Businesses that extend credit are bound by a federal law designed to protect consumers, which is known as the Credit Practices Trade Regulation Rule. The three main provisions of this law include:
- Creditors may not employ contract provisions the Federal Trade Commission (FTC) deems unfair. These provisions are: confessions of judgment, waivers of exemption, wage assignments and security interests in household goods.
- Creditors must make potential cosigners aware of their potential liabilities.
- Creditors may not assess late charges in some situations.
Who Is Required to Comply?
Any creditors who fall under FTC jurisdiction must comply with the rule. This includes finance companies, credit unions offering consumer credit and retailers.
All consumer credit transactions are covered by the rule except those involving real estate purchases. Consumer loans made for the purchase of goods and services for family, household or personal use are covered, regardless of whether they are secured by real estate owned by the consumers. The sale of goods or services under lease-purchase agreements is also covered by the rule.
Contracts signed before March 1, 1985 that contain the rule’s four prohibited provisions are not considered to be in violation and are enforceable. It is also acceptable to collect debts from cosigners who didn’t receive required notice, provided they became obligated before the rule’s effective date. Prohibited late fees may not be collected after March 1, 1985, even if the debtor signed the contract before that date.
Assessment of Penalties
The FTC may sue violators in federal court. Civil penalties of up to $10,000 may be imposed for each violation, and an order may be issued prohibiting further violations.
Prohibited Contract Provisions
Certain provisions formerly used in consumer credit contracts are prohibited. Any contracts signed after March 1, 1985 that contain any of these provisions will be held in violation of the rule:
- Confessions of Judgment: You may not include language in your agreements that would take away certain rights customarily possessed by consumers who are being sued, including the right to receive notice of the lawsuit, to appear in court, and to raise a defense. This prohibition doesn’t prohibit a consumer from admitting liability after a suit has been filed and he or she has been properly notified. It also doesn’t prevent certain power-of-attorney provisions and is not meant to impede the rights you may have to repossess secured property.
- Waivers of Exemption: You may not include language that would permit you to seize or threaten to seize possessions that state law would treat as exempt from seizure.
- Wage Assignments: Your contracts must not create agreements that would permit you to secure advance assignment of any money that may be due to a consumer as a result of his or her personal services, such as employment. The rule prohibits irrevocable assignments to creditors of wages, salaries, bonuses, disability benefits, commissions or pensions due to consumers.
- Security Interests in Household Goods: Your contracts must not contain language that would allow you to repossess most household goods in the consumer’s home for nonpayment. The law includes household necessities such as clothing, linens, appliances and items of little economic value to you but that hold personal, unique value to the consumer.
Any cosigner for a loan applicant or for debtors in default must be informed of his or her potential liability before becoming obligated for the debt. You are required to use a precisely worded statement available from the FTC. If a state law requires a different cosigner notice, it may be included in the document, provided it is consistent with the mandated notice. If any part of the FTC notice is incorrect under applicable state law, you may omit it from the notice in that state.It’s important to ensure your credit contracts stay on the right side of the law. It’s a smart idea to consult with an attorney with specific experience in credit agreements to help you stay compliant.
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