Jason Cover, Mark Furletti, and Taylor Gess explore the complexities of home improvement finance.
In this insightful crossover episode of The Consumer Finance Podcast and Payments Pros, host Jason Cover is joined by colleagues Mark Furletti and Taylor Gess to explore the complexities of home improvement finance. The discussion delves into the unique risks associated with point-of-sale financing in the home improvement sector, such as contractor oversight issues, promotions, and the intricacies of state and federal regulations. Gain valuable insights into best practices for lenders and finance companies to mitigate these risks, ensure compliance, and protect consumers. This episode offers essential guidance on navigating the evolving landscape of home improvement finance.
The Consumer Finance Podcast x Payments Pros – Point-of-Sale Finance Series: Navigating Home Improvement Finance Risks and Regulations
Host: Jason Cover
Guests: Taylor Gess, and Mark Furletti
Air Date: November 6, 2025
Jason Cover:
Welcome to a special crossover edition of the Payments Pros and The Consumer Finance Podcast. I'm Jason Cover, one of the hosts of the Payments Pros podcast. And today I'm joined by Taylor Gess and Mark Furletti to discuss home improvement finance.
Before we jump into today's episode, let me remind you to visit and subscribe to our blog, TroutmanFinancialServices.com. And don't forget to check out our other podcasts on Troutman.com/Podcast. We have episodes that focus on trends that drive enforcement activity, digital assets, consumer financial services, and more. Make sure to subscribe to hear the latest episodes.
Mark and Taylor, thank you for joining today.
Taylor Gess:
Thanks, Jason. Good to be here.
Jason Cover:
Today, we're going to talk a little bit about point-of-sale finance. And I think one of the interesting things about that area is that the lender, or the sales finance company, or the bank financing these products is working directly with installers, contractors, or platforms of installers and contractors, which leads to some risk. And I think it's no secret at this point, this has been an area of concern for both state and federal regulators.
Taylor, could you give a little bit of information to the audience about some of the things that the state and federal regulators are focused on in the context of merchant interaction with the customer?
Taylor Gess:
Sure, Jason. I think on our previous podcast, too, we talked about some of the commercial agreements with merchants or dealers providing for oversight and audit rights to protect against some bad acts that the state and federal regulators are taking issue with. And so in the home improvement financing context, we usually see dealers or contractors that are facilitating the offering of a credit product in the consumer's home in connection with a contractor offering some sort of repair or remodel.
And we're going to talk about some of the home solicitation and contractor law issues in a future podcast, but I'm going to just talk about some of the pain points when the dealer is promoting a credit product to the consumer. One big issue that can present some material risk is the potential for a contractor to misrepresent the credit terms, like the interest rate, or loan terms, or the loan duration, certain aspects of promotions, or minimum qualifications to obtain the credit or the likelihood the consumer gets approved.
A contractor may also coach an applicant to complete the application in a certain way to increase the likelihood of the applicant getting approved for the credit. Maybe, for example, by encouraging a consumer to enter a higher income than what their income actually is. Or a contractor could include application information from a person other than the applicant, such as the contractor putting his own email address in the application if a consumer did not have their own email address. There's also a risk that a contractor could steer a consumer into a financing option that is better for the contractor, but not necessarily in the consumer's best interest. Maybe that option might be more profitable for the contractor, but the consumer could end up paying greater finance surcharges or finance charges over a very long period of time.
There's also a risk that a contractor may offer a product in a discriminatory way. In some situations, the Fair Housing Act will apply in addition to ECOA. And in those circumstances, there are additional prohibited bases beyond those under ECOA to think about, and state laws may also have additional prohibited bases. And creditors and program facilitators should also consider putting protections in place to prevent contractors from charging different prices to cash-paying consumers versus consumers paying with credit.
And another big one that I think we see a lot of regulator activity surrounding is that dealers shouldn't be controlling the device the applicant is submitting the credit application on or otherwise taking credit out on the consumer's behalf. Or there could be a situation where there aren't binding documents like e-sign consents, or credit pull authorizations, or the credit agreements themselves, because the consumer did not actually execute those documents themselves. So, it's really best if the consumer is completing the transaction alone on their own device. And there's also a risk that a consumer would assert claims or defenses related to the contractor's bad acts or poor workmanship, but we'll talk about the holder rule on a later podcast.
Jason Cover:
Taylor, I know we talked about some of the things folks can do contractually to help with these risks, but what should lenders and finance companies be doing to help mitigate these risks?
Taylor Gess:
Sure. So, all those contract rights that we provided for like the monitoring, and the auditing, and providing training materials. Lenders should provide training materials to dealers, contractors, going over ways to limit or hopefully prevent those bad acts that we just talked about, and have ongoing monitoring and diligence to make sure that there aren't bad acts happening or if bad acts are happening, they're putting a stop to them.
Jason Cover:
Taylor, I think that training point is really a good one. I know some of the larger participants in this market literally post the training materials on their website. So, there's no doubt that they're available. But that's a great point. And I think exercising oversight and monitoring complaint is always a big deal as well.
Mark, I think another interesting thing about this area is that these loans are often closed-end loans, but have promotional offers that are similar to what you might have with a credit card offer. So, it sort of blends those two areas together sometimes. Do you have any thoughts on that?
Mark Furletti:
Jason, I think one of the most common promotions we see are deferred interest promotions. And the CFPB has kind of written extensively about these promotions. And just so folks are – we're on the same page of what I mean by deferred interest. This is a case where the consumer is given a period of time, it could be 6 months, it could be 12 months, it could be 18 or 24 months, during which, if the consumer pays the balance of the loan in full, what they originally borrowed to finance the purchase, then they will pay no interest. And the interest is technically not posting to their balance that they have to pay during this promotional period. However, the day that the promotion expires, all of those finance charges post to that balance and become payable.
Imagine you buy a sofa for $1,000 and there's a deferred interest promotion on it. If you pay it off within 12 months, let's say, all you have to pay is $1,000, the cost of the sofa, and then all that interest is forgiven. Let's say you pay it off the last day of the promotional period, the 12-month promotional period. If you don't pay it off, then on the next day, which is the day after the 12 months, then all the interest for the prior 12-month period becomes due and payable. The consumer doesn't have to actually pay it off in full immediately, but it gets added to the balance and then must be paid over time.
The CFPB has written extensively about deferred interest. They've done so in the context of credit cards. They've done so in the context of retail credit arrangements. They put out something as – and, actually, this is all the Biden era. CFPB – put out something last December on the high cost of retail card and talked about deferred interest promotions. But I think deferred interest promotions, whether they're offered on cards or on installment loans, kind of would raise equal concern, at least by the old CFPB and possibly state regulators.
And so the first, I think, concern about it is that consumers don't appreciate that the period of deferred interest is not a period where the money is effectively free. That interest clock is kind of ticking in the background, even though the interest is not posting, and they're not seeing it. Oftentimes, consumers confuse deferred interest with no interest, which is dramatically different. That's during this 12-month period, no interest accrues at all, and none post if you don't pay. That's not what deferred interest is.
The CFPB has said that having employee training around accurately describing deferred interest promotion is critical. We recommend prominent disclosures of deferred interest promotions, explaining to the consumer how it will work and what happens. We also recommend that consumers receive an email, some kind of an advanced notice, "Hey, the promotional period is about to expire," so that the consumer is aware of the expiration and can make a payment, and making it somewhat easy for consumers to schedule a payment to pay off. Those are all kind of in the nature of best practices.
Jason Cover:
One interesting thing, Regulation Z for open-end credit has specific marketing disclosures for these types of promotions, which aren't in the closed-end provisions, which I'm not exactly sure the reasoning of it. I assume these just weren't common for closed-end products, but were for open-ended cards. I've at least suggested to some clients that you could follow those marketing disclosures for open-end promotions for your closed-end products. And, presumably, if it was good enough for the open-end provisions, good enough for closed as well.
Mark Furletti:
Sage advice, Jason. I totally agree. I think that's generally what we recommend as a best practice. I think you're right. It's just a historical accident. Deferred interest was very common long, long time ago on cards. Didn't really happen on these installment loans. But now that there's so much point-of-sale financing, so many options, I think that's where we've seen it come in. Yeah, totally agree.
One other aspect of deferred interest and some other types of promotions that is important to highlight and warn consumers about is the possibility of a very long period when the consumer is making payments but not paying down his or her principal balance. Imagine that $1,000 loan with the 12-month promotional period, and then you post $100 or $150 of interest, and the consumer starts making minimum payments, installment payments, they may make payments for many months before they start eating into that $1,000 of principal because they have to pay off all of that deferred interest. This is another kind of negative amortization or period when they're not making any headway on the principal is another risk with deferred interest and something that it's useful as a best practice to kind of alert consumers to.
Jason Cover:
Taylor, I know from personal experience that dispersing all of the loan funds on day one to a contractor may be foolhardy because, often, things don't happen on schedule or never happen, such that you might want to at least create some milestones or withhold payment until certain things happen. Could you tell me a little bit about how that impacts the loan origination process?
Taylor Gess:
Sure, Jason. So, you're totally right. Home improvements frequently happen in phases, with payments made at multiple times throughout the life of the home improvement. Maybe there's a down payment that's required, then additional payments at certain stages or once certain project milestones are met. And in the loan context, this usually means that loan proceeds are dispersed at multiple times throughout the life of the home improvement rather than in one lump sum at the beginning of the project to help prevent some contractor issues.
When loan proceeds of a closed-end loan are dispersed in multiple phases, there's always a risk that someone could argue that the loan should be recharacterized as open-end credit under federal or state law because the multiple advances are offered at more than one time. And there may also be arguments that a single multi-advance loan is really multiple closed-end loans or a consolidation. And depending on the characterization of the type of credit, different laws may apply to the loan. And there's certain product structure considerations to think about.
Jason Cover:
Taylor, I think one point for credit sales in particular, there may be precise provisions in retail installment sales acts that apply to these types of situations, right? I think most credit sales we think of as a single sale that happens and then it's over, but many of the RIC’s do address add-ons or multiple purchase sales. So, you'd want to pay attention to that in particular if your product is a credit sale.
Taylor Gess:
Yeah, definitely agree with that in the credit sale context, Jason. And then I think, too, with the ongoing nature of the home improvement, there can also pose issues related to changes in the project scope, or the cost of materials, or similar issues that could require a change order in the home improvement project and that impacts the overall cost of the improvement and, in turn, the amount of the home improvement financing.
And, similarly, consumers could be approved for a much higher loan value but decide to only take initial advance and not subsequent advances. And if a change order or failure to take a subsequent advance results in a much smaller or, in the case of a change order, a much larger loan value, the result could be that different state laws, different licenses, or different rate caps apply to the product than what was originally anticipated. And that could cause potential issues with usury limits, or disclosure, or other substantive requirements.
Another consideration with the staged funding aspect of financing home improvements is making sure that the loan funds are dispersed at a time the consumer wants to pay the contractor for the stage of work completed. For example, if you have a kitchen remodel and it's time to make a staged dispersal of loan proceeds, but the contractor hasn't provided the value that was supposed to be given at that time, or the consumer is unhappy with the work the contractor has provided, the consumer may not want to lose, we'll call it leverage, to get the work done or fixed that the consumer has before the contractor has been paid, such that he might not want those loan proceeds to be dispersed or interest to be accruing on a payment for value not yet received.
And one way to address that risk, and something that's required under some state laws, like Illinois, in particular has a pretty broad and specific law on this, is for a consumer to sign a completion certificate, basically acknowledging that a certain dollar value or stage of work has been completed by X date, and that by signing the completion certificate, the consumer is authorizing dispersal of the next advance of the loan and agreeing that that value has been received as part of the project.
Jason Cover:
Taylor, that's a great point. And I know we've kind of raised this on some of our other podcasts and probably will on some other podcasts in the future about solar finance, but the state law overlay is really becoming important here. I think we're seeing a reaction at not just like the blue states across the board from states codifying laws that apply to contractors and home improvement finance that essentially regulate things like you mentioned, whether it's a milestone, or a rescission period, things of that nature, that may limit when you can disperse funds. And it may be product-specific, too, right? It could be pools, hot tubs, or something, may have specific requirements as opposed to general contracts or solar. A very interesting development and something to keep an eye on there.
Taylor Gess:
Yeah, Jason, just also on the state law front, I also wanted to add that there are state laws on periodicity requirements that may require substantially equal payments in substantially equal intervals or require a first payment to be made within 45 days or less from the date of origination. And there might be some risk that presents under these odd first period laws that arises in situations where a first advance has been made, but payments don't begin until after the second advance, or in some of the no payment promotions that Mark discussed earlier.
Jason Cover:
Those are great points, Taylor. I think that ties back to one of our first podcast, where we mentioned that just because you're a bank does not mean that you necessarily get to skip all of those laws either, right? They're obviously very important. If you have a RIC program or a licensed lending program, but if you're a bank program or a bank, you still need to pay attention to those as well in a lot of circumstances, or at least have a good argument that those laws are preempted in hand.
In that vein, in sort of what's happening in the market, Mark or Taylor, if you were setting up a point-of-sale finance program, are there any developing issues that you'd really want to be on top of as of today?
Mark Furletti:
Jason, I guess I would say to pay attention to merchant discounts. And I'd pay attention to these because we've seen regulators really zero in on the merchant discount and assert that it constitutes a form of interest that's imposed on the consumer or that it's somehow misleading to the consumer.
And so by merchant discount, what I mean is the case where the consumer buys something, let's say, for $1,000 and gets a $1,000 loan, but the lender doesn't disperse the full $1,000 to the merchant. There's an agreed-upon discount. And so let's say the lender disperses $950. That $50 difference the CFPB has attacked in some cases as a hidden finance charge, particularly if it's passed on to the consumer in the form of a higher cash price. And then we've also seen that in itemization of amount financed, when you say that you've dispersed $1,000 to the merchant, we've seen the Minnesota AG say that's not entirely accurate to say that you dispersed the full amount to the merchant because there was this discount. I think a best practice here is to make some type of disclosure so that the consumer understands that maybe the full amount of the loan is not being dispersed. That would probably be the best practice, I think.
Another issue that we see come up in these contexts relates to co-signers and co-borrowers. There's the Credit Practices Rule, which is an FTC rule, but it applies to banks and certain other financial institutions through the UDAAP authority of the CFPB. And the Credit Practices Rule says that someone who is a co-signer has to receive this special notice kind of alerting them to the obligation they're undertaking. The difference between a co-signer and a co-borrower is that the co-signer receives no compensation from the loan.
The loan, let's just say, Jason, you get a loan and then I agree to co-sign, you get the proceeds, or you get the benefit of the proceeds, let's say, a bathroom remodeling, and I don't get anything. In that case, I'm a co-signer. And that's different than if you and I owned a piece of property together and we did a renovation on it. Now we both benefit. I'm now a co-borrower in that case, not a co-signer. If a consumer is a co-signer, they need to receive this notice. And so it's a good idea if we have two people and they're not going to be both using the property or the service that's being purchased to ensure that they get the co-signer notice.
And then I guess a final issue that we see is what state law might apply to a particular financing arrangement. And this is because a consumer may be getting, let's say, a home improvement loan. The consumer is a resident, let's say, of Pennsylvania, but the house where the improvement is going to be made is in New Jersey. And they sign the agreement in New Jersey, or they sign the agreement in Pennsylvania, or they execute in yet another state, it can get kind of complicated. And so thinking about what state law applies in these cases also matters.
Typically, there's going to be a choice of law in a bank model program of the bank state. That's fine. But then, query whether the consumer might also have rights under the law of another state, either their state of residence, or the state where they execute the agreement, or the state where the improvement is being performed. Trying to think through that is also another area of complexity.
Jason Cover:
Yeah, Mark, I think on that state law point, bringing it back to the co-signer point, keep in mind there's a lot of co-signer notices out there that are required by state law. And sometimes those forms or their applicability could be more or less than the federal overlay. So, that's another tricky area, I think, that folks should consider when approaching that issue.
In any event, Mark and Taylor, thank you so much for joining us today.
Mark Furletti:
Thanks, Jason.
Taylor Gess:
Yeah, thank you, Jason.
Jason Cover:
And thank you to our audience for listening to today's episode. Don't forget to visit our blog, TroutmanFinancialServices.com, and subscribe so that you can get the latest updates. Please make sure to also subscribe to this podcast via Apple Podcasts, Google Play, Stitcher, or whatever platform you use. We look forward to seeing you next time.
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