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FEDERAL RESERVE BANK
OF N E W YORK
["Circular No. 7622~1
M ay 2, 1975
PROPOSED REGULATION REGARDING
UNFAIR OR DECEPTIVE PRACTICES BY BANKS
To A ll Banks, and Others Concerned,
in the Second Federal Reserve District:
F ollow ing is th e text of a statem en t issued A pril 24 by th e B oard o f G overnors o f th e Federal Reserve
S ystem :
The Board of Governors of the Federal Reserve System today published for comment a proposed regulation
prohibiting the use by banks of certain credit practices the Federal Trade Commission has proposed to declare
unfair.
The Board’s proposed regulation would apply to banks. It parallels a proposed Unfair Credit Practices Rule
applying to nonbanks published for comment by the Federal Trade Commission on April 9. The Board’s action
is based on recent legislation which requires the Board to adopt, with certain exceptions, Federal Trade
Commission regulations respecting unfair or deceptive acts or practices within 60 days of the adoption of such
rules by the Commission.
The Board’s proposed regulation, like the Commission’s, would prohibit the use of specified collection
practices and the incorporation in credit contracts of provisions considered by the Commission to be unfair. The
proposed regulation would also require that specific disclosures be made to cosigners to inform them of the legal
ramifications of agreements they sign.
The Board published the FrC proposals virtually unchanged, except to apply them to banks, so as to elicit
bank comment as promptly as possible in view of the limited time allowed by statute for Board action after the
FTC adopts final rules. It is hoped that publication of the proposal will focus attention on any operational
problems the proposed rules might create for banks.
Comment may be sent to the Federal Reserve Board (with a copy to the Federal Trade Commission) in
Washington through June 10, 1975.
E n clo sed is a copy o f the proposed regulation. C o m m en ts th e re o n should be su b m itted by June 10,
1975, an d m ay be sent to our B ank R egulations D e p a rtm e n t.
A d d itio n al copies o f this circular an d th e enclosure will be fu rn ish e d u p o n request.
A L F R E D H A Y ES,
P re sid e n t .
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
[1 2 C .F .R . PART 2 2 8 ]
UNFAIR OR DECEPTIVE ACTS OR PRACTICES
N o t ic e o f Proposed R u lem akin g
The F e d e r a l R e s e rv e Board is
c o n s id e r in g th e is s u a n c e o f
r e g u la t io n s w it h r e s p e c t t o u n f a i r o r d e c e p t iv e c r e d i t p r a c t ic e s by
banks.
These r e g u la t io n s w o u ld be is s u e d p u rs u a n t to th e a u t h o r i t y
o f S e c tio n 1 8 ( f )
o f th e F e d e r a l T ra d e Commission A c t
(1 5 U .S .C *
§ 41 et s e q .
as amended by P u b lic Law 9 3 - 6 3 7 ) .
T h a t A c t g iv e s th e Board a u t h o r i t y
t o d e v e lo p such r e g u la t io n s on i t s
own i n i t i a t i v e
r u le s p ro m u lg a te d by th e F e d e r a l T ra d e Com m ission.
o r i n re s p o n s e to
It
p ro v id e s t h a t
w henever th e F e d e r a l T ra d e Commission p r e s c r ib e s a r u l e p r o h i b i t i n g
u n f a i r o r d e c e p tiv e a c ts o r p r a c t i c e s ,
t h e r e a f t e r p ro m u lg a te s u b s t a n t i a l l y
s u b s ta n tia lly
th e Board s h a l l w i t h i n 60 days
s i m i l a r r e g u la t io n s p r o h i b i t i n g
s i m i l a r a c ts o r p r a c t ic e s o f b a n k s , u n le s s th e Board
f in d s e i t h e r t h a t such a c ts o r p r a c t ic e s o f banks a r e n o t u n f a i r o r
d e c e p tiv e o r t h a t im p le m e n ta tio n o f s i m i l a r r e g u la t io n s w it h r e s p e c t
to banks w o u ld s e r io u s ly c o n f l i c t w it h e s s e n t i a l m o n e ta ry and payments
8y8terns p o l i c i e s
o f th e B o ard.
The F e d e r a l T ra d e Commission has p roposed a r u l e p r o h i b i t i n g
th e use o f c e r t a i n c o n t r a c t u a l term s f r e q u e n t ly in c lu d e d i n consumer
c r e d i t c o n t r a c t s and c e r t a i n
a id
p r a c t ic e s o f t e n em ployed by c r e d i t o r s
in th e c o l l e c t i o n o f u n p a id d e b ts .
The p ropo sed r u l e w o u ld a ls o
r e q u i r e d is c lo s u r e s to c o s ig n e rs w h ic h c l e a r l y
r a m i f i c a t i o n s o f th e o b lig a t io n s
to
in fo r m
to w h ich th e y a g r e e .
them o f th e
-2
F a ilu r e
to co n fo rm w i t h th e term s o f t h e r u l e w ould be
c o n s id e r e d an u n f a i r o r d e c e p t iv e a c t o r p r a c t i c e p r o h ib it e d u nder
§ 5 (a )(1 )
o f th e F e d e r a l T ra d e Commission A c t
(1 5 U .S .C .
§41 e t s e q . ) .
I n o r d e r t o a s s u re t h a t p o t e n t i a l l y
a f f e c t e d banks a r e aw are
o f th e p ro p o sed r u l e and to have th e b e n e f i t o f t h e i r s u g g e s tio n s on
such m a t t e r s , th e Board i s p u b lis h in g f o r comment a s u b s t a n t i a l l y
i d e n t i c a l r u l e as w e l l as a s u b s t a n t i a l l y
i d e n t i c a l v e r s io n o f th e
C o m m iss io n 's S ta te m e n t o f Reason f o r th e P roposed R u le .
The o n ly
a l t e r a t i o n s made b y th e Board to th e C o m m issio n 's p ro p o s a l a r e th o s e
c o n fo rm in g th e s e c t io n a l d e s ig n a tio n s t o 12 C .F .R * p a r t 228 and c e r t a i n
d e f i n i t i o n a l c h an g es, e . g .
s u b s titu tin g
"b a n k s " f o r " le n d e r s w i t h i n th e
j u r i s d i c t i o n o f th e F e d e r a l T ra d e C o m m issio n .11
A c c o r d in g ly ,
th e B oard h e re b y p u b lis h e s
f o r comment a p r o
posed r u l e p o t e n t i a l l y a p p lic a b le to b a n k s :
S ec.
2 2 8 .1
D e fin itio n s .
2 2 8 .2
U n fa ir c r e d it p r a c tic e s .
AUTHORITY:
The p r o v is io n s o f t h i s P a r t 228 is s u e d u n d e r 38 S t a t .
as am ended, 15 U .S .C .
§ 2 2 8 .1
(a )
717,
§ 4 1 , e t seq.
D e fin itio n s .
L e n d e r.
Any bank w i t h i n th e j u r i s d i c t i o n o f th e Board o f
G o v e rn o rs o f th e F e d e r a l R e s e rv e S ystem , th e Board o f D ir e c t o r s o f th e
F e d e r a l D e p o s it In s u r a n c e C o r p o r a tio n , o r th e C o m p tr o lle r o f th e C u rre n c y .
(b )
R e t a i l in s t a lm e n t s e l l e r .
A p e rs o n who s e l l s goods o r s e r v ic e s
t o consum ers on a d e f e r r e d paym ent b a s is o r p u rs u a n t t o a le a s e -p u rc h a s e
a rra n g e m e n t.
-3 -
(c )
P e rs o n .
An i n d i v i d u a l , c o r p o r a t io n o r o t h e r b u s in e s s
o r g a n iz a tio n .
(d )
Consum er.
A n a t u r a l p e rs o n who seeks o r a c q u ir e s goods,
s e r v ic e s o r money f o r p e r s o n a l,
(e )
or r e ta il
O b lig a tio n .
f a m ily o r h o u s e h o ld u s e .
An a g reem en t betw een a consumer and a le n d e r
in s t a lm e n t s e l l e r .
(f)
C r e d ito r .
(g )
D e b t.
A le n d e r as d e f in e d i n
5 2 2 8 .1 (a )
Money w h ic h i s due o r a lle g e d to be due fro m one to
a n o th e r.
(h )
C o - s ig n e r .
A n a t u r a l p e rs o n who, by a g re e m e n t and w it h o u t
c o m p e n s a tio n , r e n d e rs h im s e lf l i a b l e
(i)
H o u seh o ld g o o d s.
C lo t h in g ,
f o r th e o b l i g a t i o n o f a consum er.
fu r n itu r e ,
a p p lia n c e s ,
c h in a , c r o c k e r y , k it c h e n w a r e , and p e rs o n a l e f f e c t s
lin e n s ,
o f th e consumer
and h i s d e p e n d e n ts .
(j)
P e rs o n a l l o a n .
A lo a n o f money t o a consum er as d i s t i n
g u is h e d fro m a s a le o f goods o r s e r v ic e s on a d e f e r r e d payment b a s is
o r p u rs u a n t to a le a s e -p u r c h a s e a rra n g e m e n t.
(k )
C o lle c tin g a d e b t.
j u d i c i a l p ro c e s s w h ic h i s
rep aym en t o f a l l
(1 )
Any a c t i v i t y
o t h e r th a n th e use o f
In te n d e d t o b r in g ab o u t o r does b r in g a b o u t
o r p a r t o f a consumer d e b t , e x c e p t:
I n q u i r y to lo c a t e a consumer whose w h e re a b o u ts a r e g e n u in e ly
unknown to th e c r e d i t o r ; a n d /o r
(2 )
I n q u i r y to d e te rm in e th e n a tu r e and e x t e n t o f a co n su m er's
wages o r p r o p e r t y ;
-4-
P ro v id e d T h a t ,
in
o f t h e a lle g e d
In d e b te d n e s s .
(1 )
O th e r d e f i n i t i o n s .
Code r e t a i n
§ 2 2 8 .2
th e s e two in s t a n c e s , no s p e c i f i c m e n tio n is made
Words d e fin e d
t h e i r UCC d e f i n i t i o n s
in
th e U n ifo rm C om m ercial
f o r th e purp oses o f t h i s p a r t .
U n fa ir c r e d it p r a c tic e s .
I n c o n n e c tio n w i t h th e e x te n s io n o f c r e d i t
o r a f f e c t i n g commerce, as commerce is d e f in e d in
Commission A c t,
it
is
To ta k e o r r e c e iv e
(1 )
th e m eaning o f
or in d ir e c tly :
from a consumer an o b l i g a t i o n w h ic h :
C o n s t it u t e s o r c o n ta in s
w a rra n t o f a tto rn e y ,
th e F e d e r a l T rad e
an u n f a i r a c t o r p r a c t i c e w i t h i n
S e c tio n 5 o f t h a t A c t f o r a le n d e r d i r e c t l y
(a )
to consumers in
a c o g n o v it,
c o n fe s s io n o f ju d g m e n t,
power o f a t t o r n e y o r o th e r w a iv e r o f th e r i g h t
t o n o t ic e and th e o p p o r t u n it y to be h e a rd in
th e e v e n t o f s u i t o r
p ro c es s th e r e o n ;
(2 )
C o n s t it u t e s o r c o n ta in s a w a iv e r o r l i m i t a t i o n o f exem p tio n
from a tta c h m e n t,
e x e c u tio n o r o t h e r p ro c e s s on r e a l o r p e rs o n a l
p r o p e r t y h e l d , owned by o r due to th e consum er;
(3 )
C o n s t it u t e s
o r c o n ta in s an a s s ig n m en t o f w ages;
[ A l t e r n a t e s u b p a ra g ra p h
(3 )
(3 ):
C o n s t it u t e s o r c o n ta in s an assig n m en t o f wages u n le s s
th e amount o f th e o b l i g a t i o n
le s s and no o t h e r s e c u r i t y
is
t h r e e hundred d o l l a r s
in te r e s t is
ta k e n w it h
( $ 3 0 0 .0 0 ) o r
r e s p e c t to th e
o b lig a tio n ;]
(4 )
C o n s t it u t e s o r c o n ta in s a s e c u r i t y
i n t e r e s t o th e r th an a
P u rch ase Money s e c u r i t y i n t e r e s t , EXCEPT, w h ere th e pro ceed s o f a
<f 5 -
p e r s o n a l lo a n a r e NOT to be PRIMARILY a p p lie d
to th e p u rc h a s e o f
consuoser g o o d s, th e le n d e r may ta k e a s e c u r i t y i n t e r e s t
i n OTHER THAN
h o u s e h o ld goods;
(5 )
r e ta il
Encumbers goods p u rch ased on d i f f e r e n t d a te s
from a
in s t a lm e n t s e l l e r on a d e f e r r e d paym ent b a s is , u n le s s th e
c o n t r a c t p r o v id e s t h a t paym ents made by th e consumer w i l l be c r e d it e d
in
fu ll
in
th e o r d e r a c q u ir e d ;
(6 )
t o th e e a r l i e s t p u rc h a s e to r e le a s e th e goods from encum brance
F a ils
t o e n u m e ra te and s p e c i f i c a l l y i d e n t i f y
each i n d i v i d u a l
it e m o f p r o p e r t y encum bered by i t ;
(7 )
F a ils
to p r o v id e t h a t i f
th e c r e d i t o r r e ta k e s encumbered
p r o p e r t y fro m th e consum er, th e f a i r m a rk e t r e t a i l v a lu e o f th e
p r o p e r t y so ta k e n w i l l be c r e d it e d
to w a rd th e b a la n c e due u n d er th e
o b lig a tio n ;
(8 )
C o n s t it u t e s o r c o n ta in s a p r o v is io n r e q u i r i n g th e payment
o f a t t o r n e y 's
fe e s o r any o t h e r c o s ts
in c id e n t to th e c o l l e c t i o n o f
th e o b l i g a t i o n ;
[A lte r n a te
(8 )
s u b p a rag rap h
(8 ):
C o n s t it u t e s o r c o n ta in s a p r o v is io n w h ic h :
(!)
W ith r e s p e c t t o a consum er lo a n in w h ic h th e fin a n c e
c h a rg e c a lc u la t e d a c c o rd in g t o
18 p e r c e n t p e r y e a r , p r o v id e s
a t t o r n e y 's
th e a c t u a r i a l m ethod i s more th a n
f o r paym ent by th e consumer o f
fe e s :
(A )
if
t h e lo a n i s n o t p u rs u a n t to o p e n -e n d c r e d i t
and t h e amount fin a n c e d i s
(B )
if
th e lo a n i s
$ 1 ,0 0 0 o r l e s s ; o r
p u rs u a n t to o p en -en d c r e d i t and
-6 -
th e b a la n c e o f th e a c c o u n t a t th e tim e o f d e f a u l t
is
$ 1 ,0 0 0 o r l e s s ;
< ii)
p r o v id e s
W ith r e s p e c t to an y o th e r consumer c r e d i t t r a n s a c t io n ,
f o r paym ent by th e consumer o f a t t o r n e y 's
(A ) such fe e s do n o t exceed f i f t e e n
at
fe e s u n le s s
p e rc e n t o f th e u n p a id d e b t
th e tim e o f d e f a u l t and (B ) such fe e s become due o n ly a f t e r
a c t u a l r e f e r r a l o f th e o b l i g a t i o n
to an a t t o r n e y who i s n o t a
s a l a r i e d em ployee o f th e c r e d i t o r ; ]
(9 )
P ro v id e s f o r c h a rg e s f o r l a t e o r e x te n d e d paym ents w h ic h exceed
th e amount d e r iv e d
from a p p l i c a t i o n o f th e a n n u a l p e rc e n ta g e r a t e
g o v e rn in g th e t r a n s a c t io n to th e paym ent o r payments l a t e
o r e x te n d e d ;
or
(1 0 )
F a ils
to p r o v id e t h a t th e c r e d i t o r s h a l l n o t ,
o f c o lle c t in g a d e b t,
i n t h e c o u rse
com m unicate o r t h r e a t e n t o com m unicate w it h
th e
co n s u m e r’ s e m p lo y e r o r any a g e n t o f th e e m p lo yer o r any o t h e r perso n
not lia b le
f o r th e d e b t o t h e r th a n th e spouse o r a t t o r n e y o f th e
consum er, e x c e p t as p e r m it t e d by o r d e r o f a c o u r t .
(b )
To o b l i g a t e a c o - s ig n e r o t h e r th a n t h e spouse o f th e consumer
on any o b l i g a t i o n
(1 )
u n le s s :
The c o - s ig n e r i s
l e a s t t h r e e days p r i o r
in
f u r n is h e d w it h a s e p a r a te s ta te m e n t,
to h is becom ing o b lig a t e d , w h ic h s h a l l c o n ta in
te n p o in t b o ld fa c e ty p e th e f o llo w in g in f o r m a t io n w it h
such l i m i t a
t io n s as n e c e s s a ry t o conform t o a p p lic a b le S t a t e la w and no o th e r :
at
-7-
NOTICE TO CO-SIGNER
(D a te )
BY SIGNING THIS CONTRACT YOU ARE AGREEING TO
PAY [ Amount o f C o n t r a c t ] TO [Name o f L e n d e r ],
I F [ Name o f P r i n c i p a l D e b to r ]
DOES NOT.
I F FOR ANY REASON [ Name o f P r i n c i p a l D e b to rl
DOES NOT PAY THIS [ Amount o f C o n t r a c t ]
OR ANY
PART OF I T WHEN I T IS DUE, YOU HAY BE REQUIRED
TO PAY THE AMOUNT WHICH HAS NOT BEEN PAID OR
ANY PART OF I T .
HOWEVER, BEFORE YOU CAN BE
HELD LIABLE FOR THE DEBT, [ Name o f L e n d e r]
MUST F IR S T DILIGENTLY ATTEMPT TO COLLECT THE
DEBT FRCJM [ Name o f P r i n c i p a l D e b to r] .
YOU MAY BE SUED ON THIS CONTRACT I F [ Name o f
P r i n c i p a l D e b to r l
DOES NOT PAY AS AGREED
FOR ANY REASON.
IF
[ Name o f L e n d e r] WINS A
S U IT AGAINST YOU IN COURT, I T MAY TAKE A PART
OF YOUR WAGES EACH WEEK U N TIL THE DEBT IS PAID
IN FULL; I T MAY TAKE YOUR SAVINGS OR REAL OR
PERSONAL PROPERTY WHICH YOU OWN TO PAY THIS
DEBT; AND IT MAY USE OTHER LAWFUL MEANS TO COLLECT
TH IS DEBT FROM YOU.
YOU MAY BE SUED EVEN I F [ Name o f P r i n c i p a l , D e b to r}
IS NOT SUED I F HE HAS NOT PAID AS AGREED, BUT YOU
MAY SUE H IM TO COLLECT ANY MONEY YOU HAVE PAID ON
H IS BEHALF.
T H IS NOTICE IS NOT THE CONTRACT YOU WILL BE
ASKED TO SIGN, YOU MUST BE GIVEN A COPY
OF THAT CONTRACT AND OF TH IS NOTICE.
(S ig n a tu r e o f C o - s ig n e r )
-8
(2 )
T h re e days o r more a f t e r r e c e i v i n g th e NOTICE TO CO-SIGNER,
th e c o - s ig n e r s ig n s a docum ent e v id e n c in g th e o b l i g a t i o n w h ich d i s
c lo s e s
fchfe f u l l amount he may be asked to r e p a y ;
(3 )
The c o - s ig n e r i s
docum ent t h a t he is
fu r n is h e d w it h a co m p leted copy o f e v e ry
asked to s ig n o r t h a t i s
fu r n is h e d to th e consum er;
and
(4 )
Any document e v id e n c in g th e o b l i g a t i o n c o n ta in s
th e
fo llo w in g n o tic e ;
No c o - s ig n e r o r s u r e t y o f t h i s
under except a f t e r
o b l i g a t i o n s h a l l be l i a b l e
th e le n d e r o r r e t a i l
em ployed due d i l i g e n c e
th e re
in s t a lm e n t s e l l e r has
i n a t t e m p tin g t o c o l l e c t
th e o b l i g a t i o n
fro m th e p r i n c i p a l d e b t o r .
No c o - s lg n e r o r s u r e t y o f t h i s
lia b le
o b l i g a t i o n s h a l l be
th e r e u n d e r f o r more th a n th e t o t a l o f paym ents
f o r w h ic h th e p r i n c i p a l d e b to r i s
lia b le
a t th e tim e
t h a t t h e c o - s ig n e r becomes o b lig a t e d .
No c o - s ig n e r o r s u r e t y o f t h i s
lia b le
o b l i g a t i o n s h a l l be
th e re u n d e r u n le s s p ro m p tly n o t i f i e d
in w r it in g
o f any d e f a u l t by th e p r i n c i p a l d e b t o r .
The f o llo w in g i s
a s ta te m e n t by th e F e d e r a l T ra d e Commission
o f th e re a s o n s f o r th e p ro p o sed r u l e :
STATEMENT OF REASON FOR
THE PROPOSED RULE
It
to s e t f o r t h
p a r tic u la r ity
is
its
th e C o m m issio n 's p u rp o s e ,
re a s o n f o r p ro p o s in g t h i s
to a llo w
in fo rm e d comment.
in is s u in g t h i s
r u l e w it h
s ta te m e n t,
s u ffic ie n t
The p r e c is e fo rm a t o f such
-9-
s ta te m e n ts may v a r y from r u l e
to r u l e
th e Is s u e s in v o lv e d .
p r o c e e d in g , we h a v e d e te rm in e d t h a t
In
th is
d ep e n d in g on th e c o m p le x ity o f
m e a n in g fu l comment by th e p u b lic w i l l be b e s t f a c i l i t a t e d
(1 )
by p r e s e n tin g
a s ta te m e n t d e s c r ib in g t h e b a s ic f a c t u a l and le g a l p re m is e s upon
w h ic h th e Commission has d e te rm in e d t o propo se t h e r u l e ,
and ( 2 )
a
s e r ie s o f q u e s tio n s d e s ig n e d to draw to th e p u b l i c ’ s a t t e n t i o n m a tte r s
w h ic h th e Com m ission p r e s e n t ly deems p a r t i c u l a r l y
w h ic h comment i s
p e r t i n e n t and on
e s p e c ia lly s o lic it e d .
The Commission em p h asizes .th a t n e i t h e r th e s ta te m e n t o f f a c t u a l
and l e g a l p re m is e s n o r th e q u e s tio n s s h o u ld be i n t e r p r e t e d as d e s ig
n a t in g d is p u te d is s u e s o f s p e c i f i c
made by th e Commission o r i t s
fa c t.
Such d e s ig n a tio n s s h a l l be
d u ly a u t h o r iz e d p r e s id in g o f f i c i a l
p u rs u a n t t o th e C o m m issio n 's R u le s o f P r a c t ic e .
S ta te m e n t
TBae Commission has re a s o n to b e l i e v e th a t
t h a t te rm i s
d e f in e d i n
many c r e d i t o r s , as
th e p roposed r u l e , u t i l i z e
form c o n t r a c ts
i n consumer c r e d i t t r a n s a c t io n s w h ic h c o n s t i t u t e o r c o n t a in : a
c o g n o v it p r o v is io n
( a ls o known as a ’’c o n fe s s io n o f ju d g m e n t" and
" w a r r a n t o f a t t o r n e y " ) , a w a iv e r o f s t a t u t o r y p r o p e r t y e x e m p tio n s ,
a wage a s s ig n m e n t, a p r o v is io n c r e a t in g b la n k e t s e c u r i t y i n t e r e s t s ,
a re q u ir e m e n t t h a t th e consumer re im b u rs e th e c r e d i t o r f o r a t t o r n e y
fe e s when th e c o n t r a c t i s
Im p o s in g l a t e
In c lu d e d I n
re fe rre d
c h a rg es and e x te n s io n f e e s ;
t h a t th e s e p r o v is io n s a r e
fo rm c o n t r a c t s w it h o u t r e g a r d t o th e a c t u a l r i s k o f non
repaym ent b o rn e by th e c r e d i t o r
t o an a t t o r n e y , and p r o v is io n s
in a g iv e n c a s e ;
t h a t th e s e re m e d ie s
-1 0 -
in j u r e
in
consum ers; and t h a t consumers r e c e iv e no s u b s t a n t ia l b e n e f i t
exchange f o r th e a b o v e - lis t e d c r e d i t o r re m e d ie s .
The Commission has re a s o n to b e lie v e a d d i t i o n a l l y
t h a t many
c r e d i t o r s abuse th e d e f i c ie n c y judgm ent mechanism by s e l l i n g re p o s
sessed goods a t p r ic e s
s u b s t a n t i a l l y b elo w t h e i r
f a i r m a rk e t r e t a i l
v a lu e .
T h e Com m ission f u r t h e r has re a s o n to b e lie v e
u tiliz e
form c o n t r a c t s
[§ 2 2 8 . 2 ( a ) ( 1 0 ) ]
c e r ta in
lim ita tio n s
[§ 2 2 8 . 2 ( b ) ]
re g a rd to
many c r e d i t o r s
i n consumer c r e d i t t r a n s a c t io n s w h ic h f a i l
in c lu d e p r o v is io n s l i m i t i n g
in
th a t
c o n ta c ts ' w it h
o f th e p ro p o sed r u l e ,
on th e l i a b i l i t y
o f th e p r o p o s a l;
th ir d p a r tie s ,
and w h ic h f a i l
to
as s p e c if ie d
to p la c e
o f c o - s ig n e r s , as s p e c if ie d
in
t h a t th e s e p r o v is io n s a r e o m itte d w it h o u t
th e a c t u a l r i s k o f n o n -re p a y m e n t b orne by th e c r e d i t o r i n a
g iv e n c a s e ; t h a t consum ers a r e in ju r e d by s a id
and c o - s ig n e r s a r e in j u r e d by f a i l u r e
c o - s ig n e r l i a b i l i t y ;
th ir d -p a r ty
c o n ta c ts
t o p la c e s a id l i m i t a t i o n s
on
and t h a t consumers r e c e iv e no s u b s t a n t ia l
b e n e f i t i n exchange f o r th e absence o f s a id l i m i t a t i o n s
on t h i r d - p a r t y
c o n ta c ts n o r do c o - s ig n e r s r e c e iv e a s u b s t a n t ia l b e n e f i t i n exchange
f o r th e absence o f s a id l i m i t a t i o n s
on t h e i r l i a b i l i t y .
The
Comm ission has f u r t h e r re a s o n t o b e lie v e t h a t many c r e d it o r s
fa il
t o p r o v id e c o - s ig n e r s o f consumer o b lig a t io n s w it h n e c e s s a ry i n f o r
m a tio n , as s p e c i f i e d
o f th e n o t ic e
in
in
[§ 2 2 8 . 2 ( b ) ( 1 ) ,
(b )(3 )]
and th e l a s t p a ra g ra p h
( b ) ( 4 ) o f th e p roposed r u l e and t h a t consumer c o n t r a c ts
a r e g e n e r a l l y c o -s ig n e d i n an atm o sp h ere o f h ig h p r e s s u r e .
-1 1
The Commission d e te rm in e d
above a s s e r t io n s a f t e r
th a t i t
has re a s o n to b e lie v e
i t was p re s e n te d w it h
th e
in f o r m a t io n c o m p ile d
by th e s t a f f d u r in g a tw o -y e a r i n v e s t i g a t i o n o f th e c h a r a c t e r and use
o f c o lle c tio n
rem ed ies a s s o c ia te d w it h consumer c r e d i t agreem ents
th ro u g h o u t th e U n ite d S t a t e s .
In
th e c o u rs e o f t h i s
in v e s tig a tio n
th e Commission s t a f f has r e c e iv e d d ocum en tary e v id e n c e on th e s e
re m e d ie s in
thousands o f a c t u a l c a s e s .
It
has o b ta in e d o f f i c i a l
c o r p o r a t e s ta te m e n ts c o n c e rn in g c o l l e c t i o n p ro c e d u re s and s t r a t e g ie s
and c o p ie s o f form c o n t r a c t s .
In
a d d itio n ,
th e s t a f f has e v a lu a te d
p e r t i n e n t s t a t e s t a t u t e s and j u d i c i a l r u l i n g s ,
p erso n s w i t h
an i n t e r e s t
in t e r v ie w e d many
in th e m a t t e r , and exam ined th e f in d in g s o f
th e N a t io n a l Commission on Consumer F in a n c e .
The Commission has n o t
a d o p te d any f in d in g s o r c o n c lu s io n s o f th e s t a f f .
f a c t in
th is
A ll
f in d in g s
p ro c e e d in g s h a l l be based s o l e l y on m a t te r in
of
th e
r u le m a k in g r e c o r d .
The C om m issio n 's a u t h o r i t y t o exam ine and p r o h i b i t u n f a i r
p r a c tic e s
d ic tio n
i n o r a f f e c t i n g commerce has been a n a lo g iz e d to th e j u r i s
o f an e q u it y c o u r t .
—^ T h u s , w h ere one p a r t y t o a t r a n s a c t io n
e n jo y s s u b s t a n t i a l a d v a n ta g es w i d i r e s p e c t to th o se w it h whom he d e a ls ,
it
is
a p p r o p r ia t e
f o r th e Commission to conduct an i n q u i r y to
d e te rm in e w h e th e r th a t p a r t y uses an o verabundance o f m a rk e t power
in
1/
an in e q u i t a b l e m anner.
A c c o r d in g ly ,
S p e rry and H u tc h in s o n v .
th e Commission is
F . T . C . . 4 0 5 U .S . 2 3 3 ,
p ro c e e d in g
244 ( 1 9 7 2 ) .
-12-
upon th e th e o r y t h a t r e l i e f o f th e v a r i e t y
s u b p a ra g ra p h s o f
2/
[§ 2 2 8 .2 ]
—
proposed in c e r t a i n
i s m andated by S e c tio n 5 o f th e F e d e ra l
T ra d e Commission A c t i f :
(1 )
The c r e d i t o r im poses upon consumers c o n tr a c ts
o f a d h e s io n ( i . e . , th e c r e d i t cu sto m ers c a n n o t b a rg a in
o v e r th e p a r t i c u l a r c o n t r a c t p r o v is io n s ) w h ic h c o n ta in
p r o v is io n s d is a d v a n ta g e o u s to consumers o r th e c r e d i t o r
f a i l s t o In c lu d e i n th e c o n t r a c t s o f a d h e s io n p r o v is io n s
b e n e f i c i a l to consum ers, a l l to th e consum ers' d e t r im e n t ;
and
(2 )
T h is d e t r im e n t t o consumers i s n o t o f f s e t by a re a s o n a b le
m easure o f v a lu e r e c e iv e d i n r e t u r n .
The Com m ission a d d i t i o n a l l y b e lie v e s
in
[§ 2 2 8 . 2 ( a ) ( 7 ) ]
i s m e r it e d i f
t h a t th e r e l i e f s p e c if ie d
th e d e f i c i e n c y Judgment mechanism is
abused th ro u g h th e s a le o f re p o s s e s s e d s e c u re d p r o p e r t y a t p r ic e s
s u b s t a n t i a l l y b elo w t h e p r o p e r t y 's
f a i r m a rk e t r e t a i l v a lu e .
The Com m ission f u r t h e r b e lie v e s
r e l i e f s p e c ifie d
in
o f th e n o t ic e in
(b )(4 )
t h a t S e c tio n 5 r e q u ir e s
{§ 2 2 8 . 2 ( b ) ( 1 ) and
if
th e in f o r m a t io n s p e c i f ie d
th e f a i l u r e
in
(b )(3 )]a n d
th e l a s t p a ra g ra p h
t o p r o v id e c o - s ig n e r s w it h
s a id p a ra g ra p h s d e n ie s c o - s ig n e r s a d e q u a te
in f o r m a t io n a b o u t th e n a tu r e o f t h e c o s t o f c r e d i t ,
c o -s ig n e r s '
th e
th e e x t e n t o f th e
o b l i g a t i o n s o r e v e n ts w h ic h may s u b s t a n t i a l l y a f f e c t
th e ir
in t e r e s t s .
2/
( a ) ( 1 ) ( p e r t a i n i n g t o c o g n o v it s ) , ( a ) ( 2 ) ( p e r t a i n i n g to w a iv e r s
o f s t a t u t o r y p r o p e r t y e x e m p tio n s ), ( a ) ( 3 ) ( p e r t a i n i n g t o wage
a s s ig n m e n ts ), ( a ) ( 4 ) , ( a ) ( 5 ) , ( a ) ( 6 ) ( a l l p e r t a i n i n g to b la n k e t
s e c u r ity i n t e r e s t s ) , ( a ) ( 8 ) (p e r ta in in g to a tto r n e y fe e s ) , ( a ) ( 9 )
( p e r t a i n i n g to l a t e c h a rg e s and e x te n s io n f e e s ) , and ( a ) ( 1 0 )
( p e r t a i n i n g t o c o n ta c ts w it h t h i r d p a r t i e s ) , and th e f i r s t two
p a ra g ra p h s o f th e n o t ic e i n (b ) ( 4 ) ( p e r t a i n i n g to l i a b i l i t y o f
c o -s ig n e r s ).
-1 3 F in a lly ,
r e q u ir e s
It
is
th e C om m ission's b e l i e f t h a t S e c tio n 5
th e r e l i e f s p e c i f i e d
p r e s s u re g e n e r a l l y a tte n d s
in
[§ 2 2 8 . 2 ( b ) ( 2 ) ]
th e t r a n s a c t io n s
if
c o n s id e r a b le
i n w h ic h consumers
c o - s ig n consumer o b l i g a t i o n s .
Q u e s tio n s
1.
A re th e c o n t r a c t s used I n consumer c r e d i t t r a n s a c t io n s d r a f t e d
by c r e d i t o r s
" ta k e I t
i n s ta n d a r d iz e d fo rm and p re s e n te d to consumers on a
o r le a v e i t "
b a s is u n d e r c irc u m s ta n c e s t h a t p r e c lu d e mean
i n g f u l b a r g a in in g o v e r th e term s th e r e o f ?
d r a f t e d and p r e s e n te d i n
s ig n ific a n tly
ch o o se , i f
In
th e case.
from le n d e r to le n d e r in such a way t h a t consumers c o u ld
d i f f e r e n t r e m e d ia l p r o v is io n s .
th e accom panying p r e lim in a r y s ta te m e n t th e Commission has
t e n t a t i v e ap p ro ach t o u n fa ir n e s s
c r e d i t o r s ' re m e d ie s .
o p p o s in g t h i s
It
is
i n th e c o n te x t o f
i n t e r e s t e d i n a n a ly s is
s u p p o rtin g o r
th e o r y and i n o t h e r t h e o r ie s o f u n f a ir n e s s u n d e r
S e c tio n 5 (1 5 U .S .C .
§ 45 ( 1 9 7 0 ) ) and how th e y m ig h t a p p ly to th e a r e a .
Econom ic th e o r y su g g e sts t h a t i n a f r e e l y
m a rk e t th e re m e d ie s c o n ta in e d i n
f u n c t io n in g c r e d i t
c r e d i t c o n t r a c t s w o u ld r e p r e s e n t
an e q u il i b r iu m b etw ee n th e c o s ts and b e n e f i t s
as a w h o le to consumers and c r e d i t o r s .
in
The Commission
th e y so d e s ir e d , by p ic k in g one le n d e r as opposed to
o u t li n e d i t s
3.
is
i n w h e th e r o r n o t such form c o n t r a c t s v a r y
a n o t h e r , b etw een c o n t r a c t s w it h
2.
th e s e c o n t r a c t s a r e
t h i s m an n er, th e Commission w o u ld be i n t e r
e s te d i n r e c e i v in g comments on why t h i s
w o u ld a ls o be i n t e r e s t e d
If
o f th e t r a n s a c t io n
The Com m ission i s
in te r e s te d
comment on w h e th e r (due t o la c k o f in f o r m a t io n , c o l l u s i o n ,
(ta c it or
-14-
e x p lic it)
fa lls
governm ent r e g u l a t i o n ,
t o re a c h t h i s
If
o r some o t h e r c a u s e ) th e m a rk e t
e q u ilib r iu m w it h r e s p e c t to c r e d i t o r s *
th e m a rk e t has f a i l e d
w is h e s t o know how I t
has f a i l e d ,
I n some w ay,
re m e d ie s .
th e Commission
th e causes o f such f a i l u r e ,
and
a p p r o p r ia te n e s s and ad eq uacy o f th e p ropo sed r u l e as a remedy f o r
an y such f a i l u r e .
4.
The Commission w is h e s to know th e e f f e c t o f th e p roposed r u l e
on th e c o s ts o f a n d /o r r e s t r i c t i o n s
w h e th e r th e s e c o s ts o r r e s t r i c t i o n s ,
g roups an d ,
w it h
th is
if
on th e a v a i l a b i l i t y
if
o f c r e d i t and
a n y , w o u ld f a l l on p a r t i c u l a r
s o , th e c h a r a c t e r i s t i c s o f th e s e g ro u p s .
I n c o n n e c tio n
q u e s tio n th e Commission p a r t i c u l a r l y d e s ir e s a n a ly s is based
on s p e c i f i c d a ta and e x p e r ie n c e .
5.
Do consum ers r e c e iv e any s u b s t a n t ia l b e n e f i t o r q u id p ro quo
f o r a c c e d in g t o th e p r a c t ic e s
t h a t w o u ld be p r o s c r ib e d by th e propo sed
r u le ?
6.
The Commission seeks comment on a l l a s p e c ts o f th e I n t e r a c t i o n
o f th e p ro p o sed r u l e w i t h s t a t e
law s g o v e rn in g c r e d i t and c r e d i t o r s '
re m e d ie s .
7.
F o r each o f th e i n d i v i d u a l r u l e
p r o v is io n s ,
th e Commission
d e s ir e s comment on th e n a tu r e and e x t e n t o f any consumer i n j u r y
a s s o c ia t e d w i t h
th e p r a c t i c e b e in g r e s t r i c t e d , and o f any b e n e f it s
flo w in g to consumers from th e p r a c t i c e w h ich m ig h t o f f s e t such i n j u r y .
8.
The Commission w is h e s to know w h e th e r any i n j u r y w h ich may be
a s s o c ia t e d w it h
p r a c t ic e s r e s t r i c t e d by th e r u l e may be e lim in a t e d
w it h o u t e l i m i n a t i n g th e p r a c t ic e s e n t i r e l y .
That is ,
a r e th e r e o th e r
-1 5 -
and b e t t e r ways o f a c h ie v in g th e r e s u l t s w h ich th e r u l e
seeks to
a c h ie v e ?
9.
The Commission r e q u e s ts comment on t h e p r e v a le n c e o f th e
c h a lle n g e d p r a c t i c e s .
10.
The Commission a ls o seeks comments e v a lu a t in g th e econom ic
e f f e c t o f th e r u l e
11.
on s m a ll b u s in e s s .
A re t h e r e any u n f a i r o r d e c e p tiv e consumer c r e d i t p r a c t ic e s
not
c o v e re d by th e p ro p o sed r u l e w hich m ig h t a p p r o p r i a t e l y be in c lu d e d ?
12.
Two p r o v is io n s
to t h e s e ,
th e Commission i s
w h ic h a l t e r n a t i v e
(a )
o f th e r u l e a r e s t a t e d i n
is
As
in t e r e s t e d i n comment on
p r e fe r a b le .
Wage a s s ig n m e n ts .
e ffe c ts
s p e c ific a lly
th e a l t e r n a t i v e .
Wage a ssig n m en ts may have d e le t e r io u s
on consumers by d e p r iv in g them o f th e o p p o r t u n it y to
a s s e r t l e g i t i m a t e d e fe n s e s and by c a u s in g lo s s o f employm ent
o r th e t h r e a t o f such lo s s .
Some com m entators s u g g e s t, h o w ever,
t h a t wage as s ig n m en ts a r e such an im p o r ta n t remedy in s m a ll lo a n
tr a n s a c t io n s
f o r w h ic h no o th e r s e c u r i t y i s
a v a ila b le
th a t
f o r b id d in g t h e i r use w ould cause a s i g n i f i c a n t d im in u tio n in
a v a ila b ility
th e
o f such lo a n s o r a s i g n i f i c a n t in c r e a s e i n th e c o s t
o f such lo a n s .
The Com m ission i s
i n t e r e s t e d i n in f o r m a t io n
on a p o s s ib le e x em p tio n from th e p r o h i b i t i o n o f wage a s s ig n
m ents f o r c e r t a i n
s m a ll lo a n t r a n s a c t io n s , and on th e optimum
amount f o r any such e x e m p tio n .
(k )
A t t o r n e y ’ s fe e s and c o l l e c t i o n
P r o v is io n s a llo w in g c r e d i t o r s
o th e r c o s ts
c o s ts .
to c o l l e c t a t t o r n e y 's
from d e b to rs may be ab u sed .
fe e s and
These ch a rg e s may n o t
-16-
b e a r any d i r e c t r e l a t i o n s h i p
t o a c t u a l o r re a s o n a b le c o s ts b o rn e
by th e c r e d i t o r i n c o l l e c t i n g a d e b t .
On th e o t h e r h a n d , a c r e d i t o r
s h o u ld be a b le t o r e c o v e r such a c t u a l re a s o n a b le c o s ts as a r e
In c u r r e d .
The Commission i s
th e d i f f e r i n g
In t e r e s t e d
i n r e c e iv in g comment as to
e f f e c t s o f an a b s o lu te p r o h i b i t i o n o f i n c lu s io n o f
a t t o r n e y ’ s fe e s p r o v is io n s
i n consumer o b l i g a t i o n s ; o r , a l t e r n a t i v e l y ,
o f a l i m i t a t i o n o f th e amount o f such fe e s ex p re s s e d as a p e rc e n ta g e
o f th e o b l i g a t i o n w i t h a minimum o b l i g a t i o n Amount b elo w w h ic h no
such fe e s c o u ld be c o l l e c t e d .
b e a llo w e d i s
Comment as to a p p r o p r ia t e amounts to
a ls o s o l i c i t e d .
END OF COMMISSION'S STATEMENT
Comments r e g a r d in g th e p roposed ru le 's g e n e r a l a p p l i c a b i l i t y
a re in v it e d .
The B oard w o u ld be p a r t i c u l a r l y
in te r e s te d
in s p e c ific
comments d i r e c t e d t o any re a s o n why such r u l e s h o u ld n o t a p p ly to
banks.
T h is n o t i c e i s p u b lis h e d p u rs u a n t to § 5 5 3 (b ) o f T i t l e
5
U n ite d S t a t e s Code, and § 2 6 2 . 2 ( a ) o f th e R u le o f P ro c e d u re o f th e
Board o f G o v ern o rs o f th e F e d e r a l R e s e rv e System (1 2 C .F .R . § 2 6 2 . 2 ( a ) ) .
To a id i n c o n s id e r a t io n o f th e s e m a tte r s by th e B o a rd , in t e r e s t e d
p erso n s a r e i n v i t e d
w r itin g
to s u b m it r e l e v a n t d a t a , v ie w s , o r argum ents i n
t o th e O f f i c e o f th e S e c r e t a r y , th e B oard o f G o vern o rs o f th e
F e d e r a l R e s e rv e S ystem , W a s h in g to n , D .C .
la te r
th a n June 1 0 , 1 9 7 5 .
to be r e c e iv e d n o t
Such m a t e r i a l w i l l be made a v a i l a b l e upon
r e q u e s t , e x c e p t as p ro v id e d i n
R u le s R e g a rd in g A v a i l a b i l i t y
20551,
12 C .F .R .
§ 2 6 1 . 6 ( a ) o f th e B o a rd 's
o f In f o r m a t io n .
17S in c e th e B oard may be r e q u ir e d
s u b s ta n tia lly s im ila r to
th e r u l e u l t i m a t e l y p ro m u lg a te d b y th e
F e d e r a l T ra d e Com m ission, i t
a ls o b e s e n t d i r e c t l y
to is s u e r e g u la t io n s
is
recommended t h a t c o p ie s o f comments
t o t h e Com m ission f o r c o n s id e r a t io n .
Such
comments s h o u ld be a d d re s s e d to t h e S p e c ia l A s s is t a n t D i r e c t o r f o r
R u le m a k in g , F e d e r a l T ra d e C om m ission, W a s h in g to n , D *C .
20580.
By o r d e r o f t h e B oard o f G o v e rn o rs , A p r i l 2 1 , 1 9 7 5 .
(s ig n e d ) T h eo d o re E . A l l i s o n
T h eo d o re E . A l l i s o n
S e c r e t a r y o f th e Board
[SEAL]
@FedFRASER