Introduction
The Federal Trade Commission staff prepared this
business booklet to help finance companies, retailers,
and other creditors comply with the Credit Practices
Rule, which went into effect March 1, 1985. This booklet
tells you what the Credit Practices Rule requires, who
must comply, and what transactions are covered. It also
discusses liability for rule violations and how
exemptions are granted.
How the Credit Practices Rule Affects Consumer
Contracts
What the Rule Requires
The Credit Practices Trade Regulation Rule has three
major provisions. First, it prohibits creditors from
using certain contract provisions that the Federal Trade
Commission found to be unfair to consumers. The
prohibited contract provisions are confessions of
judgment, waivers of exemption, wage assignments, and
security interests in household goods. Second, the Rule
requires creditors to advise consumers who cosign
obligations about their potential liability if the other
person fails to pay. Third, the Rule prohibits late
charges in some situations.
Who Must Comply
This Rule applies to all creditors subject to the
jurisdiction of the Federal Trade Commission. It includes
all finance companies, retailers (such as auto dealers
and furniture and department stores), and credit unions
that offer consumer credit contracts. Similar rules have
been passed by the Federal Reserve Board and the Federal
Home Loan Bank Board for banks, savings and loan
associations, and other institutions under their
jurisdiction.
What Transactions Are Covered
The Rule covers all consumer credit transactions,
except those involving the purchase of real estate. It
covers loans made to consumers who purchase goods or
services for personal, family, or household uses, even
though those loans may be secured by real estate owned by
the consumers. The Rule also applies to the sale of goods
or services under lease-purchase plans.
However, contracts with your customers signed before
March 1, 1985, which contain the four prohibited
provisions -- confessions of judgment, waivers of
exemption, wage assignments, or security interests in
household goods -- are enforceable and not in violation
of the Rule. Similarly, you may collect debts from
cosigners who became obligated before the effective date
of the Rule, even though they did not receive the notice
that the Rule requires. On the other hand, after March 1,
1985, you may not collect late fees that are prohibited
by the Rule, even if the contract was signed before that
date.
How Penalties Are Assessed
The Federal Trade Commission can sue violators of the
Credit Practices Rule in federal court. The court can
impose civil penalties of up to $10,000 for each
violation and can issue an order prohibiting further
violations.
How Exemptions Are Granted
A state may petition the Commission at any time for a
state-wide exemption from any of the Rule's provisions,
as noted under 16 C.F.R. Section 444.5 of the Rule. If
the Commission finds that the state law affords a level
of protection to consumers that is substantially
equivalent to, or greater than the protection afforded by
the Rule and the state has the ability to enforce and
administer that law effectively, an exemption may be
granted. Filing an exemption petition, however, does not
stay the Rule, which remains in effect in that state
until the exemption is granted.
Any person to who the Credit Practices Rule applies,
including creditors, also may petition the Commission for
exemption from any of the Rule's provisions (Federal
Trade Commission's Rules of Practice, 16 C.F.R. Section
1.16).
How to Comply with the Rule
This section points out the important parts of the
Rule and explains how to comply. It discusses the
prohibition against certain contract provisions; the
required use of a certain cosigner notice; and the
prohibition against late charges in certain situations.
Prohibited Contract Provisions
Certain consumer provisions, which you may have used
in consumer credit contracts, are now prohibited. These
include: confessions of judgment; waivers of exemption;
wage assignments; and security interests in household
goods. If your consumer credit contracts contain language
that requires a debtor to confess judgment, to waive
exemptions, to assign wages or income, or to give you a
blanket security interest in all household goods, you
should remove that language from all contracts signed on
or after March 1, 1985. If you have not done so, you are
in violation of the Rule.
Confessions of Judgment
In states that have not specifically outlawed the
practice, certain consumer credit contracts have
contained language taking away certain rights that
consumers being sued would ordinarily have. The include
the right to receive notice of the suit, to appear in
court, and to raise any defenses that they may have. This
provision, usually called a "confession of
judgment," allowed judgment to be entered for the
creditor automatically when the creditor sued the debtor
for breach of the contract. The Rule now prohibits
creditors from including confession of judgment
provisions, such as the following, in consumer credit
contracts:
To secure payment hereof, the undersigned jointly
and severally irrevocably authorize any attorney of
any court of record to appear for any one or more of
them in such court in term or vacation, after default
in payment hereof and confess a judgment without
process in favor of the creditor hereof for such
amount as may then appear unpaid hereon, to release
all errors which may intervene in any such
proceedings, and to consent to immediate execution
upon such judgment, hereby ratifying every act of
such attorney hereunder.
The Rule's prohibition against "confessions of
judgment," however, does not prohibit
power-of-attorney provisions that allow you to repossess
and sell collateral, as long as these provisions do not
interfere with the consumer's right to be heard in court.
The Rule also does not prohibit a consumer from
acknowledging liability after suit has been filed and the
consumer has been duly notified. The Rule is not intended
to interfere with whatever rights you have to repossess
secured property.
Waivers of Exemption
Previously, some consumer credit contracts contained
"waiver of exemption" provisions that permitted
creditors to seize (or threaten to seize) specific
possessions or possessions of a specified value, even if
state law treated them as exempt from seizure. Every
state has a law that defines certain property (generally,
property considered necessities) that a debtor is allowed
to keep even if a creditor sues and obtains a judgment.
By signing a waiver of exemption, a debtor made that
property available to a creditor who obtained a judgment
to satisfy a debt. Clauses such as the following are no
longer permissible under the FTC Rule:
Each of us hereby both individually and severally
waives any or all benefit or relief from the
homestead exemption and all other exemptions or
moratoriums to which the signers or any of them may
be entitled under laws of this or any other State,
now in force or hereafter to be passed, as against
this debt or any renewal thereof.
The Rule's prohibition against "waiver of
exemption" provisions does not prevent you from
using particular kinds of collateral. However, if state
law provides an exemption for certain kinds or amounts of
property, the contract cannot contain a provision causing
the consumer to give up that protection. In that case, an
unsecured creditor who obtained a judgment could not
seize that property. Nonetheless, if you have a valid
security interest in property, your security interest
would not be affected, even if that property is exempt by
state law. However, this provision of the Rule should be
considered with another Rule provision that prohibits the
taking of a security interest in certain property defined
as household goods.
Wage Assignments
Previously, if consumers did not pay as agreed, some
consumer credit contracts permitted creditors to go
directly to the consumers' employers to have their wages,
or some part of them, paid directly to the creditors.
Under the Rule's prohibition against "wage
assignments," your consumer contracts may not
provide for the irrevocable advance assignment to you of
any money due consumers because of their personal
services (usually through employment) if they do not pay
as agreed. The Rule prohibits irrevocable assignments to
creditors of salaries, commissions, bonuses, pensions,
and disability benefits, as well as wages due to
consumers.
Below is an example of a wage assignment provision
that is no longer permitted in consumer credit contracts:
If default be made in payment of the
above-described debt, which is the time balance
(Total of Payments) due on a retail installment
contract, each of the undersigned hereby assigns,
transfers and sets over to the above-named assignee,
wages, salary, commissions, bonuses and periodic
payments pursuant to a retirement or pension plan due
or subsequently earned from his present employer or
from any future employer within a period of two (2)
years from the date of execution hereof. This
assignment shall remain effective as to all of the
undersigned Debtors.
The amount that may be collected by assignee here on
shall not exceed the lesser of (1) 15% of the gross
amount paid assignor for any week, or (2) the amount by
which disposable earning for a week exceed thirty times
the Federal Minimum Hourly Wage in effect at the time the
amounts are payable; and shall be collected until the
total amount due under this assignment is paid or until
expiration of employer's payroll period ending
immediately prior to 30 days after service of the demand
hereon, which first occurs. This Wage Assignment shall be
valid for a period of three years from date hereof.
The term "disposable earnings" means that
part of the earnings remaining after deduction of any
amounts required by law to be withheld.
The assignor(s) hereby authorize, empower, and direct
his/their said employer(s) to pay assignee any and all
moneys due or to become due assignor(s)_ hereon,
authorize assignee to receipt for the same and release
and discharge employer from all liability to assignor(s)
on account of moneys paid in accordance herewith. no copy
hereof shall be served on employers(s) except in
conformity with applicable law.
However, the Rule specifically permits you to use
payroll deduction plans where consumers choose to pay by
regular deductions from paychecks. Such payroll deduction
plans may provide that, if borrowers change employers,
final paychecks will be assigned to you to be credited
toward balances due on loans, without notice to debtors
and without allegations of default or delinquency. Your
contracts also may provide for wage assignments that can
be revoked at will by consumers and for assignments of
wages already earned at the time of the assignment. In
addition, you may require that the revocation of a
voluntary wage assignment be in writing.
The Rule's prohibition against "wage
assignments" does not prohibit garnishment. If a
creditor obtains a court judgment against a debtor, the
creditor may continue to use wage garnishment to collect
that judgment, subject to the consumer protections
provided by federal (and sometimes state) law.
Security Interests in Household Goods
Previously, some consumer credit contracts contained
non-purchase money security agreements that allowed a
creditor to repossess many household goods in the
consumer's home if the consumer did not pay as agreed.
Now your contracts cannot use language, such as the
following, that provide for repossession of certain
household goods specified in the Rule:
This not is secured by a security interest in
consumer goods consisting of all household goods,
furniture, appliances, and bric-a-brac, now owned and
hereinafter acquired, including replacements, and
located in or about the premises at the Debtor's
residence (unless otherwise stated) or at any other
location to which the goods may be moved. In
addition, all other goods and chattels of like nature
hereafter acquired by the Debtor and kept or used in
or about said premises and substituted for any
property mentioned. Proceeds and products of the
collateral are also covered.
The Rule's definition of "household goods"
includes household necessities such as clothing,
appliances, and linens, and some items of little economic
value to you, but of unique, personal value to the
consumer .These may include items such as family
photographs, personal papers, the family Bible, and
household pets. Excluded from the definition of household
goods are:
Works of art, electronic entertainment equipment
(except one television and one radio), items acquired
as antiques (more than 100 years old), and jewelry
(except wedding rings).
The rule permits consumers to offer as security these
valuable possessions to obtain credit as well as pianos
or other musical instruments, boats, snowmobiles,
bicycles, cameras, hoe workshops, and similar items.
Under the Rule, you may continue to take
"purchase money security interests" in any
household goods when the consumer uses the loan proceeds
or the credit advanced to purchase the household goods.
If you refinance or consolidate an agreement with a
purchase money security interest in household goods, you
may retain the purchase money security interest as a part
of the refinanced or consolidated agreement to the extent
permitted by state law. If you take possession of the
secured property (as in pledge agreements that
pawnbrokers commonly use), the Rule permits a security
interest even if the property pledged is household goods.
Notice to Cosigners
If you require a cosigner for a loan applicant who
does not meet your standards of creditworthiness or for
debtors in default, the Rule requires you to inform each
cosigner of the potential liability involved before the
cosigner becomes obligated for the debt. You must use the
following statement:
Notice to Cosigner
You are being asked to guarantee this debt. Think
carefully before you do. If the borrower doesn't pay
the debt, you will have to. Be sure you can afford to
pay if you have to, and that you want to accept this
responsibility.
You may have to pay up to the full amount of the debt
if the borrower does not pay. You may also have to pay
late fees or collection costs, which increase this
amount.
The creditor can collect this debt from you without
first trying to collect from the borrower. The creditor
can use the same collection methods against you that can
be used against the borrower, such as suing you,
garnishing your wages, etc. If this debt is ever in
default, that fact may become a part of your credit
record.
This notice is not the contract that makes you liable
for debt.
If a state statute or regulation requires a different
notice to cosigners, you may include that notice on the
document if it is not inconsistent with the notice
required by the Rule. If a statement in the FTC notice
(such as one that says you can collect from the consigner
without first trying to collect from the primary debtor)
is inaccurate under sate law, you may omit it from the
notice used in that state.
You need not give the notice to someone who signs a
security agreement, when there is no personal liability
for the debt. On a revolving charge account, you only
need to give the notice to a cosigner once, when the
account is opened.
You may print the cosigner notice on your letterhead
and include identifying information, such as the credit
account number, the name of the cosigner, the amount of
the debt, and the date. You also may provide a signature
line for the cosigner to acknowledge receipt of the
notice. However, you may not include any additional
statement in the notice that would distract the
cosigner's attention from the message in the notice (But
you may add whatever additional information you wish to
your own file copy of the notice.) You may not attach the
notice form to other documents unless is appears before
any other document in the package.
The cosigner notice should be in the same language as
the agreement to which it applies. For example, if the
agreement is in Spanish, the cosigner notice also should
be in Spanish.
If you use cosigners in your consumer credit contracts
and these contracts were signed on or after March 1,
1985, you should provide those cosigners with the notice
required by the Rule. If you are not doing so, you are in
violation of the Rule.
A "cosigner" is different from a co-buyer,
co-borrower, or co-applicant because a cosigner receives
not tangible benefit from the agreement, but undertakes
liability as a favor to the main debtor who would not
otherwise qualify for credit. On the other hand, a
co-buyer (one who shares in the purchased goods), a
co-borrower (one who shares in the loan proceeds), or a
co- applicant or co-cardholder (a person who is
authorized to use a credit card account) do receive
benefits. Therefore, they are not considered cosigners
under the Rule, and you are not required to provide the
notice to them.
Late Charges
Some creditors previously calculated late fees for
delinquent payments using a practice called
"pyramiding" of late charges. When one payment
was made after its due date and a late fee was assessed
but not paid promptly, all future payments were
considered delinquent even though they were, in fact,
paid in full within the required time period. As a
result, late fees were assessed on all future payments.
In other words, each successive payment was considered
"short" by the amount of the previous late
charge, with the result that another late charge was
imposed.
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