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Home Improvement Financing: A Model State Law


Propelled by the elimination of the tax deduction for interest on consumer loans (accomplished through the Tax Reform Act of 1986) and rapidly accumulating homeowner equity, home equity loans have become a major source of consumer finance. For some people with high incomes and financial sophistication, borrowing against one's home may be appropriate. However, homeowners with substantial equity but limited incomes, too often find themselves the victims of predatory home equity loans. Predatory mortgage lenders often target older homeowners, who frequently have substantial equity in their homes. Nearly 80 percent of older Americans are homeowners, and 80 percent of these older homeowners own their homes free and clear.

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

In this AARP Public Policy Institute study, Margot Saunders and Elizabeth Renuart of the National Consumer Law Center provide an overview of state statutes and propose a model state law containing consumer protection measures, including:

  • licensing persons extending home improvement credit
  • prohibiting certain charges and practices
  • prohibiting creditors from taking a security interest in a home with an open-end credit arrangement
  • requiring home improvement creditors to be responsible for the cost of incomplete or inadequate home improvement work

Volumes II and III survey specific state statutes on home improvement financing in 50 states and the District of Columbia, Guam, Puerto Rico and the Virgin Islands.