Full text of Federal Reserve Bank of New York Circulars : Credit Practices Rule

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FEDERAL RESERVE BANK
OF MEW YORK
f r r a g f U to o
October 31, 1986

CREDIT PRACTICES RULE
Application by the State of New York
For an Exemption under Regulation AA
Comments Due by November 28, 1986
To A ll State-Chartered Banking Institutions
in the State o f N ew York:

T h e B o a rd o f G o v e rn o rs o f th e F e d e ra l R e s e rv e S y s te m h a s re q u e s te d p u b lic c o m m e n t o n a n a p p lic a tio n b y th e
S ta te o f N e w Y o rk fo r a n e x e m p tio n fro m S e c tio n 2 2 6 .1 4 o f th e B o a r d ’s C re d it P ra c tic e s R u le , R e g u la tio n A A ,
“ U n fa ir o r D e c e p tiv e A c ts o r P r a c tic e s .”
P rin te d b e lo w is th e te x t o f th e B o a r d ’s n o tic e in th is m a tte r, w h ic h h a s b e e n re p rin te d fr o m th e Federal Register
o f O c to b e r 2 4 . C o m m e n ts m a y b e se n t to th e B o a rd o f G o v e rn o rs , as s p e c ifie d in th e n o tic e , o r to o u r C o m p lia n c e
E x a m in a tio n s D e p a rtm e n t b y N o v e m b e r 2 8 , 19 86.

E . G erald C o r r ig a n ,

President.

F E D E R A L RESERVE SYSTEM
1 2 C F R P a rt 2 2 7

[Reg. A A? Docket No. R-0581]

Unfair or Deceptive Acts or Practices;
E x e m p tio n A p p lic a t io n F r o m th e S ta te

of Mew Yorts
a g e n c y : Board of Governors of the
Federal Reserve System.
a c t io n : Notice of intent to make an
exemption determination.

The Board has received from
the state of New York an application for
an exemption from § 226.14 of the
Board’s Credit Practices Rule
Regulation AA (Unfair or Deceptive
Acts or Practices). The rule prohibits
banks from entering into consumer
credit obligations that contain certain
prohibited provisions, from using a
certain late charge practice, and from
obligating a cosigner prior to providing a
required notice explaining the cosigner’s
sum m ary:

obligations. The Board is publishing
notice of the New York application, with
an opportunity for public comment, in
accordance with § 227.16(b) of
Regulation AA. That section provides
that the exemption procedures detailed
in Appendix B to Regulation Z (Truth in
Lending, 12 CFR Part 226) are to be
followed in applying for an exemption
from the Credit Practices Rule.
d a t e : Comments must be received on or
before November 28,1986.
a d d r e s s e s : Comments should be
mailed to William W. Wiles, Secretary,
Board of Governors of the Federal
Reserve System, Washington, DC 20551,
or delivered to the 20th Street courtyard
entrance, 20th Street, between C Street
and Constitution Avenue NW,
Washington, DC between 8:45 a.m. and
5:15 p.m. weekdays. Comments should
include a reference to Docket No. R0581. Comments may be inspected in
Room B-1122 between 8:45 a.m. and 5:15

p.m. weekdays.
FOR FURTHER INFORMATION CONTACT:

Adrienne D. Hurt or Heather L.
Hansche, Staff Attorneys, Division of
Consumer and Community Affairs,
Board of Governors of the Federal
Reserve System, Washington, DC 20551
(202) 452-3867, or Earnestine Hill or
Dorothea Thompson,
Telecommunications Device for the Deaf
(TDD) at (202) 452-3544.
SUPPLEMENTARY INFORMATION:

(1) Background
In April 1985 the Board adopted its
Credit Practices Rule, 12 CFR 227 (50 FR
16695), thereby amending its Regulation
AA (Unfair or Deceptive Acts or
Practices). The Board’s rule, which
became effective on January 1,1986,
followed the adoptioaby the Federal
Trade Commission (FTC) of its Credit
Practices Rule in March 1984 (49 FR

PRINTED IN NEW YORK, FROM FEDERAL REGISTER, VOL. 51, NO. 206

7740}, effective March. 1,1985.1 The
Board’s rule applies to all banks and
their subsidiaries. Staff guidelines (in
question and answer format) designed
to aid banks in complying with the
Credit Practices Rule were issued in
November 1985.
The Credit Practices Rule prohibits
banks from entering into any consumer
credit obligation that contains a
confession of judgment clause, a waiver
of exemption, an assignment of wages,
or a nonpossessory, nonpurchase money
security interest in certain types of
household goods. The rule prohibits the
enforcement of these provisions in a
consumer credit obligation purchased by
a bank.
The rule also prohibits a practice
known as “pyramiding” of late charges.
Under the late charges provision, a bank
is prevented from assessing multiple late
charges based on a single delinquent
payment that is subsequently paid. In
addition, the rule prohibits a bank from
misrepresenting a cosigner’s liability
and requires the bank to give a cosigner,
prior to becoming obligated in a
consumer credit transaction, a
disclosure notice which explains the
nature of the cosigner’s obligations and
liabilities under the contract.
Administrative enforcement of the
rule for banks may involve actions
under section 8 of the Federal Deposit
Insurance Act (12 U.S.C. 1818), including
the issuance of cease and desist orders
and the imposition of penalties of up to
$1,000 per day for violation of an order.
(2) New York’s Exemption Application
The state of New York, through its
Superintendent of Banks, has applied to
the Board for an exemption from
| 227.14 of the Board’s Credit Practices

1 Under section 18(a)(1)(B) and section 5(a)(1) of
the Federal Trade Commission Act (FTC Act), the
FTC is authorized to promulgate rules that define
and prevent “unfair or deceptive acts or practices”
in or affecting commerce with respect to extensions
of credit to consumers. Section 18(f) of the FTC Act
provides that whenever the FTC promulgates a rule
prohibiting practices which it has deemed to be
unfair or deceptive, the Board, with certain limited
exceptions, must adopt a substantially similar rule
prohibiting such practices by banks. The Federal
Home Loan Bank (FHLBB) is also required under
section 18(f) to adopt a rule substantially similar to
that of the FTC for institutions that are members of
the Federal Home Loan Bank System: the FHLBB
did so in May 1985 (50 FR 19325). with its rule also
taking effect on January 1,1988.

Rule.12 The application contains copies
of certain provisions under New York’s
General Obligations Law (G.O.L.) and
General Business Law and a comparison
of the provisions of the Board’s Credit
Practices Rule and the New York
statutory provisions. The application
also contains information about the
enforcement activities of the state’s
Banking Department.3
The Board’s rule (§ 227.16) states that,
in applying for an exemption from its
Credit Practices Rule, the procedures to
be followed are the same as those
detailed in Appendix B to Regulation Z
(Truth in Lending, 12 CFR Part 226) for
applying for an exemption from that
regulation. In accordance with those
procedures, the Board is publishing for
comment notice of this application for
an exemption determination on the New
York application. The notice
summarizes the New York exemption
application, and includes a comparison
of the relevant provisions of New York
law and the Board’s Credit Practices
Rule. In order to expedite final action on
the New York exemption request, the
notice is being published for a 30 day
comment period. Subject to the Board’s
Rules Regarding Availability of
Information (12 CFR Part 261), copies of
the New York application are available
from the Board in Washington or from
the Federal Reserve Bank of New York.
Section 227.16 of the Credit Practices
Rule provides that if a state applies for
an exemption from a provision of the
rule, such an exemption may be granted
if the Board determines that: (i) There is
a state requirement or prohibition in
effect that applies to any transaction to
which a provision of the Credit Practices
Rule 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 the
rule’s provision. If the Board makes such
2 The state of New York in its application
requested an exemption from § 227.14(b) of
Regulation AA. Section 227.14(b) sets forth the
cosigner disclosure requirements under the rule.
After a review of the exemption application in its
entirety and discussions with a representative of the
New York State Banking Department, it is apparent
that the state of New York is requesting an
exemption from all of § 227.14 of Regulation AA.
3 The state G f New York submitted an application
to the FTC for an exemption from the cosigner
provisions of the FTC’s Credit Practices Rule,
§ 444.3. The FTC granted New York’s exemption
request for transactions of $25,000 or less on August
7, 1986. 51 FR 28328 (1988).

2

a determination, the prohibition or
requirement in the Board’s rule will not
be in effect in that state to the extent
specified by the Board in its
determination, for so long as the state
effectively administers and enforces the
state requirement for prohibition. The
effect of an exemption is that banks and
their subsidiaries (other than federally
chartered institutions) that are subject
to the Board’s rule will be subject solely
to state law and enforcement.
Applicable state law provisions need
not be the same as the comparable
federal requirement in order to meet the
rule’s substantially equivalent standard.
Variations, however, should not deprive
consumers of the protections provided
by federal law. An analysis of a state’s
enforcement activities focuses on the
ways in which the state demonstrates a
commitment to enforcement and
administration of the state’s law; factors
such as staffing, training activities,
examination and administrative
procedures, and other indicators of
enforcement efforts may be considered,
as well as the existence under state law
of any private right of action by
aggrieved consumers.
(3) A Comparison of New York Law and
the Board’s Credit Practices Rule
The state of New York asserts that the
provisions of New York's General
Obligations Law Section 15-702 and
those of General Business Law Section
349 offer protection if not greater than,
then at least substantially equivalent to
the Board’s Credit Practices Rule and,
therefore, an exemption should be
granted by the Board under Regulation
AA for as long as the New York
provisions remain in effect A
comparison of the relevant provisions of
New York law (as described by the New
York exemption application) and the
cosigner provision of the Board’s rule is
set forth below. In particular, the Board
solicits comment on the following:
° The degree to which differences in
coverage between the New York law
and the Board’s rule affect the level of
protection afforded by New York law;
° The degree to which differences in the
cosigner provision of the New York
law and the Board’s rule affect the
level of protection afforded by New
York law;
° Whether the remedy for violation of
the cosigner provision of the New

York law affords a level of protection
substantially equivalent to, or greater
than, that afforded by the Board’s
rule; and
0 Whether New York administers and
enforces its law effectively.
A. Coverage
New York’s General Obligations Law
Section 15-702(2) (a) and (b) provides
that before a cosigner becomes
obligated on a consumer credit
transaction or account, the creditor must
notify the cosigner in writing of the
nature of his or her obligation. Under the
New York law a consumer credit
transaction includes a loan or sale
where credit is extended to a consumer
primarily for personal, family or
household use. A consumer credit
account includes an account established
pursuant to an agreement where the
consumer makes purchases or obtains
loans for personal, family or household
purposes, from time to time, either
directly from the creditor, or indirectly
by use of a credit card, check or other
device as the agreement may provide.
The New York law does not apply to
consumer credit transactions in excess
of $25,000 or consumer credit accounts
with a credit limit in excess of $25,000.
The Credit Practices Rule requires a
bank to provide a cosigner with a
written notice of his or her obligation
before the cosigner becomes obligated
for an extension of credit to a consumer.
Consumer credit transactions (which
include credit accounts as separately
defined under New York law) made
primarily for personal, family or
household use are covered by the rule.
The Credit Practices Rule does not
exclude consumer credit transactions or
accounts over $25,000 from the rule’s
coverage; the dollar amount is, however,
one of the factors that can be considered
in determining whether a transaction is
for a business purpose (and therefore,
not covered by the rule) rather than a
consumer purpose. (Staff Guidelines,
012(a)-2 .)
B. Cosigner Provisions
Under the Credit Practice Rule, it is a
deceptive act or practice for a bank to
misrepresent the nature or extent of a
cosigner’s liability (§ 227.14(a)(1)). New
York General Business Law Section 349
prohibits deceptive acts or practices
generally. Section 349 has been
interpreted by New York case law to
prohibit any act or practice declared

deceptive under the rules and
regulations of the FTC or under any
federal case law construing the rules
and regulations of the FTC.4 A
consumer may bring a private cause of
action or violation of the New York
deceptive acts and practices law to
enjoin an unlawful act or practice and to
recover actual damages or $50,
whichever is greater. For willful
violations, a court may award treble
damages, up to $1,000, in an action
brought by a consumer. In addition, the
Attorney General of the State of New
York may bring an action to enjoin a
deceptive practice and may seek
restitution of money or property
obtained as a result of the unlawful act
or practice.
Under the Credit Practices Rule, it is
an unfair act or practice for a bank to
obligate a cosigner in connection with
an extension of credit to a consumer
unless cosigner is informed prior to
becoming obligated of the nature of his
or her liability as a cosigner
(§ 227.14(a)(2)). The rule contains a
prescribed disclosure statement that
must be provided to a cosigner. A bank
must provide a statement which is
substantially similar to that in the rule
(§ 227.14(b)). Under the rule the cosigner
notice must be clear and conspicuous,
and may be contained in a separate
document or in the documents
evidencing the credit obligation. The
rule does not require that the cosigner
be given copies of the documents
evidencing the obligation.
New York law requires a creditor to
provide a cosigner with; (1) A written
notice that informs the cosigner of the
nature of his or her liability, and (2) a
complete copy of each document
evidencing the credit obligation. The
notice given must be substantially
similar to that provided in G.O.L. section
15-702(3) and must be printed in at least
10-point type. The notice may be on a
separate document or included in the
documents evidencing the consumer
credit obligation.
If a creditor fails to comply with the
cosigner provisions of the New York
law, the cosigner cannot be obligated as
a payment guarantor as described in the

4 State v. Colorado State Christian College of the
Church o f the Inner Power. Inc., 78 Misc. 2d 50, 348
N.Y.S. 2d 462 (Sup. Ct. 1973).

3

Uniform Commercial Code, section 3416(1). The creditor may not proceed
directly against the cosigner, but rather
must first exhaust all remedies
(including judgment and execution)
against the primary obligor. Once all
remedies against the primary obligor are
exhausted, the creditor may sue the
cosigner as a collection guarantor.

Noncompliance with the provisions of
the Credit Practices Rule is dealt with
through administrative enforcement.
Failure to comply with the cosigner
provisions of the rale does not alter the
obligation between the bank and the
cosigner. Administrative enforcement of
the rule for banks may involve actions
under section 8 of the Federal Deposit
Insurance Act (12 U.S.C. 1818), including
the issuance of cease and desist orders
and the imposition of penalties of up to
$1,000 per day for violation of an order.
The cosigner notice required by the
Credit Practices Rule states that: (1) The
cosigner may have to pay the full
amount of the debt and late fees or
collection costs; (2) the creditor can
collect from the cosigner without first
trying to collect from the borrower; (3)
the same collection remedies may be
used against the cosigner as against the
borrower; (4) the notice is not the
contract that makes the cosigner liable;
(5) if the debt goes into default that fact
could become a part of the cosigner’s
credit history; and (6) the cosigner
should think carefully before becoming
obligated. A bank may include
additional information in the notice
(such as the date of transaction, the loan
amount, information identifying the
debt, names and addresses, and an
acknowledgment of receipt) and still
meet the substantially similiar
requirement of § 227.14(b)(2). (Staff
Guidelines, Ql4(b)-9.) Minor editorial
changes may also be made to the notice,
such as changing the word “borrower”
to “accountholder" or changing the word
“debt” to “account” as appropriate.
(Staff Guidelines, Ql4(b)-7.)
Two model cosigner notices are
contained in New York’s General
Obligations Law, section 15-702(3); one
is to be used in a consumer credit
transaction and the other is for use in
connection with a consumer account.

The notices state that: (1) The cosigner
is obligated to pay the debt identified
even though the cosigner may not
personally receive any property,

s e r v ic e s o r m o n e y ; (2) th e c o s ig n e r m a y
b e s u e d e v e n th o u g h th e p r im a ry o b lig o r
m a y b e a b le to p a y ; a n d (3) th e n o t ic e is
n o t th e c o n t r a c t th a t m a k e s th e c o s ig n e r
lia b le . T h e n o t ic e a l s o r e q u ir e s th e
id e n t if ic a t io n o f th e d e b t or a c c o u n t (th e
n a m e s o f th e d e b to r a n d c r e d ito r , th e
d a te , th e k in d o f d e b t or a c c o u n t, a n d
th e to ta l o f p a y m e n t s or lim it o f
lia b ilit y ) . A s e p a r a t e l y s ig n e d w r it te n
a c k n o w le d g m e n t o f r e c e ip t in a form
s u b s t a n t ia lly s im ila r to th e m o d e l form
c o n t a in e d in G .O .L . s e c t i o n 1 5 -7 0 2 (3 ) is
p rim a f a c ie p r o o f o f r e c e ip t o f th e n o t ic e
b y th e c o s ig n e r in a n y a c t io n b y or
a g a in s t th e c o s ig n e r .

C. Administrative Enforcement
T h e N e w Y ork S t a t e B a n k in g
D e p a r tm e n t is e m p o w e r e d b y B a n k in g
L a w s e c t i o n 10 to s u p e r v is e a n d r e g u la te
N e w Y o rk s t a t e - c h a r t e r e d b a n k s .
A c c o r d in g to th e B a n k in g D e p a r tm e n t,
th is in c lu d e s r e s p o n s ib i li t y for 1 1 6
c o m m r ic a l b a n k s a n d 71 s a v in g s b a n k s ,
a s w e l l a s 17 s a v i n g s a n d lo a n
a s s o c i a t i o n s a n d 77 c r e d it u n io n s .
T h e d e p a r tm e n t m a in t a in s a s t a f f o f
o v e r 3 0 0 e x a m in e r s to c o n d u c t fie ld
e x a m in a t io n s o f f in a n c ia l in s t it u t io n s
c h a r t e r e d in N e w Y o rk . A n n u a l s a f e t y
a n d s o u n d n e s s e x a m in a t io n s a re
c o n d u c t e d o n a d iv id e d , c o n c u r r e n t, or
s e p a r a t e b a s is b y a g r e e m e n t w it h th e
F ed era l R e se rv e B an k o f N e w Y ork and
th e F e d e r a l D e p o s it I n s u r a n c e
C o r p o r a tio n (F D IC ). T h e C o n s u m e r
S e r v ic e C o m p lia n c e E x a m in a t io n , w h ic h
c o v e r s c o m p lia n c e w it h G .O .L . s e c t i o n
1 5 - 7 0 2 a n d o th e r f e d e r a l a n d s t a t e l a w s
a n d r e g u la t io n s , i s p a r t o f a n d s c h e d u le d

w it h th e a n n u a l e x a m in a t io n o f f in a n c ia l
in s t it u t io n s . In 198 5 , th e d e p a r tm e n t
c o m p le t e d 137 c o n s u m e r c o m p lia n c e
e x a m in a t io n s . T h e d e p a r tm e n t h a s b e e n
c e r t if ie d b y th e C o n f e r e n c e o f S t a t e
B a n k S u p e r v is o r s a n d c o o p e r a t e s w it h
th e F e d e r a l R e s e r v e B a n k o f N e w Y o rk
in a lt e r n a t e y e a r e x a m in a t io n p r o g r a m s.

Examiners assigned to the Consumer
Services Division are expected to attend
the Consumer Protection School
sponsored by the FDIC and other
compliance schools or seminars as
necessary. The Banking Department’s
Legal Division periodically holds
conferences for examiners on changes to
federal and state laws that affect the
compliance examination and complaint
areas. The Banking Department states
that most of compliance examiners have
been employed by banks prior to their
service with the department and have
numerous years of experience in various
divisions within the department.
C o m p lia n c e w it h G.O.L. s e c t i o n 1 5 7 0 2 is v e r if ie d b y a r e v i e w o f c r e d it f i le s
a n d th e c o m p le t io n o f a n e x a m in e r ’s
q u e s t io n n a ir e . T h e f ie ld e x a m in e r h a s
th e d is c r e t io n to d e t e r m in e th e n u m b e r
o f c r e d it f i le s to b e r e v i e w e d in
c o n n e c t io n w it h G.O.L. s e c t i o n 1 5 -7 0 2
a n d a ll o th e r f e d e r a l a n d s t a t e l a w s a n d
r e g u la t io n s . F a c to r s c o n s id e r e d in th e
s e l e c t io n p r o c e s s a r e th e n u m b e r o f
v i o la t i o n s d i s c o v e r e d d u rin g p r e v io u s
s t a t e a n d f e d e r a l e x a m in a t io n s , th e
r a tin g fro m p r e v io u s s t a t e a n d f e d e r a l
e x a m in a t io n s , th e n u m b e r o f v i o la t i o n s
b e in g d i s c o v e r e d in th e c u r re n t
e x a m in a t io n , th e ty p e o f e x a m in a t io n
( c o m p a c t e d or r eg u la r ), th e s iz e o f th e

4

in s t it u t io n , a n d th e n u m b e r o f c r e d it
t r a n s a c t io n s e n t e r e d in to b y a f in a n c ia l
in s t it u t io n b e t w e e n e x a m in a t io n s . T h e
B a n k in g D e p a r tm e n t a s s e r t s th a t it
fo u n d n o v i o la t i o n s o f G .O .L . s e c t i o n 1 5 7 0 2 in th e 137 c o n s u m e r c o m p lia n c e
e x a m in a t io n s c o n d u c t e d in 1 9 8 5 .
T h e s t a t e o f N e w Y o rk in d ic a t e s th a t
if a f in a n c ia l in s t it u t io n is u n w illin g to
c o m p ly w it h G .O .L . s e c t i o n 1 5 - 7 0 2 th e
m a tte r w o u ld b e r e fe r r e d to th e
A t t o r n e y G e n e r a l fo r e n f o r c e m e n t . S u c h
a c t io n c o u ld in v o l v e (1) th e i s s u a n c e o f
a c e a s e a n d d e s i s t o r d e r a n d / o r (2) a fte r
n o t ic e a n d h e a r in g , th e fin in g o f th e
in s titu tio n fo r it s u n w illin g n e s s to
c o m p ly w it h th e la w .

(4) C o m m en ts R e q u ested
I n te r e s te d p e r s o n s a r e in v it e d to
su b m it w r it te n c o m m e n ts o n th e s t a t e o f
N e w Y o r k 's a p p lic a t io n fo r a n
e x e m p tio n fro m § 2 2 8.1 4 o f th e B o a r d ’s
C r e d it P r a c t ic e s R u le. A f t e r th e c l o s e o f
th e c o m m e n t p e r io d , b a s e d u p o n it s o w n
a n a l y s i s a n d a n a l y s i s o f th e c o m m e n t s
r e c e iv e d , th e B o a r d w i l l p u b lis h , in th e
Federal Register, n o t ic e o f th e fin a l
a c t io n o n th e e x e m p tio n r e q u e s t.

List o f S u b je cts in 12 CFR Part 227

Banks, Banking, Consumer protection,
Credit, Federal Reserve System,
Finance.
Board of Governors of the Federal Reserve
System, October 20,1986.
James McAfee,

Associate Secretary of the Board.
[FR Doc. 86-24052 Filed 10-23-86; 8:45 am]