoring system, based on creditors’ experience with borrowers, alloting certain points to attributes describing the applicant. Escrow—funds to be paid by a second party to a third party for expenses on property held by the first party: for example, funds held by a bank—often collected together with monthly mortgage payments—to meet tax bills and in surance premiums. 8 Finance Charge—cost of a loan in dollars and cents as required by the Truth in Lending Act. Garnishment—court-sanctioned procedure by which a portion of a debtor’s wages is set aside to repay creditors. Grace Period—a period of time after a due date not subject to late charges. Gross Income—total earnings prior to deduc tions for taxes, health insurance, employee benefit plans, etc. Holder In Due Course—someone acquiring in good faith a purchaser’s note. A legal doctrine previously separated the purchaser’s obliga tion to pay the note from the seller’s obliga tion to meet the terms of the sale. Inadvertent Error—mechanical, electronic or clerical error that is not intentional. Installment Cash Credit—a one-shot loan in volving two parties: the borrower and the lender. The debt is repaid in equal install ments over a specified period of time. Installment Sales Credit—a one-shot loan us ed to buy “ big ticket” items, such as cars or appliances. A down payment is usually re quired and a contract is signed for the balance due, plus interest and service charges. The 9 debt is repaid in equal installments over a specified period of time. Generally involves three parties: the buyer, the seller and the lender. Lessor—one who owns real or personal pro perty which is leased. Interest—one component of the finance charge; interest is the periodic charge for use of credit. Licensed Lender—a consumer finance office authorized to operate in the state in which it is located. Joint Account—a credit arrangement for two or more persons, enabling all to use an ac count and assume liability to repay. Lien—a claim which one person has upon pro perty of another person, as security for debt; may also be created by law, as a mechanic’s lien for unpaid bills due a home contractor. Judgmental System —a n o n s ta tis tic a l measure of evaluating creditworthiness. Land Contract—installment contract drawn between buyer and seller for the sale of pro perty. Occasionally used as a substitute for a mortgage, except ownership of property doesn’t pass until payment of the last install ment. Late Charge—a percentage of the payment due which is charged for being late or paying after a predetermined grace period. Liability—legal responsibility to repay debt. Lien Placement Fee—cost of recording with the Secretary of State the security interest of a bank on the title of any new or used car. Mortgage—a legal instrument by which a bor rower gives a creditor a lien on property as security for a loan; the lien created by the in strument. Late Payment—a payment on which an addi tional charge may be imposed, since it was made after the due date. Mortgage Loan Commitment—written state ment by lender to grant a specific loan amount, at a given rate, for a certain term, secured by a specific property, if the real pro perty transaction is closed before the expira tion date. Lessee—one who rents real or personal pro perty from a lessor for a fee, called rent. Mortgagee—lender of money on the security of a mortgage, e.g., a bank. 10 11 -11 Mortgagor—an owner of property who ex ecutes a mortgage covering property as security for a loan. Personal Finance Company—see, “ sales finance company.” Net Worth—difference between total assets and total liabilities. Points—a loan discount, which is a one-time charge, used to adjust the yield on the loan to what market conditions demand. Each point equals one percent of the principal amount. Note—a written document which is a rec ognized legal evidence of debt, promising payment of a specified sum of money on a cer tain date. Promissory Note—see, “ note.” Open Account Credit—credit arrangement us ed by many retailers. Customer may purchase goods at any time, up to a certain limit. Pay ment may be made for all purchases within 30 days with no interest charge applied, or in stated monthly payments, based on the cur rent account balance, plus interest. I Punitive Damages—court award above the ac tual damage as punishment for violating the law. Rebate—portion of unearned interest return ed to borrower if loan is repaid before the date designated for full payment. Recording Fee—cost of recording necessary documents with the appropriate state or coun ty administrative office. Open End Credit—see, “ open account credit.” Recission—cancellation of a contract. Open End Lease—lease which may involve an additional payment based on the value of pro perty when returned. Refinance—revision of the payment schedule of existing debt. Overdraft Checking—line of credit permitting a person to write checks for more than the ac count balance, with interest charged on the amount borrowed. Payment—total sum of money borrowed, plus 12 finance charges, divided by the number of all months in the term of the loan. Repossession—act of reclaiming durable goods purchased on credit, for which payment is past due. Revolving Account—line of credit that may be used repeatedly up to a certain specified limit. 13 Sales Finance Company—lenders specializ ing in installment credit used to purchase durable items. Security—something of value pledged to assure loan repayment and subject to seizure upon default. Service Charge—finance cost related to cer tain conditions of a credit contract, such as the fee when overdraft checking is activated. Service Credit—a credit arrangement allowing bills to be paid at month-end, for services pro vided during the month. Utility companies and medical professionals extend this type of credit. Statutory Fee—administrative cost of closing a loan. Surcharge—an increase in the regular price of an item. Term—length of time designated for total repayment of loan. Third-Party Transaction—involving a buyer, a seller and a lender. Title—legal ownership. Title Search—a check of public records to determine current ownership of a parcel of real estate. Single Lump Sum Credit—a closed-end credit arrangement where the total outstanding balance is due on a specified date. Small Loan Company—see, “ sales finance company.” Special Bank Credit Plans—“ lines of credit” extended to borrowers by banks. Based upon a prearranged limit, borrower may use all or part of the credit by writing a check. Interest charges are based on the amount of credit us ed during the month and the total amount outstanding. 14 15 FEDERAL RESERVE BANK OF NEW YORK 1979
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