The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
F ed e r a l R es er v e Ba n k o f D a lla s DALLAS, TEXAS 75222 C i r c u l a r No. 75-65 May 13, 1975 PROPOSED REGULATION REGARDING UNFAIR OR DECEPTIVE PRACTICES BY BANKS TO ALL BANKS AND OTHERS CONCERNED IN THE ELEVENTH FEDERAL RESERVE DISTRICT: The Board of G o v e rn o rs of th e Federal R e s e r v e System has p ro p o s e d for comment a r e g u la tio n w h ich would a p p ly th e same p r o h i b i tions a g a i n s t a lle g e d ly u n f a ir an d d e c e p t iv e p r a c tic e s b y b a n k s th a t w e r e p ro p o s e d for n o n b a n k s by the Federal T r a d e Commission on A pril 9, 1975. In te re s te d p e r s o n s a r e invited to su bm it d a ta , v ie w s , o r a r g u ments in w r itin g to the office of th e S e c r e t a r y , Board of G o v e rn o rs of th e Federal R e s e rv e System , W ashington, D .C . 20551, to be r e c e iv e d not later th an J u n e 10, 1975. It is re com m ended th a t cop ies of comments also be s e n t to the Special A s s is ta n t D irecto r for R u lem ak in g, F e d e ra l T r a d e C ommission, W ashington, D .C . 20580. T h e B o a r d 's prop o sal is p r i n t e d on th e following p a g e s a s it a p p e a r e d in th e FEDERAL REGISTER on May 5, 1975. A dditional copies will be f u r n i s h e d upon r e q u e s t to th e S e c r e t a r y 's Office of th is B ank. S incerely y o u rs, T . W. P l a n t F i r s t V ic e P r e s i d e n t This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) E x tra c t From FEDERAL REGISTER, VOL. 40, NO. 87, Monday, May 5, 1975, p p . 19495 - 19498 [ 12 CFR Part 2 2 8 ] UNFAIR OR DECEPTIVE ACTS OR PRACTICES Notice of Proposed Rulemaking The Federal Reserve Board Is consid ering the issuance of regulations with respect to unfair or deceptive credit prac tices by banks. These regulations would be issued pursuant to the authority of Section 18(f) of the Federal Trade Com m ission Act (15 U.S.C. 41 et seq. as amended by Pub. L. 93-637). That Act gives the Board authority to develop such regulations on its own initiative or in re sponse to rules promulgated by the Fed eral Trade Commission. It provides that whenever the Federal Trade Com m issio n prescribes a rule prohibiting unfair or deceptive acts or practices, the Board shall w ithin 60 days thereafter promul gate substantially sim ilar regulations prohibiting substantially sim ilar acts or practices of banks, unless the Board finds either th at such acts or practices of banks are not unfair or deceptive or that im plem entation of sim ilar regula tions w ith respect to banks would seri ously conflict with essential m onetary and payments system s policies of the Board. The Federal Trade Commission has proposed a rule prohibiting th e use of certain contractual term s frequently In cluded In consumer credit contracts certain practices often employed by cred itors to aid in th e collection of lmpaJrf debts. The proposed rule would also re quire disclosures to cosigners which clearly inform them of the ramifications of the obligations to which they agree. Failure to conform w ith the term s of the rule would be considered an unfair or deceptive act or practice prohibited under section 5(a) (1) of the Federal Trade Commission Act (15 U.S.C. 41 et seq .). In order to assure that potentially affected banks are aware of the proposed rule and to have the benefit of their sug gestions on such m atters, the Board is publishing for com m ent a substantially identical rule as w ell as a substantially identical version of the Commission’s statem ent of reason for the proposed rule. The only alterations m ade by the Board to the Commission’s proposal are those conform ing the sectional designa tions to 12 CFR Part 228 and certain definitional changes, e.g. substituting “banks” for “lenders w ithin the jurisdic tion of th e Federal Trade Commission.** Accordingly, the Board hereby pub lishes for com m ent a proposed rule po tentially applicable to banks: Provided, That, in these two instances, no specific m ention is made of the al leged indebtedness. (1) O t h e r d e f i n i t i o n s . Words defined in the Uniform Commercial Code retain their UCC definitions for the purposes of this part. § 228.2 U n fa ir cred it practices. In connection w ith the extension of credit to consumers in or affecting com merce, as commerce is defined in the Federal Trade Commission Act, it is an unfair act or practice w ithin the m eaning of section 5 of that Act for a lender di rectly or indirectly: ( а) To take or receive from a con sumer an obligation which: (1) Constitutes or contains a cognovit, confession of judgm ent, warrant of a t torney, power of attorney or other waiver of the right to notice and the opportunity to be heard in the event of suit or process thereon; (2) Constitutes or contains a waiver or lim itation of exem ption from attach Sec. m ent, execution or other process on real 228.1 D efinitions. 228.2 U n fa ir c re d it practices. or personal property held, owned by or due to th e consumer; A u t h o r i t y : 38 S ta t. 717, as am ended (15 (3) Constitutes or contains an assign U.S.C. 41, et se q .). m ent of wages; § 228.1 D e fin itio n s. (Alternate subparagraph (3): (3) Constitute or contains an assign (a) L e n d e r . Any bank w ithin the juris diction of the Board of Governors of the m ent of wages unless the am ount of the Federal Reserve System , the Board of D i obligation is three hundred dollars rectors of the Federal Deposit Insurance ($300.00) or less and no other security Corporation, or the Comptroller of the interest is taken with respect to the obligation;) Currency. (4) Constitutes or contains a security (b) R e t a i l i n s t a l m e n t s e ll e r . A person who sells goods or services to consumers interest other than a Purchase Money on a deferred paym ent basis or pursuant security interest, except, where th e pro ceeds of a personal loan are not to be to a lease-purchase arrangement. (c) P e r s o n . An individual, corporation primarily applied to the purchase of con sumer goods, the lender m ay take a se or other business organization. (d) C o n s u m e r . A natural person who curity interest in other than household seeks or acquires goods, services or goods; (5) Encumbers goods purchased on m oney for personal, fam ily or household different dates from a retail instalm ent use. (e) O b l i g a t i o n . An agreem ent between seller on a deferred paym ent basis, un a consumer and a lender or retail in stal less the contract provides that paym ents made by the consumer will be credited m ent seller. (f) C r e d i t o r . A lender as defined in in full to the earliest purchase to re lease the goods from encumbrance in § 228.1(a). (g) D e b t . Money which is due or al the order acquired; ( б) Fails to enumerate and specifically leged to be due from one to another. (h) C o - s i g n e r . A natural person who, identify each individual item of prop by agreem ent and w ithout compensation, erty encumbered by it; (7) Fails to provide that if the creditor renders him self liable for the obligation retakes encumbered property from the of a consumer. (i) H o u s e h o l d g o o d s . Clothing, furni consumer, the fair market retail value ture, appliances, linens, china, crockery, of the property so taken will be credited kitchenware, and personal effects of the toward the balance due under the obli gation; consumer and his dependents. (8) Constitutes or contains a provision (j) P e r s o n a l l o a n . A loan of money to a consumer as distinguished from a sale requiring the paym ent of attorney’s fees of goods or services on a deferred pay or any other costs incident to the col m ent basis or pursuant to a lease-pur lection of the obligation; (Alternate subparagraph (8): chase arrangement. (8) Constitutes or contains a provi (k) C o l l e c t i n g a d e b t . Any activity other than the use of judicial process sion which: (i) W ith respect to a consumer loan which is intended to bring about or does bring about repayment of all or part of a in which the finance charge calculated according to the actuarial m ethod is consumer debt, except: (1) Inquiry to locate a consumer more than 18 percent per year, provides whose whereabouts are genuinely un for paym ent by the consumer of a t torney’s fees: known to the creditor; and/or (A) If the loan is not pursuant to (2) Inquiry to determ ine the nature and extent of a consumer’s wages or open-end credit and the am ount financed property; is $1,000 or less; or (B) If the loan is pursuant to open- he is asked to sign or that is furnished to the deficiency judgm ent m echanism by selling repossessed goods a t prices sub end credit and the balance of th e a c the consumer; and count at the tim e of default is $1,000 or (4) Any document evidencing the ob stantially below their fair m arket retail less; ligation contains the following notice; value. (ii) W ith respect to any other con No co-signer o r su re ty of th is o b lig ation The Commission further has reason sum er credit transaction, provides for sh a ll be liable th e re u n d e r except a fte r th e to believe that m any creditors utilize paym ent by the consumer of attorney’s len d er o r re ta il in sta lm e n t seller h a s em form contracts in consumer credit fees unless (A) such fees do not exceed ployed d u e diligence in a tte m p tin g to collect transactions which fail to include pro fifteen percent of the unpaid debt at the th e ob ligation fro m th e p rin cip a l debto r. visions lim iting contacts w ith third par No co-signer o r su re ty of th is o bligatio n ties, as specified in (§ 228.2(a) (10)) of tim e of default and (B) such fees become sh a ll be liab le th e re u n d e r fo r m ore th a n th e due only after actual referral of the obli ta l of p ay m e n ts fo r w hich th e p rin cip al the proposed rule, and which fail to gation to an attorney who is not a sala to d e b to r is liab le a t th e tim e t h a t th e co-signer place certain lim itations on the liability ried employee of the creditor;) of co-signers, as specified in (§ 228.2(b)) becom es obligated. (9) Provides for charges for late or ex No co-signer o r su re ty of th is ob lig atio n of the proposal; that these provisions tended paym ents which exceed the sh a ll be liab le th e re u n d e r un less p ro m p tly are om itted without regard to the actual am ount derived from application of the n otified in w ritin g of an y d e fa u lt by th e risk of non-repaym ent borne by the cred annual percentage rate governing the p rin cip al debtor. itor in a given case; that consumers transaction to the paym ent or payments The follow ing is a statem ent by the are injured by said third-party contacts late or extended; Federal Trade Commission of the reasons and co-signers are injured by failure to (10) Pails to provide that the creditor for the proposed ru le: place said lim itations on co-signer lia shall not, in the course of collecting a bility; and that consumers receive no S ta te m e n t o f R eason for debt, com m unicate or threaten to com substantial benefit in exchange for the t h e P ropo sed R u le m unicate with the consumer’s employer absence of said lim itations on thirdor any agent of the employer or any It is the Commission’s purpose, in party contacts nor do co-signers re other person not liable for the debt other issuing this statem ent, to set forth its ceive a substantial benefit in exchange than the spouse or attorney of the con reason for proposing this rule with for the absence of said lim itations on sumer, except as perm itted by order of sufficient particularity to allow informed their liability. The Commission has fur a court. com m ent. The precise form at of such ther reason to believe that m any cred (b) To obligate a co-signer other thanstatem ents may vary from rule to rule itors fail to provide co-signers of con the spouse of the consumer on any obli depending on the com plexity of the sumer obligations w ith necessary infor gation unless: issues involved. In this proceeding, we mation, as specified in (§ 228.2(b) (1 ), (1) The co-signer is furnished w ith ahave determined that m eaningful com (b) (3 )) and the last paragraph of the separate statem ent, at least three days m ent by the public will be best facilitated notice in (b) (4) of the proposed rule prior to his becoming obligated, which by presenting (1) a statem ent describ and that consumer contracts are gen shall contain in ten point bold face type ing the basic factual and legal premises erally co-signed in an atmosphere of the following inform ation w ith such upon which the Commission has deter high pressure. lim itations as necessary to conform to mined to propose the rule, and (2) a The Commission determined that it applicable State law and no other: series of questions designed to draw to has reason to believe the above as N o t ic e t o C o s ig n e r the public’s attention m atters which the sertions after it was presented with Commission presently deems particularly inform ation compiled by the staff during (Date). pertinent and on which comment is a two-year investigation of the character By signing th is c o n tra c t you a re agreeing and use of collection remedies associated to pay [ a m o u n t o f c o n tra c t] to [nam e o f especially solicited. consumer credit agreements The Commission emphasizes that with le n d e r], if [nam e o f p rin c ip a l d e b to r] does no t. neither the statem ent of factual and throughout the United States. In the I f fo r an y reaso n [nam e o f p rin c ip a l legal premises nor the questions should course of this investigation the Com d e b to r] does n o t pay th is [a m o u n t o f co n be interpreted as designating disputed m ission staff has received documentary tr a c t] o r a n y p a rt, of i t w h en i t is due, you issues of specific fact. Such designations evidence on these remedies in thousands m ay be re q u ire d to pay th e a m o u n t w hich of actual cases. It has obtained official h a s n o t b een p a id o r an y p a r t of it. How shall be made by the Commission or its corporate statem ents concerning collec ever, before you c a n be h e ld liab le fo r th e duly authorized presiding official pursu d eb t, [nam e o f lender] m u s t first dilig en tly ant to the Commission’s rules of practice. tion procedures and strategies and copies of form contracts. In addition, the staff a tte m p t to collect th e d e b t from [Name of sta tem en t has evaluated pertinent state statutes p rin c ip a l debtor.] You m ay be su ed o n th is c o n tra c t if The Commission has reason to believe and judicial rulings, interviewed many [Name o f p rin c ip a l deb to r] does n o t pay as that many creditors, as that term is de persons with an interest in the matter, agreed for an y reason. I f [Name o f lender] and exam ined the findings of the Na w ins a s u it a g a in st you in co u rt, i t m ay fined in the proposed rule, utilize form tional Commission on Consumer F i tak e a p a r t of yo u r wages each week u n til contracts in consumer credit transac th e d e b t is p a id in full; i t m ay ta k e your tions which constitute or contain: a nance. The Commission has not adopted any findings or conclusions of the staff. savings or real or perso nal p ro p e rty w hich cognovit provision (also known as a you own to pay th is d eb t; a n d i t m ay use “confession of judgm ent” and “warrant All findings of fact in this proceeding o th e r law ful m eans to collect th is d ebt of attorney”) , a waiver of statutory shall be based solely on m atter in the fro m you. property exem ptions, a wage assign rulemaking record. Y ou m ay be sued even if [Name o f p r in The Commission’s authority to ex cip a l d e b to r] is n o t sued if h e h a s n o t paid m ent, a provision creating blanket se am ine and prohibit unfair practices in curity interests, a requirement that the as agreed, b u t you m ay sue h im to collect consumer reimburse the creditor for a t or affecting commerce has been anal any m oney you have p aid o n h is b ehalf. ogized to the jurisdiction of an equity T h is n o tic e is n o t th e c o n tra c t you will torney fees when the contract is re court.1 Thus, where one party to a trans be asked to sign. You m u st be given a copy ferred to an attorney, and provisions action enjoys substantial advantages im posing late charges and extension of t h a t c o n tra c t a n d of th is notice. fees; th at these provisions are included w ith respect to those w ith whom he in form contracts w ithout regard to the deals, it is appropriate for the Commis (iSignature o f cosigner) actual risk of non-repaym ent borne by sion to conduct an inquiry to determine w hether that party uses an overabund (2) Three days or more after receiving the creditor in a given case; that these ance of market power in an inequitable the notice to co-signer, the co-signer remedies injure consumers; and th at consumers receive no substantial bene manner. Accordingly, the Commission is signs a document evidencing the obliga fit in exchange for th e above-listed cred proceeding upon the theory that relief tion which discloses the full amount he itor remedies. may be asked to repay; The Commission has reason to believe 1 Sperry and H u tc h in s o n v. F.T.C., 405 U.S. (3) The co-signer Is furnished w ith a additionally th at m any creditors abuse 233, 244 (1972). completed copy of every document that of the variety proposed In certain sub paragraphs of (§ 228.2) 1 is m andated by section 5 of the Federal Trade Commis sion Act i f : 3. Economic theory suggests that in a freely functioning credit m arket the remedies contained in credit contracts would represent an equilibrium between (1) T he cred ito r im poses up o n consum ers the costs and benefits of the transaction c o n tra cts of adh esio n (i.e., th e c re d it c u s as a whole to consumers and creditors. tom ers c a n n o t b arg ain over th e p a rtic u la r The Commission is interested in com m ent c o n tra c t provisions) w hich c o n ta in provisions on w hether (due to lack of inform ation, disad vantag eo u s to consum ers of th e c red i collusion, (tacit or explicit) governm ent to r fails to in clu de in th e c o n tra c ts of a d h e regulation, or some other cause) th e sion provisions beneficial to consum ers, all to market fails to reach this equilibrium th e con sum ers’ d e trim e n t; an d with respect to creditors’ remedies. (2) T his d e trim e n t to consum ers is n o t off If the market has failed in some way, set by a reasonable m easure of v alu e received in re tu rn . the Commission wishes to know how it The Commission additionally believes has failed, the causes of such failure, and that the relief specified in (§ 228.2(a) (7 )) appropriateness and adequacy of the pro is merited if the deficiency judgm ent posed rule as a remedy for any such m echanism is abused through th e sale failure. 4. The Commission wishes to know the of repossessed secured property at prices substantially below the property’s fair effect of the proposed rule on the costs of and/or restrictions on the availability market retail value. The Commission further believes that of credit and whether these costs or re section 5 requires the relief specified in strictions, if any, would fa ll on particular (§ 228.2(b) (1) and (b) (3 )) and th e last groups and, If so, the characteristics of paragraph of the notice in (b) (4) if the these groups. In connection w ith this failure to provide co-signers w ith the in question the Commission particularly de form ation specified in said paragraphs sires analysis based on specific data and denies co-signers adequate inform ation experience. 5. Do consumers receive any substan about the nature of the cost of credit, the extent of the co-signers’ obligations or tial benefit or q u i d p r o q u o for acceding events w hich m ay substantially affect to the practices that would be proscribed by the proposed rule? their interests. 6. The Commission seeks comment on Finally, it is the Commission’s belief that section 5 requires the relief specified all aspects of the interaction of the pro in (§ 228.2(b) (2 )) if considerable pres posed rule w ith sta te laws governing sure generally attends the transactions credit and creditors’ remedies. 7. For each of the individual rule pro in which consumers co-sign consumer visions, the Commission desires comment obligations. on the nature and extent of any con Q u e s t io n s sumer injury associated with the prac 1. Are the contracts used in consumer tice being restricted, and of any benefits credit transactions drafted by creditors flowing to consumers from the practice in standardized form and presented to which m ight offset such injury. 8. The Commission wishes to know consumers on a “take it or leave it” basis under circum stances that preclude whether any injury which m ay be asso m eaningful bargaining over th e terms ciated w ith practices restricted by the thereof? If these contracts are drafted rule may be elim inated without elim inat and presented in this manner, the Com ing the practices entirely. That is, are m ission would be interested in receiving there other and better ways of achieving comments on why this is the case. The the results which the rule seeks to Commission would also be interested in achieve? 9. The Commission requests comment whether or n ot such form contracts vary significantly from lender to lender in on the prevalence of the challenged such a way that consumers could choose, practices. 10. The Commission also seeks com if they so desired, by picking one lender as opposed to another, between contracts m ents evaluating the economic effect of the rule on sm all business. with different rem edial provisions. 11. Are there any unfair or deceptive 2. In the accom panying preliminary statem ent the Commission has outlined consumer credit practices not covered by its tentative approach to unfairness in the proposed rule which m ight appropri the context of creditors’ remedies. It is ately be included? 12. Two provisions of the rule are interested in analysis supporting or op posing this theory and in other theories stated in th e alternative. As to these, the of unfairness under section 5 (15 U.S.C. Commission is specifically interested in 45 (1970)) and how they m ight apply to com m ent on which alternative is pref the area. erable. (a) W a g e a s s i g n m e n t s . Wage assign m ents m ay have deleterious effects on * (a )(1 ) (p e rta in in g to cog n ov its), (a )(2 ) consumers by depriving them of the op (p e rta in in g to w aivers of s ta tu to ry p ro p erty portunity to assert legitim ate defenses e x em p tio n s), ( a )(3 ) (p e rta in in g to wage and by causing loss of employment or a ssig n m en ts), ( a ) ( 4 ) , ( a ) ( 5 ) , ( a )(6 ) (all p e rta in in g to b la n k e t se cu rity In te re s ts ), (a) the threat of such loss. Some com m enta (8) (p e rta in in g to a tto rn e y fe es), (a )(9 ) tors suggest, however, th at wage assign (p e rta in in g to la te charges a n d ex ten sio n m ents are such an Important remedy in fe es), a n d (a) (10) (p e rta in in g to c o n ta c ts w ith th ir d p a rtie s), a n d th e first tw o p a ra g rap h s of th e n o tic e in (b) (4) (p e rta in in g to lia b ility of c o -sig n ers). sm all loan transactions for which no other security Is available th at for bidding their use would cause a signifi can t dim inution In th e availability of such loans or a significant increase in the cost of such loans. The Commission is in terested in inform ation on a possible ex em ption from the prohibition of wage as signm ents for certain sm all loan trans actions, and on the optimum amount for any such exem ption. (b) A t t o r n e y ’s fe e s and c o lle c tio n c o s t s . Provisions allowing creditors to collect attorney’s fees and other costs from debtors m ay be abused. These charges m ay not bear any direct rela tionship to actual or reasonable costs borne by the creditor in collecting a debt. On th e other hand, a creditor should be able to recover such actual reasonable costs as are incurred. The Commission is interested in receiving com m ent as to the differing effects of an absolute prohibition of inclusion of a t torney’s fees provisions in consumer ob ligations; or, alternatively, of a lim ita tion of the amount of such fees expressed as a percentage of the obligation w ith a minimum obligation amount below which no such fees could be collected. Comment as to appropriate amounts to be allowed is also solicited. E nd of C o m m is s io n ' s S t a tem en t Comments regarding the proposed rule’s general applicability are invited. The Board would be particularly in terested in specific com m ents directed to any reason why such rule should not apply to banks. T his notice is published pursuant to section 553(b) of Title 5 U nited States Code, and § 262.2(a) of the rule of pro cedure of the Board of Governors of the Federal Reserve System (12 CFR 262.2 ( a )) . To aid in consideration of these m atters by th e Board, interested persons are invited to submit relevant data, views, or arguments in writing to the Office of th e Secretary, the Board of Governors of the Federal Reserve System , W ash ington, D.C. 20551, to be received not later than June 10, 1975. Such m aterial will be made available upon request, ex cept as provided in 12 CFR 261.6(a) of the Board’s rules regarding availability of inform ation. Since the Board may be required to issue regulations substantially sim ilar to th e rule ultim ately promulgated by the Federal Trade Commission, It is recom mended that copies of com m ents also be sent directly to the Commission for con sideration. Such comments should be ad dressed to the Special A ssistant Director for Rulemaking, Federal Trade Com m ission, W ashington, D.C. 20580. B y order of the Board of Governors, April 21, 1975. [seal] G r if f it h L . G arw ood, A s s is ta n t S e c r e ta ry o f th e B o a r d . [PR Doc.75-11580 P iled 5-2-75; 8:45 am]
@FedFRASER