12 Consumer Protection Code Violation

• Library: Elements of Civil Causes of Action (SCBar) (2015 Ed.)

12 Consumer Protection Code Violation

A. Definition

The South Carolina Consumer Protection Code (SCCPC) — S.C. Code §§ 37-1-101 et seq. — regulates all types of credit and consumer credit transactions.¹ "The purpose of the SCCPC is to clarify the law governing consumer credit and to protect consumer buyers against unfair practices by suppliers of consumer credit."² It combines the Uniform Consumer Codes of 1968 and 1974 along with modifications of the South Carolina legislature.³ The Code does not provide a single cause of action, but several possible causes of action.⁴ For example, S.C. Code § 37-5-108 provides that a court may find a consumer credit contract to be unconscionable⁵ and grants consumers a cause of action for actual damages and a penalty.⁶ The SCCPC also provides for a cause of action in conversion.⁷ The statute sets forth the right of consumers to cure defaults and states that any repossession of collateral or rented property in violation of the statute is void and the creditor is liable for conversion.⁸ It would appear that in adopting the statute the legislature meant to apply common law principles applicable to the existing tort of conversion, not to create a new action with undefined elements.⁹ The 2005 legislature enacted a new Chapter 7 of the code concerning consumer credit counseling.¹⁰ The chapter lists prohibited acts and provides that a violation renders an agreement with a consumer void.¹¹

The SCCPC cause of action most frequently reviewed by appellate courts involves required preference notices regarding attorneys and insurance agents.¹² The statute says that "whenever the primary purpose of a loan that is secured in whole or in part by a lien on real estate is for a personal, family or household purpose ... the creditor must ascertain prior to closing the preference of the borrower as to the legal counsel that is employed to represent the debtor in all matters of the transaction relating to the closing of the transaction and ... the insurance agent to furnish required hazard and flood property insurance in connection with the mortgage and comply with such preference."¹³ The statute also applies to a consumer credit sale secured in whole or part by a lien on real estate whenever the seller requires the debtor to purchase insurance or pay any attorney's fees in connection with examining the title and closing the transaction.¹⁴ The creditor may comply with the requirement by:

(1) including the preference information on or with the credit application so that this information shall be provided on a form substantially similar to a form distributed by the administrator; or
(2) providing written notice to the borrower of the preference information with the notice being delivered or mailed no later than three business days after the application is received or prepared. If a creditor uses a preference notice form substantially similar to a form distributed by the administrator, the form is in compliance with this section.¹⁵

If a creditor violates the statute, the debtor¹⁶ has a cause of action to recover actual damages and a penalty from the violator.¹⁷

A broad private remedy is found in § 37-5-202(1). Under that section, if a creditor violates certain sections of the Code, "a consumer has a cause of action to recover actual damages and also a right in an action, other than a class action, to recover from the person violating this title a penalty in an amount determined by the court not less than one hundred dollars nor more than one thousand dollars." Additionally, if a creditor contracts for or receives a charge in excess of that allowed by the SCCPC or if a consumer is entitled to a refund and a person liable to the consumer refuses to make the refund within a reasonable time after demand,¹⁸ the consumer may recover a penalty.¹⁹ The elements of an action under § 37-5-202(1) are set forth below.

B. Elements

While it does not appear that any South Carolina case has set forth the elements of a cause of action under the Code, from the language of the statute, the plaintiff must show that:

(1) he or she is a consumer
(2) the defendant is a creditor
(3) the defendant has violated one of the specified sections of the Code.

C. Elements Defined

1. Consumer

A "consumer"²⁰ is a "buyer, lessee or debtor to whom credit is extended in a consumer credit transaction."²¹ A "consumer credit transaction" is a consumer credit sale,²² consumer loan,²³ a refinancing or consolidation of a consumer credit sale or loan, a consumer lease,²⁴or a consumer rental purchase agreement,²⁵ all of which are limited by statute to transactions primarily for personal, family, or household purposes. And, with the exception of consumer rental purchase agreements, the definitions require that the consumer be a "person" — a natural person or individual — other than an "organization."²⁶

2. Creditor

For an action to be brought pursuant to the SCCPC, the defendant must be a creditor. "Creditor" is defined as a person who grants credit in a credit transaction²⁷ or (except as otherwise provided) an assignee of a creditor's right to payment.²⁸ In the case of credit cards, the creditor is the card issuer, not a person honoring the card. The term also includes lessors in consumer rental purchase agreements.

3. Violation of the Code

The SCCPC lists sections of the Code which, if violated, give rise to a cause of action.²⁹These are sections applying to:

(1) Receipts, statements of account, and evidences of payment;³⁰
(2) Notice to cosigners and similar parties;³¹
(3) Schedule of maximum loan finance charges to be filed and posted;³²
(4) Prohibited negotiable instruments;³³
(5) Claims and defenses to which assignees are subject;³⁴
(6) Security in sales or leases;³⁵
(7) Prohibited assignments of earnings;³⁶
(8) Referral sales and leases;³⁷
(9) Attorney's fees;³⁸
(10) Limitations on default charges;³⁹
(11) Authorizations to confess judgment;⁴⁰
(12) Consumer rental-purchase disclosure;⁴¹
(13) Consumer rental-purchase reinstatement;⁴²
(14) Noncredit term life insurance;⁴³
(15) Claims and defenses arising from sales and leases to which lenders are subject;⁴⁴
(16) Claims and defenses to which card issuers are subject;⁴⁵
(17) Authority to make supervised loans;⁴⁶
(18) Restrictions on interest in land as security;⁴⁷
(19) Limitations on the schedule of payments on loan terms for supervised loans;⁴⁸and,
(20) Assurances of discontinuance of conduct subject to an order of the Administrator of the Department of Consumer Affairs.⁴⁹

The plaintiff should identify the specific section violated and meet the language of that section.

D. Defenses

The SCCPC contains several defenses for an action brought under § 37-5-202. First, a creditor is not liable for a penalty if he or she notifies the consumer of a violation before receiving written notice of the violation from the consumer or before the consumer brings an action. The creditor must correct the violation within 60 days after notifying the consumer to qualify for the defense.⁵⁰ Secondly, a creditor may not be held liable if he or she shows, by a preponderance of evidence, that the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid it.⁵¹

The SCCPC also contains a list of exclusions.⁵² The Act does not apply to:

(1) Extensions of credit to government or governmental agencies or instrumentalities;
(2) Sale of insurance by an insurer;⁵³
(3) Transactions under public utility, municipal utility or common carrier tariffs if a subdivision or agency of this State or of the United States regulates the charges for the services involved, the charges for delayed payment, and any discount allowed for early payment;
(4) Transactions made pursuant to and in compliance with Chapter 39 of Title 40;
(5) Licensing or examining restricted lenders;⁵⁴
(6) Rates and charges for advancing insurance premiums by insurance agents⁵⁵or insurance premium service;⁵⁶
(7) Rates and charges on restricted loans;⁵⁷
(8) Loans, sales, or leases made primarily for agricultural purposes;⁵⁸
(9) Loans to or on behalf of students pursuant to a government supported educational loan program;
(10) Federally-chartered credit unions;
(11) Transactions in securities or commodities accounts with broker-dealers registered under State law⁵⁹ or with the Securities and Exchange Commission.

Another defense is the arbitration clause commonly included in contracts with consumers. Plaintiffs have challenged arbitration clauses as unconscionable. One objection to contracts containing arbitration clauses is that they are contracts of adhesion. An adhesion contract is a standard form contract offered on a take-it or leave-it basis with terms that are not negotiable.⁶⁰

There are several limitations for actions under § 37-5-202. Under § 37-5-202(1), no action may be brought for a violation arising from sales or loans made pursuant to a revolving charge or revolving loan account more than two years after the violation occurred. For violations arising from other consumer credit transactions, no action may be brought more than one year after the scheduled or accelerated maturity of the debt. Additionally:

With respect to excess charges arising from sales or loans made pursuant to a revolving charge or revolving loan account, no action pursuant to this subsection may be brought more than two years after the violation or passage of a reasonable time for refund occurs. With respect to excess charges arising from other consumer credit transactions no action pursuant to this subsection may be brought more than one year after the scheduled or accelerated maturity of the debt.⁶¹

For actions based on violations of Chapter 10 of the SCCPCC — including a violation of the required preference notices regarding attorneys and insurance agents — an action must be brought within three years after the violation occurred.⁶² The three-year statute of limitations applies to actions commenced...