FINANCIALPROTECTION

Home ImprovementFinancingVolume IModel State Law

A Model State LawIn three volumes

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byMargot Saunders, AttorneyElizabeth Renuart, Attorney

National Consumer Law Center

Sharon Hermanson, Project OfficerAARP Public Policy Institute

October 2000

The Public Policy Institute, formed in 1985, is part of Public Affairs at AARP. One of the missions of theInstitute is to foster research and analysis on public policy issues of importance to older Americans.This publication represents part of that effort. The views expressed therein are for information, debate,and discussion, and do not necessarily represent formal policies of AARP.

© 2000, AARP. Reprinting with permission only. Stock Number: D17165AARP, 601 E Street, NW, Washington, DC 20049http://research.aarp.org

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���� �ACKNOWLEDGMENTS

This model state law is the result of a consensus process involving experts fromacross AARP and other organizations. It required a level of communication andpurpose that went well beyond the normal review and comment process.

The authors of this report wish to acknowledge the following individuals for their review:Lynn Drysdale, Attorney, Florida Legal Services, Inc.; Debra Bierman, Attorney, BetTzedel Legal Services; Karen Brown and Bill Brennan, Attorneys, Home DefenseProject, Atlanta Legal Aid., Inc.; Addison Parker, Attorney, Appalachian Research andDefense Fund of Kentucky, Inc.; Dan Hedges, Attorney, Mountain State Justice (WestVirginia); Kathleen Keest, Assistant Attorney General (Iowa); Ira Rheingold, Attorney,Legal Assistance Foundation of Chicago; Alan White and Irv Ackelsberg, Attorneys,Community Legal Services, Inc. (Pennsylvania); and Carolyn Carter, Attorney, NationalConsumer Law Center.

For their support and review of the project, the following AARP staff deserve specialthanks: George Gaberlavage, Associate Director, AARP Public Policy Institute;DaCosta Mason, Consumer Issues Team Leader, AARP State Legislation Department;Nina Simon, Attorney, AARP Foundation Litigation; and Jean Davis, Attorney, AARPFoundation Litigation.

For their preparation of materials, special thanks go to Gabriel Montes, SeniorAdministrative Associate, AARP Public Policy Institute, and Linda Walker, AssociateEditorial Specialist, AARP State Legislation Department.

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Section 1. APPLICATION, PURPOSES, CONSTRUCTION ..............................................................7

Section 2. DEFINITIONS ....................................................................................................................7

Commentary: Definitions .....................................................................................................................8

Section 3. LICENSING......................................................................................................................10

Commentary: Licensing .................................................................................................................... 11

Section 4. REQUIRED TERMS AND DISCLOSURES ....................................................................12

Commentary: Required Terms and Disclosures ...............................................................................14

Section 5. PROHIBITED TERMS .....................................................................................................14

Commentary: Prohibited Terms ........................................................................................................15

Section 6. ALLOWED CHARGES....................................................................................................15

Commentary: Allowed Charges ........................................................................................................16

Section 7. COMPLETION CERTIFICATE BY LENDERS ANDRELEASE BY SUB-CONTRACTORS ........................................................................................17

Commentary: Completion Certificate by Creditors and Release by Sub-Contractors ......................17

Section 8. PROHIBITED PRACTICES .............................................................................................18

Commentary: Prohibited Practices ...................................................................................................19

Section 9. OBLIGATIONS OF ASSIGNEES, HOLDERS ANDHOME IMPROVEMENT CREDITORS ........................................................................................20

Commentary: Obligations of Assignees, Holders and Home Improvement Creditors ......................20

Section 10. RIGHTS AND OBLIGATIONS OF THE PARTIES IN DISPUTE .....................................20

Commentary: Rights and Obligations of the Parties in Dispute ........................................................23

Section 11. OBLIGATION OF GOOD FAITH AND FAIR DEALING ...................................................24

Commentary: Obligation of Good Faith and Fair Dealing ..................................................................24

Section 12. LIMITATIONS ON ACTIONS ..........................................................................................24

Commentary: Limitations on Actions ................................................................................................24

Section 13. ENFORCEMENT ..........................................................................................................25

Commentary: Enforcement ...............................................................................................................25

Section 14. SEVERABILITY .............................................................................................................26

Commentary: Severability .................................................................................................................26

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* Consumer Behavior Study. (1999). AARP. The study was conducted by Princeton SurveyResearch Associates. 1504 respondents at least 18 years of age were asked questions on a widerange of consumer issues, including home repair and financing.

Propelled by the elimination of the tax deduction for interest on consumer loans(accomplished through the Tax Reform Act of 1986) and rapidly accumulatinghomeowner equity, home equity loans have become a major source of consumerfinance. At the end of 1997, the outstanding home equity debt of U.S. homeownerswas an estimated $420 billion. In a recent AARP study,* 31 percent of personseighteen and older reported that they had ever taken out a home improvement or homeequity loan; 50 percent of respondents aged 50-64 reported they had done so. Forsome people with high incomes and financial sophistication, borrowing against one’shome may be appropriate. However, homeowners with substantial equity but limitedincomes, too often find themselves the victims of predatory home equity loans.

Predatory mortgage lenders often target older homeowners, who frequently havesubstantial equity in their homes. Nearly 80 percent of older Americans arehomeowners, and 80 percent of these older homeowners own their homes free andclear. According to the latest American Housing Survey, two-thirds of olderhomeowners had at least $50,000 in home equity. Moreover, older homeowners aremore likely to live in homes in need of repair, and less likely than younger homeownersto do the home repair work themselves.

Many predatory loans are initiated by fraudulent home improvement contractors who,working as agents of subprime (i.e., less than prime, or ‘A’) mortgage lenders, offer andarrange financing secured by the borrower’s home. Predatory practices by fraudulenthome improvement contractors include 1) obtaining the borrower’s consent for a loanwith excessively high rates and fees, often through deception or coercion, and/or 2)receiving the loan proceeds directly or indirectly from the lender without providing anyservices to the homeowner, or without providing services commensurate with theamount of the payment. Moreover, the lender may still demand full payment from theborrower.

Currently, each state and territory has a distinct set of laws that regulate creditextended to finance home improvements. In most states, general laws such as retailinstallment sales acts, small loan acts, industrial loan acts, second mortgage acts,and general interest and usury laws govern home improvement financing. Other stateshave statutory schemes modeled after the Uniform Consumer Credit Code (UCCC). Afew states (including New Jersey, Pennsylvania, Michigan, California, Florida, andMaryland) have specific home improvement statutes designed to protect consumers.

The Home Improvement Financing Model Act is designed to address the predatorypractices that arise when a home improvement contractor either directly extends credit,or arranges for credit, to finance home improvements or repairs. The Model Actaddresses credit assigned from a home improvement contractor, broker or othercreditor, as well as the refinancing of home improvement credit. It requires anyoneextending home improvement credit to be licensed by the state and to meet certainminimum requirements. The Model Act also prohibits certain charges and practicesassociated with home financing and places responsibility upon the creditor to ensurethat the home improvements are completed to the satisfaction of the borrower. Inaddition, the Model Act prohibits creditors from taking a security interest in a homewith an open-end credit arrangement.

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���� �The Model Act requires that home improvement lenders bear the cost of incomplete orinadequate home improvement work. By requiring that lenders bear the cost of abusesin home improvement, the Model Act provides them with a strong incentive to ensurethat their lending practices are responsible and to closely monitor the activities of homerepair contractors with whom they are associated. This is the policy behind theFederal Trade Commission (FTC) Rule of Preservation of Claims and Defenses. TheModel Act strengthens the protections provided under the FTC Rule by applying theprotections to a broader group of abuses and to more assignees of the homeimprovement credit agreements. Two unique provisions strengthen these protections.First, the Model Act requires creditors to obtain a completion certificate from anindependent inspector certifying that the home improvements have been satisfactorilycompleted, before the creditor may make the final payment to a home improvementcontractor. Second, the Model Act permits a consumer to make payments on a loaninto an escrow account if the work has not been satisfactorily completed or if the homeimprovements are not as warranted. The lender can release the money from theescrow account by obtaining an independent inspector’s opinion certifying that thehome improvements have been completed in a workmanlike manner. The lender hasthe option to either resolve the home improvement problems, or bear the cost.

Finally, the Model Act provides a consumer with a private right of action, including theability to recover actual damages, statutory damages, punitive damages, costs, andattorney fees. Intentional violations are punishable by criminal prosecution as well.

Homeownership by Americans reached a record 66.7 percent in 1999, and represents akey wealth-building opportunity for families, especially those with lower incomes. Thestripping of wealth through predatory home equity loans threatens to reverse thesegains and destabilize neighborhoods. The strong consumer protections included in theHome Improvement Financing Model Act can benefit all persons who obtain financingfor home improvements through contractors. Such protections can be of great value tothe millions of older persons who desire to remain active in their communities and agein place.

Sharon Hermanson, Project OfficerPublic Policy InstituteAARP

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�� ���(a) Application. This Act applies to all home improvement credit as defined

herein.

(b) Purposes. The purposes of this Act are to:1. Reduce and eliminate abusive lending practices in home improvement

financing;2. Prevent honest and ethical home improvement sellers and creditors from

suffering any competitive disadvantage with unethical sellers andcreditors;

3. Encourage competition in the rates and other terms of homeimprovement finance agreements;

4. Combat fraudulent sales practices in the home improvement industry byholding creditors responsible for the actions of home improvementsellers and contractors; and

5. Ensure that homeowners have an effective method of enforcing theirhome improvement warranty and other rights.

(c) Construction. This Act shall be construed liberally to accomplish itspurposes. It should not be construed to limit consumers’ rights under otherstate and federal laws and regulations.

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(a) The term “actual damages” includes, but is not limited to, any or all of thefollowing, as applicable:1. The temporary or permanently diminished value of the residence caused

by the failure to complete in a workmanlike manner the work under ahome improvement contract;

2. The cost of completing the home improvement in a workmanlikemanner;

3. The cost of restoring the residence to its prior condition where it isdamaged in the home repair;

4. Damages for mental anguish; or5. Wages lost by a consumer as a result of a violation of this Act, or a

breach of the home improvement contract financed by the homeimprovement credit agreement, or related claims.

(b) The term “broker” means any person who for a fee or other paymentarranges or offers to arrange an extension of home improvement credit.

(c) The term “Commissioner” means [INSERT NAME OF APPROPRIATE STATEOFFICIAL].

(d) The term “consumer” refers to each person obligated on a homeimprovement credit agreement, including co-signers and co-owners who arenot co-signers, where:1. The credit was extended for a family, personal, or household purpose; or2. The credit was extended to improve the consumer’s primary residence

for a business purpose.

(e) The term “creditor” means any person who regularly extends homeimprovement credit or receives assignments of home improvement creditagreements.

(f) The term “home improvement” includes, but is not limited to the repair,

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���� �replacement, remodeling, removal, renovation, alteration, conversion,modernization, improvement, demolition, rehabilitation or sandblasting ofor addition to any residence, or to any land or building, upon which aresidence is affixed. Without regard to affixation, “home improvement”includes the installation of central heating or air conditioning systems, stormwindows, or awnings.

(g) The term “home improvement contractor” means the seller of, or contractorfor, home improvements, who enters into the home improvement contractfinanced by the home improvement credit agreement.

(h) The term “home improvement credit” means credit extended to a consumersecured by a lien on a primary residence payable in 4 or more installments,which is:1. Made by a home improvement contractor;2. Arranged for by a home improvement contractor;3. Arranged for by a broker, to whom the homeowner was referred by the

home improvement contractor;4. Assigned from a home improvement contractor, broker, or lender; or5. A refinancing of home improvement credit when the new credit was

solicited from the homeowner during the period within 5 years of thecompletion of the home improvement.

(i) The term “home improvement credit agreement” means the full agreementbetween the parties that reflects their obligations and responsibilities to eachother, which includes promotional materials, advertisements, and alldocuments signed by the parties in connection with the transaction.

(j) The term “lien” means any legal claim on or security interest in realproperty, in a manufactured home, or in goods affixed to real property thatarose by consent or by operation of law in connection with a homeimprovement credit agreement.

(k) The term “open-end credit plan” means a plan under which the creditorreasonably contemplates repeated transactions, which prescribes the termsof such transactions, and which provides for a finance charge which may becomputed from time to time on the outstanding unpaid balance, or which isdisclosed as open-end credit by the creditor.

(l) The term “residence” means a dwelling which is a residential structure ormanufactured home which contains 1-4 family housing units or individualunits of condominiums or cooperatives or contains 1 dwelling unit and 1business unit.

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“Actual damages” is broadly defined to ensure that a consumer damaged as a result ofa home improvement contract or home improvement credit agreement is made whole.By specifying examples of the types of losses consumers might suffer resulting frombreach of the home improvement contract, or failure to comply, the Model Actincreases the ability of consumers to obtain redress. For example, when victims ofhome improvement fraud are forced to stay home from work to respond to breach ofwarranties, repeated inspections, or other reasons resulting from the problems withthe home improvements, the loss of income is included in the measurement of actualdamages under the Model Act.

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�� ���In the Model Act, “Commissioner” refers to the person in the state charged with theadministrative responsibilities of regulating consumer credit or licensing creditproviders or overseeing banks (Commissioner of Banks, Consumer CreditAdministrator, for example).

The term “consumer” is defined more broadly than the standard "person acting forfamily, personal or household purposes” (as in the federal Consumer Credit ProtectionAct, and numerous state consumer protection laws) and also includes persons whoare extended credit to improve a primary residence for a business purpose. Oftenpersons operating small businesses are forced to use their home as collateral forloans to provide capital for those small businesses.

The term “creditor” is defined in the Model Act to cover persons who either: 1) regularlyextend home improvement credit, or 2) receive assignments of home improvementcredit. As a result, the Model Act places the obligations and duties on the assigneesof home improvement credit. It is anticipated that this term may be further refinedthrough state regulation, for example, by referring to the limitations on the term in thefederal Truth in Lending Act (TILA). Currently, the federal law limits its coverage tocreditors who make more than 4 extensions of credit in any year. States may chooseto either follow the federal limitation or establish other limitations.

The term “home improvement” is drafted as broadly as possible to encompass anyhome-related improvements that require financing.

The definition for“home improvement credit” covers all credit that is secured by thehome and used to finance home improvements. A significant expansion of coverage ofhome-secured credit is in §2(h)(5), which includes the “refinancing of homeimprovement credit when new credit was solicited from the homeowner during theperiod within 5 years of the completion of the home improvement.” Often, creditorssecure home improvement financing or home refinancing in conjunction with the homeimprovement contract. Under current law in most states, once the home improvementcontract is refinanced with a direct extension of credit, the consumer loses all of theprotections otherwise available against the creditor for the home improvementcontractor’s breach of contract or warranty. The language in §2(h)(5) preventsattempts by creditors to avoid liability for problems with home improvement contractsby including loans that were unfairly refinanced within 5 years from the time in whichthe consumer was solicited. If creditors are liable for any problems resulting from thehome improvement contractor’s failures, the creditors will select more carefully thosewith whom they conduct business.

“Home improvement credit agreement” is defined broadly to include the full agreementbetween the parties, and specifically includes all advertisements and promotionalmaterials made by the creditor as well as all documents signed by the parties.

The Model Act prohibits the use of "open-end credit" plans for agreements covered bythe Act. The Model Act requires contractors to extend only closed-end credit for anyhome improvement that is secured by the consumer's home. If the home improvementcontractor uses open-end credit to secure the home improvements, the home may notbe taken as security for the extension of credit. Thus, the Model Act prohibits the useof home-secured open-end credit. To ensure that extensions of open-end credit areeffectively prohibited, the definition includes both the traditional definition (TILA), asand any plan which “is disclosed as open-end by the creditor.” Currently, manycreditors prefer to extend credit as open-end credit because the disclosures requiredby TILA are far less comprehensive than those required for closed-end credit, with

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���� �fewer remedies available under federal law to redress problems. In addition, theNational Banking Act prohibits a state from capping the interest rates charged its owncitizens by national banks chartered in another state, thereby allowing theseinstitutions to circumvent state limitations on interest rates.

The term “residence” includes single family structures, manufactured homes, andresidential structures of up to 4 family housing units, and duplexes in which theconsumer lives in 1 unit and a business is operated in another unit.

(a) Necessity for License. Prerequisites to Issuance. No person shall engage inor offer to engage in the business regulated by this Act unless and until alicense has been issued by the Commissioner. The Commissioner shall notissue or renew any such license unless and until the following findings aremade:1. The authorization of the applicant to engage in such business will

promote the convenience and advantage of the community in which theapplicant proposes to engage in business;

2. The financial responsibility, experience, character, and general fitness ofthe applicant are such as to command the confidence of the public andto warrant the belief that the business will be operated lawfully and fairly,and within the provisions and purposes of this Act;

3. Neither the applicant, nor any principals of the applicant (which includesany persons owning at least 5 percent of the applicant) have beenconvicted of any crimes;

4. The applicant has unencumbered assets of at least $25,000 per businesslocation;

5. The applicant has provided a sworn statement that the applicant has notin the past used, nor will in the future, directly or indirectly use thecriminal process to collect the payment of home improvement creditagreements, or any means which are illegal, unfair, deceptive, andconstitute harassment to collect home improvement credit agreements;and

6. Such other information as the Commissioner may deem necessary.

(b) Annual Review of Compliance with Law. No license shall be issued forlonger than 1 year, and no renewal of a license may be provided if thelicensee has violated this Act.

(c) Public Hearing. A public hearing shall be held for each original applicationand for renewals if one is requested in writing by at least 5 members of thepublic or the Commissioner.

(d) Bond. Each licensee must post a bond in the amount of $50,000 per locationwhich must continue in effect for 5 years after the licensee ceases operationin the state. Such bond must be available to pay damages and penalties toconsumers harmed by any violation of this Act.

(e) Fees. Each licensee shall pay an annual fee in an amount determined by theCommissioner. The total of fees collected from licensees shall be sufficientto cover the costs of administering this Act.

(f) Business Location. Not more than one place of business shall bemaintained under the same license, but the Commissioner may issue more

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�� ���than 1 license to the same licensee upon compliance with all the provisionsof this section governing issuance of a single license.

(g) Other Business. No licensee shall conduct the business of making loansunder this Act within any office, suite, room, or place of business in whichany other business is solicited or engaged in unless, in the opinion of theCommissioner, such other business would not be contrary to the bestinterests of consumers and is authorized by the Commissioner in writing.

(h) Revocation of License. If the Commissioner finds, after due notice andhearing, or opportunity for hearing, that any licensee, or officer, agent,employee, or representative thereof, has: 1) violated any of the provisions ofthis Act; 2) failed to comply with the rules, regulations, instructions, ororders promulgated by the Commission; 3) failed or refused to make anyrequired reports to the Commissioner; or 4) furnished false information tothe Commissioner, the Commissioner may issue an order revoking orsuspending the right of such licensee and such officer, agent, employee, orrepresentative to do business in this state as a licensee. No revocation,suspension, or surrender of any license shall relieve the licensee from civilor criminal liability for acts committed prior thereto.

(i) List of Licensees. Complaint Process. Powers of the Commissioner. TheCommissioner shall maintain a list of licensees which shall be available tointerested persons and the public. The Commissioner shall create a toll-freetelephone number whereby consumers may obtain information aboutlicensees and complaint forms. The Commissioner shall establish acomplaint process whereby an aggrieved consumer or any member of thepublic may file a complaint against a licensee or non-licensee who violatesany provision of this Act. The Commissioner shall hold hearings upon therequest of a party to the complaint. Upon review of the evidence received atthe hearing, the Commissioner shall make findings of fact and conclusionsof law. The Commissioner may issue cease and desist orders, refer thematter to the appropriate law enforcement agency for prosecution under thisAct, and/or suspend or revoke a license granted under this Act, as theCommissioner deems appropriate. All such proceedings shall be open tothe public.

(j) Regulations. The Commissioner may promulgate regulations to carry outthe provisions of this Act.

(k) Exemption. Federal or state chartered banks, savings and loan associations,and credit unions are exempt from the licensing requirements of this section,but otherwise must comply with the requirements of this Act.

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The Model Act adopts the licensing definition from the AARP Model HomeImprovement Contractor Act.* The purpose of the licensing provision is to regulatepersons providing home improvement financing to ensure compliance with the ModelAct. While the licensing provision in this Act is similar to many states’ small loan ormortgage lender licensing provisions, it is designed as a separate licensingrequirement.

* AARP. (1999). Home Improvement Contractors: A Model State Statute. D16911

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���� �The licensing provisions protect consumers in several ways. Licensure helps toeliminate fraudulent creditors from making loans. The licensing mechanism allows theCommissioner to deny a license application, or revoke an existing license, if theapplicant or licensee is not fit or has violated any provision of the Model Act.

The payment of the annual fee (an amount established by the designatedCommissioner) helps to defray administrative expenses and make the Model Actrevenue neutral. The creditors covered by the Model Act, thus, pay for itsenforcement. The licensing requirements also include an annual review for compliancewith the Model Act and the posting of a $50,000 bond for each business location toensure payment of damages or penalties accruing to consumers harmed by anyviolation of the Model Act.

§3 of the Model Act restricts a creditor’s ability to operate other business(es) in thesame location as the home improvement credit business, if the business is contrary tothe best interest of consumers. This provision is to prevent home improvementcreditors from co-mingling several lending businesses in order to provide the consumerwith the least favorable terms.

Licensure, as required in §3, creates enforcement mechanisms to protect consumersfrom creditors acting in an illegal manner. When licensing is required, consumers cancontact the licensing agency and obtain information about creditors prior to enteringinto a loan. The licensing mechanism provides a complaint process whereby anaggrieved consumer may file a complaint against a person the consumer believes is inviolation of the Model Act.

The licensing exemption provision is modeled after a number of states’ creditorlicensing frameworks which exempt certain types of creditors from licensingrequirements, but require compliance by those creditors. National banks and savingsand loan associations, for example, will not need licensing, but will be required tocomply with the other consumer protections in the Model Act. It is recognized thatout-of-state national banks, however, may also be exempt from the limits on financecharges.

(a) Required Contract Terms. To be valid against a consumer, a completedoriginal home improvement credit agreement must be provided to eachconsumer, which must, in plain language, indicate the rights and obligationsof the parties under the agreement, including the following:1. Date of the transaction;2. Name, address (no post office box numbers), and license number of the

contractor and the creditor;3. Total sales price due under the agreement;4. Total amount financed under the agreement as required by federal laws

and regulations governing the disclosure of consumer credit;5. Total finance charges due under the agreement as required by federal

laws and regulations governing the disclosure of consumer credit;6. Description of any collateral taken to secure the agreement;7. Terms and conditions of repayment and default of the agreement;8. In those home improvement credit agreements in which the creditor is

authorized to and does charge a rate higher than authorized by §6(b) ofthis Act, the creditor shall clearly and conspicuously disclose before theconsumer is obligated to enter into the home improvement creditagreement the following:

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�� ���“THIS IS A HIGH RATE CREDIT TRANSACTION. A LOWERRATE MAY BE AVAILABLE TO YOU AT OTHER LENDERS.”

9. Notice in at least 14-point bold type that the consumer shall not sign theagreement if there are any blanks and that the consumer is entitled to acopy of the agreement at the time the consumer signs it;

10. Statement that any holder of the agreement is subject to all claims anddefenses which the consumer could assert against the homeimprovement contractor;

11 Notice of 3-day right of cancellation or rescission, as required under stateor federal law; and

12. Statement in the title in 12-point or larger bold type:HOME IMPROVEMENT CREDIT AGREEMENT (NONNEGOTIABLE).

(b) Additional Disclosures. In addition to the required contract terms, thefollowing specific disclosures are required in all home improvement creditagreements. However, these disclosures are not required to be provided in ahome improvement credit agreement which is a refinancing agreement andis consummated after satisfactory completion of the home improvementwork:1. Amount of downpayment, which shall not exceed one-third of the total

contract price;2. Schedule of such payments (one or more progress payments are

required to be paid by the creditor to the home improvement contractorprior to the completion of the work under the home improvementcontract) must be provided, indicating the amount of each payment anda description of the work which must be completed and the materialsused in order to trigger each scheduled payment;

3. Description of the work to be performed and the materials to be usedunder the home improvement contract, as well as a set of specificationsthat cannot be changed without the written approval of the consumer;

4. Approximate starting date and the promised completion date;5. Statement advising the consumer that it is the responsibility of the

contractor to obtain all necessary permits to perform the work;6. Names, license numbers, and addresses (no post office box numbers) of

all subcontractors performing the home improvement work; and7. Statement that the consumer is entitled to a late charge of 5 percent of

the total of payments for each 30 days after the completion date that thehome improvement is not completed satisfactorily.

(c) Language. If a language other than English is used in the negotiation orexplanation of the agreement or the work to be performed, the agreementmust be written plainly in both English and the other language.

(d) No Waivers and Exclusions from Electronic Delivery.1. No act, agreement, or statement of any consumer shall constitute a valid

waiver of any provision of this Act, or related laws and regulations,intended for the benefit or protection of the consumer, or of any claim ordefense the consumer may have against the creditor arising out of theagreement.

2. The provisions of the Uniform Electronic Transactions Act (UETA) shallnot apply to the rights and obligations of the parties under homeimprovement credit agreements as described by this Act. Norequirement of this Act may be varied by agreement, including but notlimited to, the right to receive information under this Act in a paperform.

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���� �(e) Time of Obligation. A consumer shall not be obligated under a home

improvement credit agreement until the agreement is provided to theconsumer as required by this Act, and all applicable periods of cancellationor rescission have expired.

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The required terms and disclosure provisions of the Model Act require that the homeimprovement credit agreement contract terms disclose: 1) the consumer’s obligation,and 2) the details of the home improvement work to be performed. The “requiredterms” provision includes the total sales price, total amount financed, total financecharge, and a description of the collateral. The provision also requires that thecontract contain a notice: 1) that the borrower should not sign the contract if there areany blanks, 2) that any holder is subject to all claims and defenses in which theconsumer could assert against the home improvement contractor, and 3) of any 3-dayright of rescission, as required by state or federal law.

Out-of-state national banks may claim an exemption from the limits on financecharges in §6. If such a creditor charges more than allowed in the Model Act, thenthe creditor must include a special notice in the contract to the borrower that thecontract is a high-rate credit transaction.

The “additional disclosure” provisions apply unless the credit agreement is arefinancing loan and is consummated after the home improvement work has beencompleted. In all other cases, the creditor must disclose to the borrower details of thehome improvement contract being financed, including the: 1) schedule of paymentsand work, 2) description of work to be performed and specifications, 3) starting andcompletion dates, and 4) names, license numbers, and addresses of allsubcontractors. This provision also entitles a consumer to a late charge of 5 percentof total payments for each 30 days after the completion date if the work is notcompleted satisfactorily. This provision is designed to give the borrower greaterleverage with the creditor to ensure acceptable completion of the home improvementwork. The additional disclosures are intended to ensure that the creditor is aware ofthe details of the contractor’s proposal, and, thereby, has the responsibility for thework’s appropriate completion.

Finally, this section declares that the provisions of the UETA shall not apply to therights and obligations of the parties under the home improvement credit agreement.Most states will be considering passage of the UETA, promulgated by the NationalCommission on Uniform State Laws, in 2000 or 2001. UETA is designed to facilitateelectronic commerce by allowing the replacement of paper writings with electronicrecords. As most home improvement credit agreements will be negotiated in personbetween the consumer and the contractor or the creditor, there is no reason forelectronic records to replace paper. For example, allowing contractors who aretransacting business in consumers’ homes to comply with federal and state lawsrequiring disclosure of important consumer information by scrolling through thedisclosures on a laptop screen rather than handing them paper notices, may lead toabuses.

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(a) Prohibited Terms. No home improvement credit agreement shall containany of the following provisions:1. Waiver of federal, state, or local health, life safety, or building code

requirements;2. Confession of judgment;

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member of a class in any action brought by or against the consumer;4. Clause in which the consumer relieves the home improvement contractor

or the creditor from liability for any legal or equitable remedies whichthe consumer may have against the home improvement contractor or thecreditor under the home improvement credit agreement or relatedinstrument;

5. Clause requiring the consumer to submit to binding arbitration;6. Any assignment of or order for payment of wages or other compensation

for services;7. Provision relieving the creditor from liability for acts committed by the

contractor or its agent or the creditor’s agent in the collection of anypayments or in the repossession of any goods;

8. Provision in which the consumer agrees not to assert any claim ordefense arising out of the agreement;

9. Provision that the creditor may be awarded attorney’s fees;10. Waiver of any provisions of this Act;11. Balloon payment larger than twice the regular payment;12 Installment payment schedule that fails to amortize the home

improvement credit agreement within 30 years;13. Provision requiring prepayment penalties in the event the consumer

prepays the balance due on the agreement, or defaults;14 Liquidated damages or other clause that provides for payment by the

consumer of a penalty for default or for cancellation;15. Authorization of the entry of anyone into the consumer’s dwelling

without the knowing and voluntary consent of the consumer given at thetime of the entry; or

16. Hold harmless clause.

(b) Effect of Inclusion of Prohibited Terms. It is a violation of this Act for anyhome improvement agreement to include any of the prohibited provisions.Any prohibited term included in a home improvement credit agreement isvoid and unenforceable.

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Many consumers who enter into home improvement credit agreements are unawarethat they have waived important rights. Discrepancies in sophistication and bargainingpower between the creditor and the consumer often place the consumer at adisadvantage. §5 of the Model Act lists provisions that are not allowed in a homeimprovement credit agreement. The list borrows extensively from various states’ laws,including those modeled after the Uniform Consumer Credit Code (UCCC). The list ofprohibited terms includes waiver of health, life, safety, or building code provisions;confession of judgments; waiver of right to a jury trial or waiver of other legal rights;binding arbitration requirements; and assignments of wages. The list also prohibitscertain payment terms detrimental to the consumer. Any prohibited term included in ahome improvement credit agreement is void, and its inclusion is a violation of theModel Act.

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(a) No Other Charges. Other than the fees and charges specifically enumeratedin this Act, no creditor in a home improvement credit agreement shallcharge or receive any fees, charges, finance charges, interest, or othercompensation in relation to the agreement.

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���� �(b) Maximum Interest Rate. Finance charges on a home improvement credit

agreement must be calculated using the actuarial method based on a 365-day year, and may not exceed the rate announced by the Commissioner atthe beginning of the month prior to the month in which agreement is signed.The rate shall not exceed 5 percent above the then current yearly interest ratefor the 10-year U.S. Treasury bill. The Commissioner may reduce, but maynot increase, the allowable rate based on the Commissioner’s determinationthat a different rate is required to protect consumers and to assure anappropriate supply of home improvement credit agreements at a prudentinterest rate.

(c) Other Allowed Charges. In addition to allowed finance charges under thissection, a creditor may charge or pay under a home improvement creditagreement the following:1. Actual charges for recording any security interest taken in collateral;2. Bona fide and reasonable closing costs for services performed to close

the loan;3. Reasonable broker fee, which shall not exceed 2 percent of the amount

financed by the home improvement credit agreement;4. Late payment charges when a consumer pays an installment 15 or more

days late, not to exceed 5 percent of the installment past due, or $15,whichever is less. Only one late charge may be imposed for each lateinstallment payment;

5. Bona fide and reasonable charges for inspections contemplated tocomply with §7(b); and

6. Court costs reasonably incurred in the collection of an amount dueunder the agreement.

(d) Kickbacks and Referral Fees Prohibited. No party to a home improvementcredit agreement shall make any payment or pay any consideration orprovide any goods or services, before or after performance of the homeimprovement credit agreement, to any seller of materials, contractor, broker,home inspector, or creditor, other than the cash price of the homeimprovement or fees and charges, as specifically allowed by §6 of this Act.

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Home improvement financing is regulated inconsistently across states. Not only dothe interest rates vary from state to state, but numerous states have more than onelaw which may set limitations on interest rates and charges. §6 of the Model Actestablishes a uniform calculation of interest rates and limits other allowable charges.

§6 establishes the interest rate based upon the current rate of a 10-year U.S. Treasurybill. The Model Act directs the Commissioner to set the allowable interest rate eachmonth at no more than 5 points over the current Treasury bill rate. The Commissionermay also reduce the interest rate if a determination is made that a different rate isrequired to protect consumers. The rate is based on the rate published by theCommissioner in the month prior to the month (for ease of reference) in which theagreement was signed.

Additionally, the interest rate must be calculated using the actuarial method andbased on a 365-day year. Requiring that interest be computed only on the actuarialmethod prohibits lenders from charging more interest than is actually earned. At thetime each payment is made, the exact amount of interest based on the actualoutstanding balance of the amount due is calculated. No rebate of finance charges is

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�� ���ever necessary because none can ever be charged unless earned. The 365-day yearrequirement addresses an accounting technique that some lenders routinely use —that is based on a year made up of 12 months of 30 days each, leading to a 360-dayyear. This results in an effective interest rate that is higher than allowed based on theactual calendar year.

Other allowed charges are limited to: actual fees for recording a security interest takenin collateral; bona fide and reasonable closing costs; a reasonable brokers' fee (up to2 percent of the amount financed); a late payment charge not exceeding 5 percent or$15.00, whichever is less; and court costs reasonably incurred in the collection of theamount due. No points are permitted, and the allowed settlement and closing costscannot include points.

This section also prohibits fees not authorized by the Model Act, including “kickbacks”and referral fees. Sellers of materials and home improvements would, thus, not beallowed to receive a referral fee from a creditor for assigning the loan.

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(a) Release of Liens by Subcontractors. Before the creditor shall make partialor full payments to the home improvement contractor, the creditor mustreceive reasonable assurance, through releases or other certifications fromall subcontractors that have worked on the residence up to that point intime, that no claim or mechanics' liens shall be placed upon the property forthat portion of the work for which the payment is made.

(b) Completion Certificate Required. Proceeds of a home improvement creditagreement shall be disbursed only to: the consumer; the consumer andhome improvement contractor jointly; or to a bona fide escrow agent of thecreditor. Prior to paying more than 70 percent of the full price contracted forunder the home improvement contract, the creditor shall obtain: 1) aninspection from an independent inspector (from a list maintained by theCommissioner) who shall supply a completion certification stating that thehome improvements were satisfactorily completed, and 2) a final certificateshowing compliance with all applicable housing or building codes (ifrequired by state or local law).

(c) Defense for Lack of Compliance. It shall be a complete defense to paymenton a home improvement credit agreement if the payment of more than 70percent of the contract price is made by a creditor to a contractor or brokerwithout having fully complied with the requirements of §7.

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The Model Act makes creditors more accountable to consumers for the workperformed by contractors with the funds provided by the creditor. §7(a) requires thecreditor to receive assurance that the home improvement contractor’s subcontractors,who are to be paid out of funds disbursed, will not file a mechanic’s lien or other claimagainst the consumer’s property (that is, will actually be paid by the contractor) forthat portion of the work for which the payment is made to the contractor.

§7(b) requires that: 1) proceeds from the home improvement credit agreement only bepaid to the consumer, to the consumer and home improvement contractor jointly, or toa bona fide escrow agent of the creditor, and 2) the creditor, prior to paying more than70 percent of the price contracted for under the home improvement contract, musthave an independent inspection of the home improvements performed that includescertification by the inspector to the creditor that the home improvements have beensatisfactorily completed. This provision assures that the home improvements have

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���� �been completed in a workmanlike manner before the final disbursement of loanproceeds to the contractor. If the inspector cannot provide a completion certificate,the creditor will encourage the contractor to complete the work as warranted, in orderto receive complete payment. If the creditor fails to obtain a certificate of completion,and pays more than 70 percent of the contract price to the contractor or his broker,the consumer, under §7(c), has a complete defense to any remaining payment on thehome improvement credit agreement. This independent inspection is in addition to theinspection and completion certificate which may be required under local or statehousing or building codes. Both the statutorily required housing or building codeinspection, and the private inspection required under the Model Act, are necessarybecause of inconsistent local regulations and enforcement.

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(a) Unfair Practices Prohibited. No creditor may engage in any unfair ordeceptive activity in the making or collecting of a home improvement creditagreement.

(b) Specific Practices Prohibited. The following activities are specificallyprohibited:1. Presenting agreement disclosures and documents in a manner likely to

be confusing to the least sophisticated consumer;2. Taking a lien on a residence in any home improvement credit agreement

in which the credit is extended under an open-end credit plan;3. Taking a security interest in any real or personal property, other than the

goods sold as part of the home improvement contract, or in the propertyto which those goods are affixed;

4. Offering multiple extensions of credit to finance a single homeimprovement in order to avoid a requirement of law that would apply if asingle extension of credit were involved, or for the purpose of causingconfusion about the terms or nature of the home improvement creditagreement;

5. Representing that the creditor offers or provides a good rate of interestwhen the creditor’s rate is higher than average.

6. Procuring or facilitating the procurement of a completion certificatebefore the work has been completed in a manner satisfying the homeimprovement contract;

7. Representing that the consumer may not cancel a transaction prior to theend of any applicable federal or state cancellation or rescission periods,or that if the consumer canceled after these dates, the consumer wouldowe more than the reasonable value of the goods and services providedto the consumer up to the date of cancellation;

8. Financing a home improvement contract that cannot be cancelledwithout cost by the consumer, when the terms of the home improvementcredit agreement are different from the credit terms represented to theconsumer before the home improvement work was started;

9. Failing to disclose the requirements for cancelling or rescinding a homeimprovement credit agreement when a consumer requests to cancel orrescind it;

10. Violating any rule adopted by the Commissioner;11. Failing to rebate any unearned insurance or other charges;12. Entering into an agreement in which the amount of the regular payments

exceed 25 percent of the consumer’s net income;13. Obtaining a negotiable instrument in a home improvement credit

agreement from the consumer other than a personal check that is not

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14. Financing the sale of credit life insurance, credit disability insurance, orcredit unemployment insurance with the proceeds of the homeimprovement credit agreement. This subsection does not prohibit acreditor from selling the consumer credit insurance or propertyinsurance after the home improvement credit agreement has beenconsummated, which may be cancelled by the consumer at any time,and which is payable by the consumer in equal installments during theterm of the insurance coverage.

(c) General Prohibitions. No creditor may violate any provision of this Act.

* The standard for “least sophisticated consumer” was developed by the federal courts interpretingthe Fair Debt Collection Practices Act to ensure full coverage and protection for consumers under thatAct. Without this standard being specifically required, judges reviewing compliance with consumerprotection laws tend to use themselves as the gauge to determine whether an activity is deceptive ormisleading. As judges are apt to be more sophisticated and more knowledgeable about the law andthe enforcement of their rights, the standard of whether a judge is misled or deceived, is obviously toohigh (Jeter v. Credit Bureau, Inc.760 F.2d 1168 (11th Cir. 1985)).

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The Model Act prohibits unfair or deceptive practices in the making or collecting of ahome improvement credit agreement. Prohibited acts are specified to help protectconsumers from a variety of abusive lending practices used by unscrupulous homeimprovement creditors, such as misrepresenting the consumer’s right to rescind orcancel a transaction or misleading the consumer about the terms of the loan. The firstprohibited practice, "presenting agreement disclosures and documents in a mannerlikely to be confusing to the least sophisticated consumer," is designed to target themisleading and confusing delivery of important information to consumers. The standardfor this provision is that of the "least sophisticated consumer."*

§7 provisions of the Model Act prohibit creditors from: 1) taking a security interest ingoods or real estate not involved in the home improvement, 2) offering multipleextensions of credit for a single home improvement in order to avoid any legallimitations on the financing, 3) entering into an agreement in which the amount of theregular payments exceed 25 percent of the consumer’s net income, 4) procuring acompletion certificate before the home improvement has been satisfactorily completed,or 5) failing to rebate unearned finance or insurance charges.

The Model Act also prohibits creditors from taking a security interest in theconsumer’s residence when credit is extended under an open-end credit plan. Oftenconsumers are unaware of the terms of open-end home-secured loans, creating therisk of losing their homes. The Model Act requires that any credit arrangements tofinance home improvements that are secured by the home cannot be open-end credit.

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(a) Sale-Related Affirmative Claims and Defenses. Notwithstanding any otherlaw, all creditors, assignees, holders, and purchasers of a homeimprovement contract financed by home improvement credit agreement, asdefined in this Act, are subject to all affirmative claims and defenses whichthe consumer may have against the seller, home improvement contractor,the broker, or creditor, regardless of whether the instrument includes thenotice required in §4(a)(10).

(b) Duties of Holder upon Payment in Full. The holder of a home improvementcredit agreement shall, without charge to the consumer, release all liens,mortgages, or other encumbrances arising out of a home improvementcredit agreement when it is paid in full and return any originals of the homeimprovement credit agreement to the consumer.

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Provisions in §9 of the Model Act provide that all assignees of home improvementcredit agreements are liable for the affirmative claims and defenses that the consumercould have brought against the home improvement contractor, broker, or creditor.Currently, the consumer is able to bring affirmative claims against the homeimprovement contractor, but these claims can be rendered ineffective becauseassignees are not clearly liable for claims against the holder of the home improvementcredit agreement. §9 establishes a new right under state law to bring all claimsagainst the creditor.

In every state, the Uniform Commercial Code (UCC) includes a protection for allassignees of contracts, which allows assignees to buy negotiable paper free fromclaims or defenses which could be brought against the original maker of the contractin certain circumstances. To address problems due to the application of a holder indue course, the FTC promulgated a rule which allows consumers to raise claims anddefenses against holders as a defense to a claim for payment of the credit. However,in recent years, there has been some dispute in the courts regarding the properinterpretation of the protections provided by the FTC rule. This provision in the ModelAct ensures that borrowers can raise both affirmative claims and defenses against theassignee of the home improvement credit agreement, and ensures that the amount ofdamages the consumer can recover from the creditor is not limited as is possibleunder the FTC rule. Fraud claims, usury claims, TILA claims, and UDAP claims areamong the consumer rights that would be specifically protected.

Elimination of the "holder rule" will force the home improvement financing industry toincrease self-regulation. If the assignees of home improvement credit agreements areclearly liable for claims the borrowers have against the contractors and loanoriginators, then these assignees will more carefully screen those contractors withwhom they do business.

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(a) Right to Escrow Payments. When the home improvements financed by ahome improvement credit agreement are not completed as warranted, inaddition to any other remedy provided by law or by this Act, a consumermay make scheduled installment payments due on the home improvementcredit agreement into an escrow account established by a licensed attorneyor other person approved by the Commissioner. Proof that the scheduledpayments are made in a timely manner into the escrow account shall beprovided to the creditor. The creditor may not accelerate the balance of the

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�� ���payments on the home improvement credit agreement while the consumerpays installments into an escrow account in a timely manner. The consumermust give the creditor notice: 1) in a reasonable manner (which may includetelephoning the creditor’s place of business), 2) that this action is beingtaken, and 3) of the reasons for the action. At its own expense, the creditormay procure a written opinion from an independent inspector, obtained froma list maintained by the Commissioner, and must provide the consumer acomplete copy of the written opinion from the independent inspector. If theindependent inspector finds that there is no reasonable basis for theconsumer’s claim that the home improvements are not as warranted, and theconsumer does not contest the inspector’s opinion within 60 days after thecreditor has provided the opinion to the consumer, the creditor may demandand receive all payments made into the escrow account. If the creditor failsto obtain such an opinion from an independent inspector within 1 year of thefirst payment into the escrow, the full amount of the funds held in escrowshall revert to the consumer, and the balance due on the agreement shall beconsidered to be paid in full. Prior to the expiration of this 1-year period, thecreditor, at its option, may allocate some or all of the funds held in theescrow account to complete the home improvement work financed by thehome improvement credit agreement in a workmanlike manner. Ifadditional funds are necessary, the creditor may, at its option, provide suchfunds.

(b) Judicial Foreclosure. Foreclosure of a home improvement credit agreementshall not be obtained except by judicial foreclosure.

(c) Contents of Written Notice of Intent to Foreclose.1. Before a creditor in a home improvement financing agreement

accelerates the maturity of a home improvement financing agreementand commences foreclosure or other legal action to take possession ofthe residence securing the agreement, the creditor shall give theconsumer notice of such intention at least 30 days in advance of suchaction, as provided in this subsection.

2. Notice of intention to take action as specified under §10(c)(1) shall be inwriting, sent to the consumer by registered or certified mail (with areturn receipt requested) at the consumer’s last known address (ifdifferent, to the address of the property which is the subject of the homeimprovement financing agreement).

3. The written notice shall clearly and conspicuously state in a mannercalculated to make the consumer aware of the situation:A. The particular obligation or real estate security;B. The nature of default claimed;C. The right of the consumer to cure the default as provided under

§10(d);D. The performance, including the sum of money, if any, and interest,

that shall be tendered to cure the default as of the date specifiedunder §10(c)(3)(E);

E. The date by which the consumer shall cure the default to avoidinitiation of foreclosure, or other action (which date shall not be lessthan 30 days after the date the notice is effective), and the name andaddress and phone number of a person to the payment or tendershall be made;

F. That if the consumer does not cure the default by the date specifiedunder §3(c)(3)(E), the creditor may take steps to terminate the

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���� �consumer’s ownership in the property by commencing a foreclosuresuit or other action in a court of competent jurisdiction;

G. That if the creditor takes the steps indicated under §10(c)(3)(F), aconsumer shall have the right to cure the default pursuant under§10(d), but that the consumer shall be responsible for the creditor’scourt costs;

H. The right, if any, of the consumer to transfer the residence to anotherperson subject to the security interest, and that the transferee mayhave the right to cure the default as provided in this Act.

I. That the consumer is advised to seek counsel from an attorney of theconsumer’s choice;

J. The possible availability of financial assistance for curing a defaultfrom programs operated by the state or federal government ornon-profit organizations, if any, as identified by the Commissioner;and

K. The name and address of the creditor and the telephone number of arepresentative of the creditor whom the consumer may contact if theconsumer disagrees with the creditor’s assertion that a default hasoccurred or the correctness of the creditor’s calculation of theamount required to cure the default.

(d) Right to Cure.1. Notwithstanding any other law to the contrary, as to any home

improvement credit agreement for which a notice of intention toforeclose is required to be given pursuant to §10(c), whether or not suchrequired notice was in fact given, the consumer, or anyone authorized toact on the consumer’s behalf, shall have the right at any time, up to theentry of final judgment to cure the default, deaccelerate, and reinstatethe home improvement credit agreement by tendering the amount orperformance as specified in §10(d)(2). The consumer may exercise theright to cure a default as to a particular home improvement financingcontract only once every 18 months. The 18-month time period is fromthe date of cure and reinstatement.

2. To cure a default, a consumer shall pay or tender all sums included inthe notice to the person identified in the notice provided pursuant to§10(c).

3. To cure a default under §10(c), a consumer shall not be required to payany charge, fee, or penalty attributable to the exercise of the right to curea default as provided for in this section.

4. Cure of default reinstates the consumer to the same position as if thedefault had not occurred. It nullifies, as of the date of the cure, anyacceleration of any obligation under the mortgage, or any note arisingfrom the default.

5. If a default is cured prior to the filing of a foreclosure or other action toseize the residence, the creditor shall not institute the foreclosure orother action for that default. If a default is cured after the filing of theforeclosure or other action, the creditor shall give written notice of thecure to the court. Upon such notice, the court shall dismiss the actionwithout prejudice.

(e) Rights in addition to other law. The rights conferred by §10 areindependent of, and in addition to, any other rights under other laws.

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�� ���One of the greatest frustrations consumers have when faced with unacceptable ordeficient work on a home improvement contract is the consumer’s lack of leverage toforce the contractor to correct any defects and make the work acceptable. Whendisputes arise in the middle of a home improvement project, the consumer may behesitant to assert legal rights against the contractor. Moreover, once the contractorhas completed a project and been paid in full, the consumer may find it difficult toforce the contractor to return to the house to perform warranty work. §10 is designedto give the consumer additional procedural and substantive rights against the creditorwhen the consumer is faced with unacceptable home improvement contractperformance. This is accomplished through an escrow provision and inspectionprocedure. Additionally, consumers are provided with a right to cure a default beforethe residence can be seized, and the creditor must provide notice of the consumer’srights prior to the foreclosure or other action.

§10(a) establishes that any consumer dissatisfied with the home improvement workmay make payments on the home improvement credit agreement into an escrowaccount, instead of to the creditor. The consumer must notify the creditor that thepayments are being made into escrow pending satisfactory completion of the work,and must explain to the creditor the reason(s) for this action. The creditor may: 1)correct the problem(s) noted by the consumer (from the proceeds of the loanpayments); or 2) hire an independent inspector (chosen from a list provided by theCommissioner) to inspect the home improvements. If the inspector determines thatthere is no reasonable basis for the consumer’s claim that the work was not performedas warranted, and the consumer does not contest the finding within 60 days, then thecreditor may demand all escrow funds. In addition, §10 states that the consumermakes any remaining payments directly to the creditor. §10(a) further provides that ifthe creditor fails to hire an independent inspector within 1 year of the notice by theconsumer, the creditor forfeits any right to funds in the escrow account and theconsumer is no longer liable under the agreement.

The purpose of §10(a) is to assure that creditors: 1) carefully screen homeimprovement contractors before they purchase contractor contracts, or providefinancing for home improvements, and 2) have a recourse agreement with thecontractors, which requires the contractor to buy back the credit agreement whenclaims are made regarding the home improvements. When the contractor buys backthe credit agreement and seeks to enforce it, no law limits the claims and defensesthat the consumer can raise directly against the contractor, as original maker of thecontract.

§10(b) limits foreclosures to judicial foreclosures to ensure adequate review of thecontract and the credit agreement by a court prior to foreclosure. This is a significantchange for most states, which generally permit non-judicial foreclosures. However,this change is necessary to ensure that the obligations required by the Model Act areenforced.

Inconsistent or non-existent cure and redemption rights often leave consumers withoutany options for retaining their homes once default has occurred and foreclosure hasbegun. §10(d) is designed to provide a consumer with an unequivocal opportunity tocure a default before the consumer’s home is taken in foreclosure or other action.§10(c) requires the creditor to provide the consumer with a notice of those rights. TheModel Act covers home improvement credit agreements in which secured interest istaken in a mobile home, as well as secured interest in real estate. Therefore, theprovisions on notice of foreclosure and right to cure refer to “other actions” in additionto foreclosure actions. These “other actions” would be actions to enforce the personal

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The provisions of the Model Act regarding the notice of rights prior to foreclosure andright to cure are borrowed from the New Jersey Fair Foreclosure Act. Before a creditorin a home improvement financing agreement accelerates the maturity of a homeimprovement financing agreement and commences foreclosure or other legal action totake possession of the residence securing the agreement, the creditor must give theconsumer notice of such intention at least 30 days in advance of such action, asprovided in §10(c) and §10(d). The notice must be sent by registered or certified mail,and clearly describe all the information that the consumer must have in order to curethe default, including the exact amount necessary to cure the default and the date bywhich it is due. The consumer is provided with no more than 1 right to cure every 18months.

The Model Act clarifies that the rights conferred by §10 are in addition to all otherrights under other laws.

Every home improvement credit agreement and duty within this Act imposes anobligation of good faith and fair dealing in its performance or enforcement.

The Model Act imposes an obligation of good faith and fair dealing on every homeimprovement credit agreement.

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An action under this Act must be brought within 4 years from the date of theoccurrence or discovery of the violation. §12 shall not bar a person fromasserting a violation of the Act as a defense to such action by recoupment orset-off in an action to collect the debt which was brought more than 4 years fromthe date of the occurrence of the violation. Any violation of TILA which gives aright to rescission under that Act, constitutes a violation of the Act for allpurposes, including raising such claims by way of recoupment at any time.

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§11 of the Model Act allows consumers to bring an action to enforce their rights for upto 4 years after the discovery of the violation. Many deficient home improvements maynot be easily detectable upon initial inspection by the consumer, so it is important toallow consumers a remedy for claims which may not be discovered for a significantperiod of time after completion of the work. The 4-year period allowed for consumersto bring their claims is based on the statute of limitations under UCC. §11 of theModel Act also allows consumers to raise any claims they may have as an affirmativeclaim or a defense to any suit brought on the debt by the creditor.

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and any other persons to whom this Act applies and who either failed toobtain a license or are exempt from the requirements to obtain a license.1. Any violation of any state law prohibiting unfair or deceptive trade

practices (UDAP) constitutes a violation of this Act.2. Any violation of this Act constitutes a violation of any state law

prohibiting unfair or deceptive trade practices.3. Any person found to have violated this Act shall be liable to the

consumer for the following:(A) actual and consequential damages;(B) a statutory penalty equal to the finance charges agreed to in the

home improvement credit agreement, plus 10 percent of the amountfinanced;

(C) punitive damages, if appropriate; and(D) costs and reasonable attorneys’ fees.

4. A consumer may be granted injunctive, declaratory, and such otherequitable relief as the court deems appropriate in an action to enforcecompliance with this Act.

5. The intentional violation of this Act, or regulation thereunder, of a homeimprovement credit agreement which finances a home improvementinvolving an unlicensed seller, contractor, or broker renders the homeimprovement credit agreement void, and the creditor shall have no rightto collect, receive, or retain any principal, interest, or other chargeswhatsoever with respect to the loan, and the consumer may recover anypayments made under the agreement.

6. The consumer may bring a class action suit to enforce this Act.7. The remedies provided in §13 are not intended to be the exclusive

remedies available to a consumer nor must the consumer exhaust anyadministrative remedies provided under this Act or any other applicablelaw before proceeding under this section.

(b) Criminal. Any person, including members, officers, and directors of thecreditor, who knowingly violates this act is guilty of a misdemeanor and, onconviction, is subject to a fine not exceeding $1,000 or to imprisonment notexceeding 6 months, or both.

The ability of consumers to sue the creditor directly for violations of the Model Act andto seek complete relief for the wrongs committed by licensed and unlicensed creditorsis crucial. Administrative enforcement alone is inadequate because agencies may nothave sufficient resources to pursue all appropriate individual enforcement actions. Theconsumer may bring a civil action or a class action suit and is entitled to both actualand consequential damages, as well as a statutory penalty equal to the financecharges agreed to in the home improvement credit agreement, plus 10 percent of theamount financed (this is the same statutory penalty provided in most states for aviolation of the requirements on secured parties under §9 of the UCC), and in somecases, punitive damages, as well as attorneys’ fees and costs. Injunctive andequitable relief is also available, if appropriate. The consumer’s remedies arecumulative of any other rights to redress the consumer may have.

The Model Act also makes any violation of the Model Act a per se violation of thestate Unfair and Deceptive Acts and Practices (UDAP) Act, and makes any violation ofthe state UDAP Act a violation of this act. Connecting the state UDAP Act and theModel Act in this way increases the consumer’s chances to obtain viable remedies

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���� �against unscrupulous creditors.

This section also provides for criminal penalties, which are an important deterrent tocreditor fraud. Any violation of the statute is a misdemeanor and is subject to a fine ofup to $1,000 and/or imprisonment for up to 6 months.

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If any portion of this Act is determined to be invalid for any reason by a finalnon-appealable order of any court of this state or of a federal court of competentjurisdiction, then it shall be severed from this Act. All other provisions of thisAct shall remain in full force and effect.

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The Model Act provides that any individual portion of the Act that may be found to beinvalid may be severed from the Act and the remaining provisions will remain fullyenforceable.

Public Policy Institute601 E Street, NW

Washington, DC 20049

http://r e s e a r c h . a a r p . o r g

©2000. AARP.

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