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Federal R eserve Bank OF DALLAS W IL L IA M H . W ALLACE FIRST V IC E p r e s i d e n t AND CH IE F O PER ATING O FFIC E R August 11, 1988 DALLAS. TEXAS 7 5 2 2 2 Circular 88-52 TO: To Chief Executive Officer of all member banks and others concerned in the Eleventh Federal Reserve District SUBJECT Board Guidelines on the Credit Practices Rule under Regulation AA DETAILS On July 29, 1988, the Board of Governors published a second update to its staff Guidelines on the Credit Practices Rule under Regulation AA (Unfair or Deceptive Acts or Practices by Creditors). The Credit Practices Rule became effective in 1986 pursuant to the Federal Trade Commission Act which requires the Board to adopt rules similar to those announced by the Federal Trade Commission. The Board's rule applies to all consumer credit obligations other than those for the purchase of real property. It prohibits banks from using certain remedies to enforce consumer credit obligations. Under the rule, banks may not include these remedies in their consumer credit obligations, and if banks purchase obligations that contain a prohibited provision, they are prohibited from enforcing them. The prohibited provisions are: (1) confessions of judgment; (2) waivers of exemption; (3) wage assignments; and (4) nonpossessory, nonpurchase-money security interests in household goods. In addition, the rule prohibits a certain late charge practice, and provides protections for cosigners in consumer credit transactions. The Board maintains staff guidelines on the rule that focus on general information that will be useful to most banks. This is the second time that the guidelines have been updated. This most recent update addresses questions on the use of multi-purpose credit documents, the acquisition of a security interest in household goods from a purchase-money lender, and certain exemptions from the rule. ATTACHMENTS The Board's press release and the text of changes are attached. For additional copies of any circular please c ontact the Public A ffairs D epartm ent a t (214) 6 51 -6 2 8 9 . Banks and others are encouraged to use the following incom ing W A TS numbers in contacting this Bank (800) 4 4 2 -7 1 4 0 (intrastate) and (800) 5 2 7 -9 2 0 0 (interstate). This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) - 2 - MORE INFORMATION For further information regarding this circular, please contact Dean A. Pankonien at (214) 651-6228. For additional copies of this circular, please contact the Public Affairs Department at (214) 651-6289. Sincerely yours, FEDERALRESERVEpressrelease For immediate release July 29, 1988 The Federal Reserve Board today published the second update to its staff guidelines on the Credit Practices Rule under Regulation AA. The updated guidelines become effective August 1, 1988. The Board's Credit Practices Rule, applicable to all banks and their subsidiaries, addresses unfair or deceptive acts or practices in the extending of consumer credit. The rule does not apply to loans for the purchase of real property. Banks are prohibited from using certain remedies to enforce consumer credit obligations and from using a late charge practice commonly referred to as pyramiding. The rule also provides protections for cosigners of consumer credit obligations. The Board's update to the guidelines is attached. - Attachment 0 - FEDERAL RESERVE SYSTEM 12 CFR Part 227 [Reg. AA] UNFAIR OR DECEPTIVE ACTS OR PRACTICES Update of Staff Guidelines on the Credit Practices Rule AGENCY: Board of Governors of the Federal Reserve System. ACTION: Update of staff guidelines on the Credit Practices Rule. SUMMARY: The Board is publishing an update to the staff guidelines on the Credit Practices Rule, Subpart B of Regulation AA (Unfair or Deceptive Acts or Practices). The rule prohibits banks and their subsidiaries from using certain creditor remedies in connection with a consumer credit obligation, from using a late-charge practice commonly referred to as pyramiding, and from obligating a cosigner prior to giving a required notice explaining the cosigner's obligations. The update addresses questions on the use of multi-purpose credit documents, the acquisition of a security interest in household goods from a purchase-money lender, and exemptions from the rule. EFFECTIVE DATE: August 1, 1988 FOR FURTHER INFORMATION CONTACT: Attorney, or Linda Vespereny, Adrienne D. Hurt, Senior Staff Attorney, Division of Consumer and Community Affairs, at (202) 452-2412; for the hearing impaired only, contact Earnestine Hill or Dorothea Thompson, Telecommunications Device for the Deaf (TDD) at (202) 452-3544, Board of Governors of the Federal Reserve System, Washington, DC 20551. - 2 - SUPPLEMENTARY INFORMATION: (1) Background In March 1984, the Federal Trade Commission (FTC) adopted its Credit Practices Rule, effective March 1, 1985, pursuant to the authority granted the FTC under sections 18(a)(1)(B) and 5(a)(1) of the Federal Trade Commission Act (FTC Act), 15 U.S.C. 57a(a)(1)(B) and 15 U.S.C. 45(a)(1). Under this statute the FTC is authorized to promulgate rules that define and prevent "unfair or deceptive acts or practices" in or commerce. 18(f) of the FTC Act, 15 U.S.C. 57a(f), Section affecting provides that whenever the FTC promulgates a rule prohibiting acts or practices that it has deemed to be unfair or deceptive, the Board of Governors of the Federal Reserve System must adopt a substantially similar rule prohibiting such acts or practices by banks unless the Board finds that such acts or practices by banks are not unfair or deceptive, or that the adoption of similar regulations for banks would seriously conflict with essential monetary and payments systems policies of the Board. In April 1985, the Board adopted a rule substantially similar to the FTC's Credit Practices Rule (50 FR 16695) as an amendment to the Board's Regulation AA, Unfair or Deceptive Acts or Practices (12 CFR 227). The Board modified certain provisions of the FTC's rule to take into account the needs and character istics of the banking industry. effect on January 1, 1986. The Board's rule went into - 3 - (2) Summary of the rule The Board's rule applies to all consumer credit obligations other than those for the purchase of real property. It prohibits banks from using certain remedies to enforce consumer credit obligations. Under the rule, banks may not include these remedies in their consumer credit obligations, and if banks purchase obligations that contain a prohibited provision, banks are prohibited from enforcing them. prohibited provisions are: waivers of exemption; The (1) confessions of judgment; (2) (3) wage assignments; and (4) non- possessory, nonpurchase-money security interests in household goods. In addition, the rule prohibits a certain late charge practice, and provides protections for cosigners in consumer credit transactions. The Board's rule applies to all banks and their subsidiaries. Institutions that are members of the Federal Home Loan Bank System and nonbank subsidiaries of bank holding companies are covered by the rules of the Federal Home Loan Bank Board and the FTC, respectively. (3) Staff guidelines Staff guidelines on the Board's Credit Practices Rule were issued in November 1985 (50 FR 47036). The guidelines focus on information of general application that will be useful to most banks, and provide the vehicle for answering questions about the rule. The guidelines are updated periodically, as necessary. The first update was in October 1986 (51 FR 39646). contains the second update. This notice - (4) 4 - Explanation of revision to guidelines Following is a brief description of the revisions to the staff guidelines on the Board's Credit Practices Rule. Section 227.13 --UNFAIR CREDIT CONTRACT PROVISIONS Question 13(a)-2 has been added to clarify the rule regarding the inclusion of a confession of judgment clause in a multi-purpose credit document. Some creditors use multi-purpose credit contracts for consumer, business, and other types of credit obligations. The issue is whether these forms may contain a confession of judgment clause with qualifying language indicating that the clause is not applicable in a consumer credit obligation (for example, stating that a confession of judgment is effective only "in nonconsumer purpose loans," "in business or agricultural purpose loans," or "to the extent permitted by law"). Given the public policy purpose of the rule -- to eliminate the use of prohibited contract provisions in consumer credit obligations -- section 227.13(a) is strictly construed to mean that a confession of judgment clause may not be contained in consumer credit documentation, even with qualifying language. Therefore, if a bank uses a multi-purpose credit document for a consumer purpose loan, the bank must cross out, blacken in, or otherwise indicate removal of the clause from the credit document. Question 13(d)-3a explains that when a bank refinances a purchase-money obligation originated by another lender, the acquisition of the purchase-money lender's security interest in household goods does not violate the rule. 5 - - SECTION 227.16 -- STATE EXEMPTIONS Section 227.16 allows a state agency to apply for an exemption from all or part of the provisions of the Board's rule. Question 16(b)-3 has been added to indicate the exemptions that have been granted. List of Subjects in 12 CFR Part 227 Banks, Banking, Consumer Protection, Credit, Federal Reserve System, Finance. (5) Text of revisions The revisions to the staff guidelines on the Credit Practices Rule read as follows: * * * * * SECTION 227.13 -- Unfair Credit Contract Provisions * * * * * 13(a) Confessions of Judgment * Q13(a)-2: * * * * Language limiting confession of judgment provision. If a bank uses multi-purpose credit contracts, may the bank include a confession of judgment clause with qualifying language indicating that the clause is not applicable in a consumer purpose loan -- such as, "You confess judgment to the extent the law allows," or "This clause applies only in business purpose loans"? A: No. Given the public policy purpose of the rule, a bank may not have a confession of judgment clause in a consumer credit contract, even with limiting language. Therefore, when a 6 - - multi-purpose form is used for a consumer purpose loan, the bank must cross out, blacken in, or otherwise indicate clearly the removal of the prohibited clause from the loan document. * * * * * 13(d) Security Interest in Household Goods * * * * * Q13(d)-3a: Refinancing (new creditor) - original loan purchase mon ey . On the same facts as those detailed in Q13(d)-3, assume that the consumer refinances the loan with a different bank. May that bank acquire the security interest of the purchase-money lender in household goods without violating the rule? A: Yes, the bank may acquire the security interest of the purchase-money lender without violating the rule. * SECTION 227.16 — * * * State Exemptions * Q16(b)-3. * * * * * Exemptions granted. What states have been granted an exemption from the Board's rule? A: The state of Wisconsin was granted an exemption from all provisions of the Board's rule effective November 20, 1986, for transactions of $25,000 or less. The state of New York was granted an exemption from the cosigner provisions of the Board's rule effective January 21, 1987, for transactions of $25,000 or less. In both Wisconsin and New York, transactions over $25,000 are subject to the Board's rule but compliance with state law is - 7 - deemed compliance with the federal law. The state of California was granted an exemption from the cosigner provisions of the Board's rule effective August 1, 1988. These exemptions do not apply to federally-chartered institutions. Board of Governors of the Federal Reserve System, July 28, 1988. signed (William W. Wiles) William W. Wiles Secretary of the Board
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