[Federal Register Volume 60, Number 90 (Wednesday, May 10, 1995)]
[Proposed Rules]
[Pages 24805-24808]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-11360]
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FEDERAL TRADE COMMISSION
16 CFR Part 444
Regulatory Flexibility Act Review of Trade Regulation Rule
Concerning Credit Practices
AGENCY: Federal Trade Commission.
ACTION: Termination of review.
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SUMMARY: In accordance with the Regulatory Flexibility Act (5 U.S.C.
601) (``the RFA'') and a published plan for Periodic Review of
Commission Rules (46 FR 35118 (July 7, 1981)), the Federal Trade
Commission solicited comments and data on whether the Trade Regulation
Rule Concerning Credit Practices (16 CFR part 444) (the ``Rule'') has
had a significant impact on a substantial number of small entities, and
if it has, whether the Rule should be amended to minimize any
significant impact on small entities (59 FR 18009 (April 15, 1994)).
The Commission also requested comments about the overall costs and
benefits of the Rule and its overall regulatory and economic impact as
a part of it systematic review of all current Commission regulations
and guides. The notice required comments to be submitted to the
Commission no later than June 14, 1994. Based on the comments received,
which are summarized in this notice, the Commission finds that there is
an insufficient basis to conclude that the Rule has had a significant
economic impact upon a substantial number of number entities of
otherwise merits revision. The Commission is therefore terminating this
review.
DATES: This action is effective as of May 10, 1995.
FOR FURTHER INFORMATION CONTACT:
Sandra M. Wilmore, Attorney, Division of Credit Practices, Bureau of
Consumer Protection, Room S4429, Federal Trade Commission, 6th and
Pennsylvania Avenue NW., Washington, D.C. 20580. Tel: (202) 326-3224.
SUPPLEMENTARY INFORMATION: The RFA requires the Federal Trade
Commission to conduct a periodic review of rules issued by the
Commission that have or will have a significant economic impact on a
substantial number of small entities. For the purpose of the RFA
review, the term ``small entity'' is defined under the Small Business
Size Standards, codified at 13 CFR part 121 and revised by the Small
Business Administration (49 FR 5024-5048 (Feb. 9, 1984)). In addition,
the Commission has determined, as a part of its oversight
responsibilities, to review rules and guides periodically. These
reviews will seek information about the costs and benefits of the
Commission's rules and guides and their regulatory and economic impact.
The information obtained will assist the Commission in identifying
rules and guides that warrant modification or rescission. This periodic
review is conducted in accordance with the Commission's plan for
periodic review of rules (46 FR 35118 (July 7, 1981)).
I. Background and Summary
The Commission promulgated the Rule on March 1, 1984, (49 FR 7740),
and it became effective on March 1, 1985. The Rule applies to lenders
and retail installment sellers (creditors) and prohibits them from
directly or indirectly taking or receiving from a consumer an
obligation that includes certain contract provisions determined to be
unfair, failing to provide a notice to potential cosigners, or using an
unfair method of calculating late fees.
In promulgating the Rule, the Commission found that: (1) consumers
suffers substantial economic and non-economic injury from creditors'
use of the remedies that the Rule restricts; (2) consumers themselves
cannot reasonable avoid these remedies or avoid the harsh consequences
of the remedies by avoiding default; and (3) the overall costs to
consumers are greater than the countervailing benefits that the use of
these remedies provide to consumers or creditors.\1\
\1\See Credit Practices Rule: Statement of Basis and Purpose and
Regulatory Analysis (SBP), 49 FR 7740, 7743-7745 (1984).
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The notice that initiated this review requested comments on whether
any part of the Rule has had a significant impact on a substantial
number of small entities and, if so, whether any such impact can be
reduced consistent with the operation of the Rule.
In addition, the Commission requested comments on a number of other
issues relating to the operation of the Rule.
II. Public Comments
In response to the Federal Register notice, the Commission received
a total of seven comments, four from creditor trade associations\2\ and
three from legal organizations representing consumers.\3\ The
commenters' responses to the questions posed in the notice are
summarized and analyzed below. Unless otherwise noted, the Commission
is not aware of other information bearing on the issues discussed.
\2\Comments were received from the Credit Union National
Association (``CUNA''), which represents 5,000 state and 7,000
federal credit unions in the United States; the CUNA Mutual
Insurance Group (``CMIG''), which provides form contracts and
compliance support, as well as insurance coverage, to CUNA members;
the Illinois Credit Union System, which represents 645 state and
federal credit unions in Illinois; and the Missouri Bankers
Association, a trade association representing 500 commercial banks
in Missouri.
\3\Comments were received from the National Consumer Law Center,
Inc. (``NCLC''); the UAW-GM Legal Service Plan (``UAW-GM''), which
provides legal services to auto workers and retirees; and the law
firm of Williams & Eoannou, which represents consumer debtors in
bankruptcy proceedings and in cases involving possible violations of
federal and state credit laws.
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1. Continuing Need for the Rule
Two commenters directly addressed the question of the continuing
need for the Rule. The UAW-GM and NCLC stated that consumers continue
to need the protection of the Rule. According to Williams & Eoannou,
consumers have benefited from the Rule because it ``eliminated the use
of a limited number of onerous and overreaching boilerplate contract
provisions * * * the limited utility of which in collecting debts was
more than offset by their brutally invasive and disruptive impact on
consumers and their families.'' No commenter discussed any costs
imposed on consumers by the Rule.
2. Proposed Changes to the Rule to Benefit Consumers
All of the commenters made some recommendation regarding changes to
the Rule. Except as noted, the commenters who proposed changes to
benefit consumers did not discuss the cost to creditors of those
changes. [[Page 24806]]
a. Security Interests in Household Goods
i. Definition of Household Goods
One commenter, UAW-GM, stated that the Rule's definition of
household goods is too limited. According to UAW-GM, consumers would be
better protected and the law would be more consistent with other
federal formulations if the definition of household goods under the
Rule were changed to parallel the household goods exemption and lien-
avoidance provisions of the Bankruptcy Code, 11 U.S.C. 552 (d)(3) and
(f)(2).\4\ The exemptions provided under the Bankruptcy Act include
items not covered by the Rule, notably books, animals, crops, and
musical instruments, but do not include the Rule's coverage of wedding
rings and personal effects.
\4\Those provisions of the Bankruptcy Act provide an exemption
for:
The debtor's interest, not to exceed $200 in value in any
particular item or $4,000 in aggregate value, in household
furnishing, household goods, wearing apparel, appliances, books,
animals, crops, or musical instruments, that are held primarily for
* * * personal, family, or household use. * * *
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The Commission did not address this question directly at the time
that it promulgated the Rule, but did indicate that it was aware of the
lien-avoidance provision of the Bankruptcy Act. The SBP refers to the
fact that 1978 amendments to the Bankruptcy Act created an exception to
the old rule that secured loans survived bankruptcy for those loans
secured by blanket security interests in household goods, 11 U.S.C.
552(f)(2), discussed above. The reference occurs in a discussion of the
treatment of the refinancing of purchase money security interests and
does not indicate that the Commission ever considered conforming the
definition of household goods in the Rule to the definition contained
in the Bankruptcy Act provision discussed.\5\
\5\See SBP at page 7767.
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Since bankruptcy is one of the situations in which a creditor's
security interest in the personal possessions of the debtor is most
likely to be at issue, a consistent federal standard as to which items
are protected is sensible. However, we have no evidence that the lack
of such a parallel standard is sufficiently problematic to warrant
amending the rule.
Alternatively, UAW-GM proposed that the list of specific items
included in the definition be described as illustrative and not
exclusive.\6\ In the SBP, the Commission stated its intention to limit
coverage to necessities and to the class of goods for which the injury
to consumers from a security interest exceeds offsetting benefits.\7\
Conceivably, the Rule could be expanded to apply to any other items
meeting that test. However, this could raise certain enforcement
difficulties. It is not clear that, if a creditor took a security
interest in items not enumerated as household goods, the Commission
could establish the requisite knowledge on the part of the creditor to
bring a civil penalty action for a rule violation.\8\ Again, we have no
evidence of problems with the Rule's current definition of household
goods sufficient to justify an amendment to the Rule.
\6\In contrast, the Missouri Bankers Association stated that
there should be no expansion of the definition of household goods
and that any expansion would restrict the collateral that could be
provided by consumers who are not homeowners.
\7\See SBP at pages 7767 and 7768.
\8\Section 5(m)(1)(A) of the FTC Act states that:
The Commission may commence a civil action to recover a civil
penalty * * * against any person * * * which violates any rule under
this Act respecting unfair or deceptive acts or practices * * * with
actual knowledge or knowledge fairly implied on the basis of
objective circumstances that such act is unfair or deceptive and is
prohibited by such rule. (Emphasis added.)
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ii. Property Insurance
The NCLC presumes that creditors take security interests in the
consumer's personal property in order to sell excessively priced
property insurance to the consumer and that the Rule should be amended
to address this problem. The Truth in Lending Act and Regulation Z
impose disclosure requirements relating to the sale of property
insurance by creditors.\9\ Given the legal restrictions on the
Commission's ability to regulate the business of insurance, this agency
may not have the authority to address the pricing of insurance directly
or the expertise to determine what constitutes fair pricing.\10\ We
found no evidence to justify attempting to do so as an amendment to the
Rule.
\9\Section 226.4 of Regulation Z, which implements the Truth in
Lending Act, allows creditors to exclude such insurance premiums
from the finance charge if the insurance coverage may be obtained
from a person of the consumer's choice, if that fact is disclosed to
the consumer, and if the coverage is obtained through the creditor,
the insurance premium and the term of the insurance are disclosed.
\10\See McCarran-Ferguson Act, 15 U.S.C. 1012.
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iii. Cross-Collateralization
Williams & Eoannou observed that the use of cross-collateral
security clauses in revolving charge agreements is increasing. The
commenter notes that the Rule as initially proposed would have
prohibited such clauses, and that that provision was deleted from the
final rule.\11\ The Commission is urged by the commenter to amend the
Rule to prohibit the use of cross-collateral.
\11\According to the SBP:
Cross-collateralization occurs when goods purchased from a
retailer on credit are used to secure credit extended for subsequent
purchases until the account is cleared. A provision of the proposed
rule that we have decided not to promulgate would have restricted
cross-collateral clauses in installment sales contracts.
Essentially, the provision would have required first-in, first-out
accounting for credit contracts covering multiple purchases.
SBP, 49 FR 7740, 7786 (March 1, 1984).
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The Commission did not adopt the provision initially because it
found insufficient evidence in the record that the use of cross-
collateral clauses was prevalent or that cross-collateral, when used,
caused any notable degree of consumer injury. It, therefore, concluded
that the benefits of the provision would not outweigh its costs.\12\ As
the comment did not provide specific information about the prevalence
of cross-collateralization or the degree of injury resulting from its
use, we find no basis for revising that conclusion.
\12\See SBP at page 7786.
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b. Notice to Cosigners
Commenters addressed various aspects of the Rule's cosigner
provision, which will be discussed in turn below.
i. Definition of Cosigner
UAW-GM stated that the cosigner definition should be clarified. The
Rule defines a cosigner as a person who is ``liable for the obligation
of another person without compensation.'' A person is considered not to
have received compensation if that person does not receive goods,
services, or money in return. According to the commenter, in connection
with the financing of automobiles, the cosigner's name is sometimes
placed on the title to the vehicle with the name of the purchaser in
order to avoid the Rule's protections for cosigners.
The commenter states that this is done without the cosigner's
knowledge in situations where the cosigner has no actual access to the
vehicle securing the loan. The cosigner's name on the title suggests
that he has received an ownership interest in the car in exchange for
his commitment to pay and is, therefore, not a cosigner within the
meaning of the Rule. According to UAW-GM, the Commission should amend
the Rule to make clear that, in the absence of an actual possessory
interest in the security, the Rule should apply.
At the time the Rule was promulgated, the Commission
[[Page 24807]] considered comments stating that the cosigner provisions
of the Rule could be avoided by requiring potential cosigners to become
co-applicants for credit. In response, the Commission revised the final
Rule to define as a cosigner ``any person whose signature is obtained
after the initial applicant is told that the signature of another
person is necessary.''\13\ The cosigner definition also states that:
\13\Id. at page 7778.
A person is a consigner within the meaning of this definition
whether or not he or she is designated as such on a credit
obligation.\14\
\14\16 CFR 444.1(k).
Thus, the Commission clearly intended that the definition of
cosigner turn on the circumstances under which the person became
obligated to pay rather than how the person is characterized by the
creditor on the documents evidencing the transaction. Accordingly, the
current Rule would apply to the situation described by the commenter.
In addition, the Rule currently states that it is a deceptive act
or practice for a creditor, ``directly or indirectly, to misrepresent
the nature of extent of cosigner liability to any person.''\15\
Therefore, it should be possible to challenge creditor practices that
seek to avoid the effect of the rule by concealing the cosigner's
status. Such a challenge may be made using the existing provision
without the necessity of amending the Rule.
\15\16 CFR 444.3(a)(1).
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ii. Cosigner Liability
UAW-GM also stated that the Rule should provide that a creditor
cannot collect from a cosigner who was not given the required Notice.
The commenter observed that the Federal Reserve Board (``FRB'') Staff
Guidelines on that agency's version of the Rule\16\ say that an attempt
to collect from a cosigner who did not receive the Notice is a
violation of the Rule.\17\
\16\50 FR 47,036 (1985) and 51 FR 39,646 (1986), Q14(a)-2.
\17\Section 18(f) of the Federal Trade Commission Act requires,
within 60 days after the Commission issues a trade regulation rule
declaring certain acts or practices to be unfair or deceptive, that
the bank regulatory agencies issue a substantially similar rule for
creditors subject to their jurisdiction unless the agencies find
that the practices of their creditors are not unfair or deceptive or
that to promulgate such a rule would ``seriously conflict with
essential monetary and payment systems policies. . . .''
Accordingly, the FRB and other agencies issued their own versions of
the Rule.
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The SBP does not indicate that the Commission considered the
question of the private enforceability of consumer credit contracts
entered into in violation of the Rule. The FRB, which followed the
Commission's lead, did consider this question, as did the Federal Home
Loan Bank Board (``FHLBB'')\18\. Making a contract entered into in
violation of the Rule unenforceable against the cosigner could
potentially provide a private enforcement mechanism for consumers and
give creditors an additional incentive to comply. However, the
commenter provided no information about the actual experience of
cosigners with creditors subject to the other regulatory agencies'
versions of the Rule, including whether their versions effectively
prevented violations or provided relief to consumers. Consequently, the
Commission lacks sufficient information to decide that a proceeding to
amend the Rule in such a manner is justified.
\18\The FHLBB is now the Office of Thrift Supervision (``OTS''),
Department of the Treasury.
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iii. The Notice as a Separate Document
The three credit union-related associations asked that the Rule be
amended to permit creditors to include the Notice in the documents
evidencing the consumer credit obligation rather than requiring that it
be a separate document. The commenters noted that the versions of the
Rule promulgated by the National Credit Union Administration
(``NCUA''), the FRB, and the OTS do not require the notice to be on a
separate document. While the commenters requested this change primarily
for the benefit of creditors, the Illinois Credit Union System also
expressed the view that consumers would be better served if they
received a document that included both the Notice and the terms of the
credit obligation.
In the SBP, the Commission explained its reason for requiring that
the Notice be a separate document:
The purpose of this requirement is to assure that the cosigner
will actually become aware of the notice before becoming obligated.
Thus, the notice document cannot be affixed to other documents
unless the notice document appears before any other document in a
package, and it may not include any other statement * * *.\19\
\19\SBP at page 7778.
Thus, if the result of combining the Notice with the contract were
to make the Notice's message less meaningful to the consumer, as the
Commission believed, this benefit would come with a substantial cost to
the consumer. On balance, and in the absence of information about the
experience of cosigners with creditors subject to the other regulatory
agencies' versions of the Rule, we have determined to retain the
existing cosigner notice provision.
c. Other Rule Provisions
i. Third Party Contacts
The NCLC stated that many creditors continue to contact third
parties in order to coerce consumers into paying debts. When the Rule
was enacted, the Commission considered, but rejected, a provision to
prohibit most creditor contacts with third parties.\20\ The Commission
stated that the record in the rulemaking proceeding did not contain
evidence of widespread abusive third party contacts, that the cost of
the provision would outweigh its benefits, and that the Commission
considered a case-by-case approach more appropriate ``to stem abusive
third party contacts without restricting legitimate contacts.''\21\ We
feel that this approach has been adequate to deter abusive third party
contacts.\22\
\20\Id. at pages 7785-7786.
\21\Id.
\22\Since the Rule was enacted, the Commission has brought one
case against a creditor for abusive third party contacts and other
unfair or deceptive debt collection practices. See Avco Fin. Serv.,
104 F.T.C. 485 (1984) (Consent Agreement).
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ii. Attorney's Fees
The NCLC also stated that consumers who pay creditors' attorney's
fees are routinely overcharged to subsidize the attorney's unsuccessful
collection efforts against other consumers. The Commission considered,
but rejected, a Rule provision prohibiting credit contract clauses
requiring that debtors pay attorney's fees incurred by creditors in
debt collection.\23\
\23\See SBP at pages 7784-7785.
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The Commission expressed the view that, because the proposed Rule
provision would not have restricted the power of courts to impose
attorney's fees on defaulting consumers under state law, the provision
might have had little effect. While the Commission found that most
creditors included attorney's fee provisions in contracts when
permitted to do so by state law, it found that the cost of restricting
this practice outweighed the benefits of doing so. Although the
Commission found that attorney's fees tend to be based on a percentage
of the amount of the outstanding obligation, and sometimes bear little
relation to the amount of work performed by the attorney, it stated
specifically that this does not imply that debtors overcompensate
creditors for their attorney's fees.\24\ Thus the Commission previously
rejected the premise of the NCLC comment. We have received no
information in connection with this [[Page 24808]] review that would
lead us to revise that position.
\24\Id.
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3. Impact of the Rule on Creditors
CUNA, the only creditor representative to discuss the subject,
stated that ``Generally, credit unions have not reported any
significant economic or regulatory impact on their operations due to
this rule.''
4. Proposed Changes to the Rule to Benefit Creditors
The Missouri Bankers Association posited that the Rule provision
prohibiting the pyramiding of late fees is not sufficiently clear as to
what constitutes a late fee.\25\ The Association questioned whether a
returned check fee, for example, would be a late fee under the Rule,
and, if so, whether the creditor would be permitted under the Rule to
collect it.
\25\The three credit union-related associations asked that the
Rule be amended to permit creditors to include the Notice in the
documents evidencing the consumer credit obligation rather than
requiring that it be a separate document, as discussed above.
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This comment calls for an explanation of the Rule, rather than a
modification to it.\26\ The Rule does not prohibit a creditor from
collecting a late fee, nor would it prohibit a creditor from collecting
a returned check fee. The Rule states that, where a charge is assessed
with respect to only one late payment and that charge remains unpaid,
the creditor may not for that reason deem all subsequent payments to be
late or incomplete and assess late charges with respect to those
payments as well.
\26\The Commission has handled inquiries of this nature through
staff interpretation letters, which are placed on the public record.
To date, more than 70 such letters interpreting the Rule have been
issued.
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In the example provided by the commenter, if one check was returned
for insufficient funds, the creditor could assess a returned check fee
if permitted by state law and the terms of the contract to do so. What
the creditor could not do, assuming the consumer did not promptly pay
the returned check fee, is to declare all subsequent payments to be
late or incomplete solely for that reason and assess fees on those
payments.
5. Effect on Other Regulations
Except for the comparisons to the Federal Reserve Board and other
agencies' versions of the Rule discussed above, no commenter discussed
the Rule's effect on other federal, state or local laws or regulations.
6. Effect of Technology or Economic Conditions
No commenter discussed the effects, if any, of changes in relevant
technology or economic conditions on the Rule.
7., 8., and 9. Effect on Small Businesses
According to CUNA, the Rule applies to 5,000 state-chartered credit
unions.\27\ CMIG states that the majority of those credit unions have
assets of $100 million or less. Thus, they are considered to be small
entities for the purposes of the RFA.\28\ The only burden that the
commenters who claim to represent such entities identified as having
been imposed by the Rule on small entities was the requirement
discussed above of providing the cosigner notice as a separate
document.
\27\Federally-chartered credit unions are subject to the NCUA's
version of the Rule.
\28\See Small Business Size Regulations, 13 CFR Part 121.601.
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10. The Notice to Cosigner
No commenter discussed the wording of the notice.
11. Effect on the Cost and Availability of Credit
As mentioned above, CUNA stated that its members generally reported
no significant economic impact on their operations due to the Rule.
Williams & Eoannou stated that the Rule has had no negative impact on
the cost or availability of credit and that the use of credit by
consumers has increased since the Rule became effective. NCLC provided
statistics purporting to show the increase in consumer debt in the
years following the Rule's implementation. In its view, this increase
can be explained in part by increased consumer demand for what became,
as a result of the Rule, a more attractive type of credit. No commenter
suggested any adverse economic impact from the Rule.
12. Disclosure Alternative to the Rule
No commenter addressed the question of an alternative Rule that
would require disclosure of the existence of contract provisions that
might cause injury to consumers, as opposed to restricting the use of
such provisions.
III. Conclusion
The Notice attracted limited public interest. The discussion of
issues relating to small entities, the parties protected by the RFA,
was minimal. A number of varying suggestions were made to expand the
Rule, but none of these had extensive support.
After carefully considering the comments, the Commission believes
that they do not present a sufficient basis to conclude that the Rule
has had a significant impact on a substantial number of small entities.
Similarly, none of the other issues raised in the comments merits
revision of the Rule at this time. The Commission is therefore
terminating this review.
List of Subjects in 16 CFR Part 444
Federal Trade Commission, Consumer credit contracts, Consigner
disclosures, Trade practices, Truth in Lending.
Authority: The Regulatory Flexibility Act, 5 U.S.C. Section 601
(1980).
By direction of the Commission.
Donald S. Clark,
Secretary.
[FR Doc. 95-11360 Filed 5-9-95; 8:45 am]
BILLING CODE 6750-01-M
