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FEDERAL RESERVE BAWK
O F M E W YORK
r Circular N o . 1 0 2 5 4 “1
|_ A u g u s t 15, 1988 J
C R E D IT P R A C T IC E S R U LE
A m endm ents to S taff Guidelines
To All Depository Institutions, and Others Concerned,
in the Second Federal Reserve District:
The Board o f Governors o f the Federal Reserve System has am ended its Staff Guidelines on the
Credit Practices Rule (Subpart B o f Regulation A A S“ Unfair or Deceptive A cts or Practices” ), effective
A ugust 1, 1988. In announcing the am endm ents, the Board o f Governors issued the follow ing statement:
The Federal Reserve Board has published the second update to its staff guidelines on the
Credit Practices Rule under Regulation AA. The updated guidelines are 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.
Printed below is the text o f the am endm ents as published in the Federal Register o f A ugust 3.
Q uestions regarding Regulation A A or the Credit Practices Rule m ay be directed to our Com pliance
E xam inations D epartm ent (Tel. N o . 212-720-8136); copies o f R egulation A A or the Credit Practices
Rule will be furnished upon request directed to oui Circulars D ivision (Tel. N o . 212-720-5215 or 5216).
E. G
e r a l d
C
o r r ig a n
,
President.
12CFR Part 227
[Reg. AA]
Unfair or Deceptive Acts or Practices;
Update of Staff Guidelines on the
Credit Practices Rule
a g e n c y : Board of Governors of the
Federal Reserve System.
a c t io n : Update of staff guidelines on
the Credit Practices Rule.
s u m m a r y : 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:
Adrienne D. Hurt, Senior Attorney, or
Linda Vespereny, 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.
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)(l)(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
affecting commerce. Section 18(f) of the
FTC Act, 15 U.S.C. 57a(f), provides that
whenever the FTC promulgates a rule
prohibiting acts or practices that it had
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
PRINTED IN NEW YORK, FROM F E D E R A L R E G IS T E R , VOL. 53, NO. 149, pp. 29225-29226
(O v d )
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
2. Summary of the Rule
purpose loans," or “to the extent
The Board’s rule applies to all
permitted by law"). Given the public
consumer credit obligations other than
policy purpose of the rule—to eliminate
those for the purchase of real property.
the use of prohibited contract provisions
It prohibits banks from using certain
in consumer credit obligations—
remedies to enforce consumer credit
§ 227.13(a) is strictly construed to mean
obligations. Under the rule, banks may
that a confession of judgment clause
not include these remedies in their
may not be contained in consumer credit
consumer credit obligations, and if
documentation, even with qualifying
banks purchase obligations that contain
language. Therefore, if a bank uses a
a prohibited provision, banks are
multi-purpose credit document for a
prohibited from enforcing them. The
consumer purpose loan, the bank must
prohibited provisions are: (1)
cross out, blacken in, or otherwise
Confessions of judgment; (2) waivers of
indicate removal of the clause from the
exemption; (3) wage assignments; and
credit document.
(4) non-possessory, nonpurchase-money
Question 13(d)-3a explains that when
security interests in household goods. In a bank refinances a purchase-money
addition, the rule prohibits a certain late obligation originated by another lender,
charge practice, and provides
the acquisition of the purchase-money
protections for cosigners in consumer
lender’s security interest in household
credit transactions.
goods does not violate the rule.
The Board’s rule applies to all banks
Section
227.16 State Exemptions.
and their subsidiaries. Institutions that
Section
227.16 allows a state agency
are members of the Federal Home Loan
to apply for an exemption from all or
Bank System and nonbank subsidiaries
part of the provisions of the Board’s rule.
of bank holding companies are covered
Question 16(b)—
3 has been added to
by the rules of the Federal Home Loan
indicate the exemptions that have been
Bank Board and the FTC, respectively.
granted.
3. Staff Guidelines
List of Subjects in 12 CFR Part 227
Staff guidelines on the Board’s Credit
Banks, Banking, Consumer protection.
Practices Rule were issued in November
Credit,
Federal Reserve System,
1985 (50 FR 47036). The guidelines focus
Finance.
on information of general application
5. Text of Revisions
that will be useful to most banks, and
provide the vehicle for answering
The revisions to the staff guidelines
questions about the rule. The guidelines
on the Credit Practices Rule read as
are updated periodically, as necessary.
follows:
The first update was in October 1980 (51 *
* * * *
FR 39040). This notice contains the
Section 227.13 Unfair Credit Contract
second update.
Provisions.
4. Explanation of Revision to Guidelines
13(a) Confessions of Judgment
Following is a brief description of the
*
*
*
*
A
revisions to the staff guidelines on the
Ql3(a)-2: Language limiting
Board’s Credit Practices Rule.
confession of judgment provision. If a
Section 227.13 Unfair Credit Contract
bank uses multi-purpose credit
Provisions.
contracts, may the bank include a
confession of judgment clause with
Question 13(a)-2 has been added to
clarify the rule regarding the inclusion of qualifying language indicating that the
clause is not applicable in a consumer
a confession of judgment clause in a
purpose loan—such as, “You confess
multi-purpose credit document. Some
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 Part 227). The Board
modified certain provisions of the FTC’s
rule to take into account the needs and
characteristics of the banking industry.
The Board’s rule went into effect on
January 1,1986.
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
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
*
*
*
*
*
Ql3(d)-3a: Refinancing (new
creditor)—original loan purchase
money. On the same facts as those
detailed in Ql3(d)-3, assume that the
consumer refinances the loan with a
different bank. May that bank acquire
the security interest of the purchasemoney 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.
* * * * *
Ql6{b}-3. Exemption 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 20,1988, 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
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.
W illiam W . W iles,
Secretary o f the Board.
[FR Doc. 08-17401 Filed 8-2-88: 8:45 amj
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