Full text of Federal Reserve Bank of New York Circulars : 9854. Amendments to Regulation AA

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FEDERAL RESERVE BANK
OF NEW YORK

[

Circular No. 9854 ~|
May 8, 1985

AMENDMENTS TO REGULATION AA
Adoption of FTC Rules Prohibiting Certain
Consumer Debt Collection Practices
To All Commercial Banks, and, Others Concerned,
in the Second Federal Reserve District:

Following is the text of a statement issued by the Board of Governors of the Federal Reserve
System:
The Federal Reserve Board has announced a final rule amending its Regulation AA — Unfair or
Deceptive Acts or Practices — that will carry out the Credit Practices Rule recently adopted by the
Federal Trade Commission.
All banks except those savings banks that are members of the Federal Home Loan Bank System
will be affected by the new rule.
The Board’s action, effective January 1, 1986, prohibits banks from entering into any consumer
credit obligation that contains a confession of judgment clause,1 a waiver of exemption,2 an assignment
of future wages to the creditor in the event of default, or a security interest in the consumer’s household
goods other than those purchased with the credit. In addition, the rule prohibits the enforcement of these
provisions in a consumer credit obligation purchased by a bank.
The rule also forbids the pyramiding of late charges. Through this practice, a creditor imposes
multiple late charges based on a single late payment that is subsequently paid in full on or before the next
timely payment. As the subsequent timely payments are made, and the late charge extracted, the late
charges begin to pyramid. In addition, the rule requires a creditor to give a notice to cosigners informing
them of the nature of their obligation and potential liability. Under the new rule, banks are given the
option of either providing the notice in a separate document or including the notice in the contract docu­
ment.
1 A confession of judgment clause is a statement by which the consumer agrees in advance to permit the creditor to obtain a
judgment in the event of default without giving the debtor prior notice or an opportunity to be heard in court.
2 Under such a provision, the consumer waives or limits state law exemptions sheltering the consumer’s home or other necessities
from attachment.

Enclosed is the text of the amendments, effective January 1, 1986, which has been reprinted
from the Federal Register. Questions regarding this regulation may be directed to our Regulations
Division (Tel. No. 212-791-5914).




E. Gerald Corrigan,
President.

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

UNFAIR OR DECEPTIVE ACTS OR PRACTICES
AMENDMENTS TO REGULATION AA

(effective January 1, 1986)

FEDERAL RESERVE SYSTEM
12 CFR Part 227

[Reg. AA; Doe. No. R-00Q6]
Unfair ©r Deceptive Acts or Practices;
Credit Practices
agency: Board of Governors of the
Federal Reserve System.
ACTOON: Final rule.

SUMMARY: The Board is publishing a
final rule amending Regulation AA
(Unfair or Deceptive Acts or Practices)
to implement, as to banks, the Credit
Practices Rule adopted by the Federal
Trade Commission. The Federal Trade
Commission Act requires the Board to
adopt a rule, subject to certain
exceptions, that is substantially similar
to the Commission’s rule. This rule
prohibits banks from entering into any
consumer credit obligation that contains
certain prohibited provisions, from
pyramiding late charges, or from
obligating a cosigner without a required
notice. The rule also prohibits the
enforcement of any prohibited
provisions contained in a consumer
credit obligation purchased by a bank.
EFFECTSVE DATE: January 1,1986.
F©R FURTHER INFORMATION CONTACT:
Steven Zeisel, Senior Attorney or
Richard Garabedian, Staff Attorney,
Division of Consumer and Community
Affairs, Board of Governors of the
Federal Reserve System, Washington,
D.C. 20551, at (202) 452-3867 or (202)

452-3667. Regarding the regulatory
flexibility analysis, contact: Robert
Kurtz, Economist, Division of Research
and Statistics, Board of Governors of the
Federal Reserve System, Washington,
D.C. 20551, a t (202) 452-2915.
SUPPLEMENTARY BNFORMATBOW: (1)
General. The Board is publishing a final
rule to amend Regulation AA (12 CFR
Part 227). The rule implements, as to
banks, the Credit Practices Rule adopted
by the Federal Trade Commission,
effective March 1,1985 (49 FR 7740,
March 1,1984). Under section 18(f)(1) of
the Federal Trade Commission Act (15
U.S.C. 57a(f)(l)), the Board must adopt,
subject to certain exceptions,
regulations substantially similar to those
adopted by the Commission under
section 18(a)(1)(B) of the Act (15 U.S.C.
57a(a)(l)(B)). The Board must act within
60 days of the effective date of the
Commission’s rule. This scheme was
established by section 202(a) of the
Magnuson-Moss Warranty—Federal
Trade Commission Improvement Act (15
U.S.C. 57a).
The Board published for public
comment, on Novenber 30,1984 (49 FR
47041), a proposed rule that was
substantially similar to the rule adopted
by the Commission. The Board solicited
public comment on issues believed to be
important in assisting the Board in its
determination of whether to adopt a
substantially similar rule. The Board
received 137 comments in response to
the proposal, including comments from
all the Federal Reserve Banks. About

one-half of the commenters addressed
the rule as a whole, the majority of
which were in opposition. Many
commenters merely requested
clarification of the provisions in the rule.
The Board is not required to adopt a
rule if it finds that such acts or practices
of banks are not unfair or deceptive, or
if adoption of similar regulations would
seriously conflict with essential
monetary and payment systems policies
of the Board. In its analysis of each of
the rule’s provisions, the Board has
examined the record established by the
Commission, the use of the practices by
banks, and the concerns raised by the
commenters. In so doing, the Board has
concluded that neither statutory
exception is applicable. Therefore, the
Board is adopting a rule substantially
similar to the rule adopted by the
Commission. However, in promulgating
a substantially similar rule, the Board
has modified certain provisions, in light
of the comments received, to take into
account the needs and characteristics of
the banking industry. These
modifications are discussed under each
particular provision of the rule.
The rule prohibits a bank from
including certain creditor remedies in its
consumer credit obligations and makes
unenforceable such remedies when
contained in obligations purchased by a
bank. The rule also prohibits an
accounting practice regarding late
charges, prohibits misrepresentation of
cosigner liability, and requires a
disclosure to be given to cosigners. The

PRINTED IN NEW YORK, FROM FEDERAL R E G IST E R , VOL. 50, NO. 82

For this Regulation to be complete, retain:
1) Pamphlet effective September 27, 1976.
2) This slip sheet.
[Enc. Cir. No. 9854]




prohibited contractual provisions are
the following: (1) A confession of
judgment clause; (2) a waiver or
limitation of statutory exemption from
attachment, execution or other legal
process; (3) an assignment of wages; and
(4) a non-purchase money security
interest in household goods. The
prohibited late charge practice prevents
the deduction from a timely payment of
a late charge applicable to an earlier
payment, thus causing the timely
payment to be delinquent because of
non-payment in full. The cosigner
provision prohibits misrepresentation of
a cosigner’s liability and requires that a
notice disclosing the nature of the
cosigner’s obligation be given to the
cosigner, either in a separate document
or in the credit obligation.
(2) Scope. The rule applies to all
banks and their subsidiaries, except
savings banks that are members of the
Federal Home Loan Bank System.
(3) Definitions. Consumer. As the
definition of consumer makes clear, the
rule does not apply to credit extended
for the purchase of real property.
Dwellings such as mobile homes and
houseboats are not considered real
property under this definition if they are
deemed to be personal property under
state law.
Cosigner. A cosigner includes any
person who renders himself or herself
personally liable, in any capacity, for
the obligation of another person without
receiving goods, money, or services. It
does not include a person who only
pledges collateral for the obligation of
another person. Thus, any sole or joint
owner of property who merely gives a
security interest without personal
liability is not a cosigner.
The definition of cosigner has been
clarified for open-end accounts. It has
been modified from the proposal to
exclude any consumer who has the
contractual right to draw on an openend credit obligation, such as a credit
card account. This clarification was
made in light of concerns raised by the
commenters that a bank will not know,
at the time that account is opened,
whether a consumer will ever draw on
the account and therefore not be
considered a cosigner.
Household goods. The term
“household goods” includes only those
items specified in the regulation. Thus,
other items of personal property that are
not household goods are not subject to
the rule’s prohibition against taking




nonpurchase money security interests.
The term does not include such items as
fixtures, automobiles, boats,
snowmobiles, cameras and camera
equipment (including darkroom
equipment), pianos, home workshops
and the like. As used in the definition of
household goods, the term “personal
effects” is intended to have its
commonly accepted meaning. Items that
are clearly personal effects are those
which a person would ordinarily carry
about on his or her person and
possessions of uniquely personal nature,
such as family photographs.
(4)
Unfair Credit Contract Provisions.
The first sentence of § 227.13 makes
clear that it is an unfair act or practice
for a bank either to enter into a
consumer credit obligation containing
any of the prohibited provisions or to
seek to enforce any of the prohibited
provisions contained in a consumer
credit obligation purchased by the bank.
This is a modification from the proposal
which prohibited the purchase of an
obligation containing a prohibited
provision. The Board believes, in light of
the comments received and further
analysis, that making such provisions
unenforceable will achieve the goals of
the rule without imposing undue
compliance burdens on banks.
Confession of Judgment. This
provision prohibits only confessions of
judgment that involve anticipatory
waivers of procedural due process in the
context of credit obligations. It does not
prohibit confessions of judgment
executed after an action has been
instituted on the underlying obligation
or after the consumer’s default. The rule
also does not prohibit powers of
attorney given in a mortgage loan
obligation or deed of trust for purposes
of foreclosure, and the rule does not
prohibit powers of attorney given to
expedite the transfer of pledged
securities, to expedite the,disposal of
repossessed collateral, or to allow
prompt cancellation of insurance in an
insurance premium finance contract.
Waiver of Exemption. This provision
prohibits the contractual waiver of a
property exemption that is provided to a
consumer under state law. However, a
waiver is permitted if it relates to
property which is specifically given as
security in connection with the
obligation.
Assignment of Wages. This provision
prohibits the assignment of wages but
allows payroll deduction plans,

2

assignments that are revocable by their
terms, and assignments of earned
wages. Payroll deductions plans are
permitted whether revocable or
irrevocable.
Blanket Security Interests. This rule
prohibits nonpossessory security
interests in household goods, as defined
in the rule, in nonpurchase money
transactions. Because the rule only
prohibits certain nonpossessory security
interests, it will not affect a consumer’s
right to pledge or pawn any household
goods.
The rule also does not prohibit
nonpurchase money security interests in
stocks, bonds, and other non-household
goods assets. In addition, it does not
prevent consumers from borrowing on
the equity in their homes. If a purchase
money loan is refinanced or
consolidated, the household goods
collateralizing the prior loan can
continue to secure the new loan, even if
the new loan is for a larger amount or is
in other respects a nonpurchase money
loan.
(5)
Unfair or Deceptive Practices
Involving Cosigners. Section 227.14
(a)(1) prohibits a bank from
misrepresenting a cosigner’s liability to
any person. Section 227.14(b)(1) requires
that a disclosure notice be given to the
cosigner, prior to becoming obligated,
either on a separate document or on the
documents evidencing the consumer
credit obligation. In either case, the
notice must be substantially similar to
the specified notice ancfbe clear and
conspicuous. In order to be clear and
conspicuous, the notice must be
distinctive. A notice in the contract
might be, for example, in slightly larger
type or set off from the contract
language. If the notice is on a separate
document, additional information may
be placed on the document, such as the
bank’s identity, the identity of the debt
in question, the cosigner’s
acknowledgment of receipt, the date,
and any state notice that is required.
The alternative of including the notice in
the contract documents—suggested by a
number of commenters—was adopted to
take into account the needs and
characteristics of the banking industry.
If the underlying contract is in a foreign
language, the notice should be provided
in the same language.
A “substantially similar” standard has
been adopted to allow banks to modify
the notice to take into account, for

example, such variations as conflicts
with state law, default situations, state
notice requirements, and loans in which
the bank cannot identify the cosigner. In
addition, language may be deleted if it is
either inapplicable or inaccurately
reflects the agreement.
In the case of open-end credit
obligations, the notice must be given
before the cosigner becomes obligated
for any fees or transactions on the
account. This modification from the
proposal, which required the notice to
be given before execution, was added in
response to the concerns of commenters
that the point of execution may be
uncertain in open-end obligations that
are consummated through the mail.
Requiring the notice before any
obligation is incurred will provide
sufficient protections.
If state law requires that a notice also
be given to cosigners, the bank may
include both notices in the credit
obligation or on a separate document
(either on the same side or on opposite
sides), until an exemption is granted.
(6) Unfair Late Charges. This rule only
prohibits the imposition of a late charge
resulting from the failure to pay an
earlier late charge. For example, if a
consumer makes the January payment
15 days late, but makes the February
payment on time and in full, the bank
may not cause the latter payment to be
considered delinquent by extracting the
late charge applicable to the January
payment. The rule does not prohibit late
charges from being assessed for every
period that a payment remains not fully
paid. For example, if a consumer fails to
make the January payment and then
makes the February payment on time,
the bank may continue to assess a late
charge until the January payment is
made; the rule is not intended to permit
a consumer to skip a payment and
unilaterally extend the term of the loan.
(7) Regulatory Flexibility Analysis.
The Board’s Division of Research and
Statistics has prepared a regulatory
flexibility analysis. A copy of the
analysis may be obtained from
Publications Services, Board of
Governors of the Federal Reserve
System, Washington, D.C. 20551, at (202)
452-3245.
List of Subjects in 12 CFR Part 227

Banks, banking, Consumer protection,
Credit, Federal Reserve System,
Finance.




PART 227—[AMENDED]
Text of Proposed Revision. Pursuant
to the authority granted in section 18 of
the Federal Trade Commission Act (15
U.S.C. 57a), the Board is amending
Regulation AA, 12 CFR Part 227, by
redesignating the current provisions as
Subpart A and adding a new Subpart B,
as follows:
Subpart A—Consumer Complaints

*

*

*

*

*

Subpart B—Credit Practices Rule
Sec.

227.11
227.12
227.13
227.14
involving
227.15
227.16

Authority, purpose, and scope.
Definitions.
Unfair credit contract provisions.
Unfair or deceptive practices
cosigners.
Unfair late charges.
State exemptions
A u th o r ity : 15 U.S.C. 57a.

Subpart A—Consumer Complaints
*

*

*

*

*

Subpart B—Credit Practices Rule
§ 227.11

Authority, purpose, and scope.

(a) Authority. This subpart is issued
by the Board under section 18(f) of the
Federal Trade Commission Act, 15
U.S.C. 57a(f) (section 202(a) of the
Magnuson-Moss Warranty—Federal
Trade Commission Improvement Act,
Pub. L. 93-637).
(b) Purpose. Unfair or deceptive acts
or practices in or affecting commerce
are unlawful under section 5(a)(1) of the
Federal Trade Commission Act, 15
U.S.C. 45(a)(1). This subpart defines
unfair or deceptive acts or practices of
banks in connection with extensions of
credit to consumers.
(c) Scope. This subpaft applies to all
banks and their subsidiaries, except
savings banks that are members of the
Federal Home Loan Bank System.
Compliance is to be enforced by:
(1) The Comptroller of the Currency,
in the case of national banks and banks
operating under the code of laws for the
District of Columbia;
(2) The Board of Governors of the
Federal Reserve System, in the case of
banks that are members of the Federal
Reserve System (other than banks
referred to in paragraph (c)(1) of this
section); and
(3) The Federal Deposit Insurance
Corporation, in the case of banks
insured by the Federal Deposit

3

Insurance Corporation (other than banks
referred to in paragraphs (c)(1) and
(c)(2) of this section).
§227.12

Definitions.

For the purposes of this subpart, the
following definitions apply:
(a) "Consumer” means a natural
person who seeks or acquires goods,
services, or money for personal, family,
or household use other than for the
purchase of real property.
(b)
(1) “Cosigner” means a natural
person who assumes liability for the
obligation of a consumer without
receiving goods, services, or money in
return for the obligation, or, in the case
of an open-end credit obligation, without
receiving the contractual right to obtain
extensions of credit under the account.
(2) “Cosigner” includes any person
whose signature is requested as a
condition to granting credit to a
consumer, or as a condition for
forbearance on collection of a
consumer’s obligation that is in default.
The term does not include a spouse
whose signature is required on a credit
obligation to perfect a security interest
pursuant to state law.
(3) A person who meets the definition
in this paragraph is a "cosigner,”
whether or not the person is designated
as such on the credit obligation.
(c) “Earnings” means compensation
paid or payable to an individual or for
the individual’s account for personal
services rendered or to be rendered by
the individual, whether denominated as
wages, salary, commission, bonus, or
otherwise, including periodic payments
pursuant to a pension, retirement, or
disability program.
(d) “Household goods” means
clothing, furniture, appliances, linens,
china, crockery, kitchenware, and
personal effects of the consumer and the
consumer’s dependents. The term
“household goods” does not include:
(1) Works of art;
(2) Electronic entertainment
equipment (other than one television
and one radio);
(3) Items acquired as antiques; that is,
items over one hundred years of age,
including such items that have been
repaired or renovated without changing
their original form or character; and
(4) Jewelry (other than wedding rings).
(e) "Obligation” means an agreement
between a consumer and a creditor.
(f) “Person” means an individual,

corporation, or other business
organization.
§ 227.13

Unfair credit ©©ntraeS provisions.

It is an unfair act or practice for a
bank to enter into a consumer credit
obligation that contains, or to enforce in
a consumer credit obligation purchased
by the bank, any of the following
provisions:
(a) Confession of judgment. A
cognovit or confession of judgment (for
purposes other than executory process
in the State of Louisiana), warrant of
attorney, or other waiver of the right of
notice and the opportunity to be heard
in the event of suit or process thereon.
(b) W aiver o f exemption. An
executory waiver or a limitation of
exemption from attachment, execution,
or other process on real or personal
property held, owned by, or due to the
consumer, unless the waiver applies
solely to property subject to a security
interest executed in connection with the
obligation.
(c) Assignment of wages. An
assignment of wages or other earnings
unless:
(1) The assignment by its terms is
revocable at the will of the debtor;
(2) The assignment is a payroll
deduction plan or preauthorized
payment plan, commencing at the time
of the transaction, in which the
consumer authorizes a series of wage
deductions as a method of making each
payment; or
(3) The assignment applies only to
wages or other earnings already earned
at the time of the assignment.
(d) Security interest in household
goods. A nonpossessory security interest
in household goods other than a
purchase money security interest.
§ 227.14 Unfair m d©eeptiv© practices
involving cosigners.

(a) Pronhibited practices. In
connection with the extension of credit
to consumers, it is:




(1) A deceptive act or practice for a
bank to misrepresent the nature or
extent of cosigner liability to any
person; and
(2) An unfair act or practice for a bank
to obligate a cosigner unless the
cosigner is informed prior to becoming
obligated of the nature of the cosigner’s
liability.
(b) Disclosure requirement. (1) A clear
and conspicuous disclosure statement
shall be given in writing to the cosigner
prior to becoming obligated. The
disclosure statement shall be
substantially similar to the following
statement and shall either be a separate
document or included in the documents
evidencing the consumer credit
obligation.
Notice to Cosigner
You are being asked to guarantee this debt.
Think carefully before you do. If the borrower
doesn't pay the debt, you will have to. Be
sure you can afford to pay if you have to, and
that you want to accept this responsibility.
You may have to pay up to the full amount
of the debt if the borrower does not pay. You
may also have to pay late fees or collection
costs, which increase this amount.
The bank can collect this debt from you
without first trying to collect from the
borrower. The bank can use the same
collection methods against you that can be
used against the borrower, such as suing you,
garnishing your wages, etc. If this debt is ever
in default, that fact may become a part of
your credit record.
This notice is not the contract that makes
you liable for the debt.

(2) In the case of open-end credit, the
disclosure statement shall be given to
the cosigner prior to the time that the
cosigner becomes obligated for fees or
transactions on the account.
(3) A bank that is in compliance with
this paragraph may not be held in
violation of paragraph (a)(2) of this
section.
§227.15

Unfair (ate charges.

(a) In connection with collecting a
debt arising out of an extension of credit

4

to a consumer, it is an unfair act or
practice for a bank to levy or collect any
delinquency charge on a payment, when
the only delinquency is attributable to
late fees or delinquency charges
assessed on earlier installments, and the
payment is otherwise a full payment for
the applicable period and is paid on its
due date or within an applicable grace
period.
(b) For the purposes of this section,
“collecting a debt” means any activity,
other than the use of judicial process,
that is intended to bring about or does
bring about repayment of all or part of
money due (or alleged to be due) from a
consumer.
§ 227.16

Slat© exemptions.

(a) General rule. (1) An appropriate
state agency may apply to the Board for
a determination that:
(1) There is a state requirement or
prohibition in effect that applies to any
transaction to which a provision of this
subpart applies; and
(ii)
The state requirement or
prohibition affords a level of protection
to consumers that is substantially
equivalent to, or greater than, the
protection afforded by this subpart.
(2) If the Board makes such a
determination, the provision of this
subpart will not be in effect in that state
to the extent specified by the Board in
its determination, for as long as the state
administers and enforces the state
requirement or prohibition effectively.
(b) Applications. The procedures
under which a state agency may apply
for an exemption under this section are
the same as those set forth in Appendix
B to Regulation Z (12 CFR Part 226).
By order of the Board of Governors of
the Federal Reserve System, April 23,
1985.
William W. Wiles,
Secretary o f the Board.
[FR Doc. 85-10212 Filed 4-26-85; 8:45 am]