In the era before there was a CFPB, the Federal Trade Commission (“FTC”) was one of the two important federal regulators of our industry. The FTC and its Consumer Affairs Division took its authority from the Federal Trade Commission Act of 1914, to adopt guides, rules and regulations for the consumer finance industry. There are two particular rules—the Preservation of Consumers' Claims and Defenses (known as the “Holder-in-Due-Course Rule”) and the Credit Practices Rule—that we've worked with for years, and which remain very important to this day.
The Holder-in-Due-Course Rule, 16 C.F.R. Part 433, was the first recognition that creditors taking assignment of consumer credit contracts from sellers of consumer products (furniture, cars, etc.) should not be immune from claims of buyers against original sellers. In the pre-Rule days, there was a doctrine at Common Law that said that an assignee that was a “holder-in-due-course” of a debt obligation, was not liable for the acts of the contract assignor, absent knowledge of a claim by the debtor on the contract. And, proving that knowledge was tough.
The FTC studies revealed that too many consumers were being taken advantage of by unscrupulous sellers; and, the way to put an end to this activity was to make certain that assignees of consumer credit contracts took and held such contracts subject to all claims and defenses which the debtor could assert against the seller of such merchandise. So, the FTC adopted a regulation in 1976 that mandated that every consumer credit contract must include specific language that, in effect, destroys the holder-in-due-course doctrine with respect to consumer credit.
(I promise that we spent more than two paragraphs on this in law school!)
Following up on the success of this earlier rulemaking, the FTC next adopted an even broader Regulation—the Credit Practices Rule—in 1985. It is found at 16 C.F.R. Part 444. The Credit Practices Rule was aimed at specific unfair and deceptive credit practices that were prevalent at the time.
First, the Regulation listed certain practices as inherently unfair, such as writing a consumer contract that included taking a “confession of judgment” or “waiving rights of exemption” to property not the subject of the contract.
Next, “Household Goods” (such as clothing, furniture, appliances, cookware, and personal effects) cannot be the subject of a non-possessory security interest unless they are being purchased in the contract.
Third, the Regulation provides that it is a deceptive practice for a creditor to misrepresent the nature of “co-signing” for a debt. The Regulation actually recites specific language in the form of a “Notice to Cosigner” that must be used.
Finally, the Regulation prohibits the practice known as “pyramiding” of late charges. That is, a creditor may not levy or collect a late charge from a payment, which payment is otherwise a full payment, when the delinquency would be attributable to a late fee assessed on an earlier installment. (This one is actually pretty tricky to describe in one sentence.)
These two Regulations were the early forerunners of the types of Regulations that we have seen in recent years from the CFPB. They address specific acts and practices of creditors that the FTC Commissioners found to be unfair or deceptive in consumer credit transactions.
With this explanation then, I suggest the following best practices:
Practice Pointer #1: Check the fine print of your note and installment sales contract forms, to be absolutely certain that you are not claiming waivers or rights that are prohibited in such contracts.
Practice Pointer #2: Look over the holder-in-due-course language to be certain that it follows that language required by the Regulation.
Practice Pointer #3: If you include cosigners as obligors on consumer debt, be sure that you are giving such co-signers the full and correct required notice.
Once again, these matters have long been required, but continue to be overlooked.