This article tells you what the Credit Practices Rule is, what it requires, who must comply, and what transactions are covered.

What is the Credit Practices Rule?

The Credit Practices Trade Regulation Rule is a federal law that governs certain aspects of the extension of credit from a business to its customers.

What the Credit Practice Rule Requires

The Credit Practices Rule has three major provisions. First, it prohibits creditors from using certain contract provisions that the Federal Trade Commission found to be unfair to consumers. The prohibited contract provisions are confessions of judgment, waivers of exemption, wage assignments, and security interests in household goods (these prohibited provisions are explained in more detail below, and examples of each are provided). Second, the Rule requires creditors to advise consumers who cosign obligations about their potential liability if the other person fails to pay. Third, the Rule prohibits late charges in some situations.

Who Must Comply

This Rule applies to all creditors subject to the jurisdiction of the Federal Trade Commission. It includes all finance companies, retailers (such as auto dealers and furniture and department stores), and credit unions that offer consumer credit contracts. Similar rules have been passed by the Federal Reserve Board and the Federal Home Loan Bank Board for banks, savings and loan associations, and other institutions under their jurisdiction.

What Transactions are Covered

The Rule covers all consumer credit transactions, except those involving the purchase of real estate. It covers loans made to consumers who purchase goods or services for personal, family, or household uses, even though those loans may be secured by real estate owned by the consumers. The Rule also applies to the sale of goods or services under lease-purchase plans.

However, contracts with your customers signed before March 1, 1985, which contain the four prohibited provisions -- confessions of judgment, waivers of exemption, wage assignments, or security interests in household goods -- are enforceable and not in violation of the Rule. Similarly, you may collect debts from cosigners who became obligated before the effective date of the Rule, even though they did not receive the notice that the Rule requires. On the other hand, after March 1, 1985, you may not collect late fees that are prohibited by the Rule, even if the contract was signed before that date.

How Penalties are Assessed

The Federal Trade Commission can sue violators of the Credit Practices Rule in federal court. The court can impose civil penalties of up to $10,000 for each violation and can issue an order prohibiting further violations.

Prohibited Contract Provisions

Certain consumer provisions, which you may have used in consumer credit contracts, are now prohibited. These include: confessions of judgment; waivers of exemption; wage assignments; and security interests in household goods. If your consumer credit contracts contain language that requires a debtor to confess judgment, to waive exemptions, to assign wages or income, or to give you a blanket security interest in all household goods, you should remove that language from all contracts signed on or after March 1, 1985. If you have not done so, you are in violation of the Rule.

Confessions of Judgment

In states that have not specifically outlawed the practice, certain consumer credit contracts have contained language taking away certain rights that consumers being sued would ordinarily have. These include the right to receive notice of the suit, to appear in court, and to raise any defenses that they may have. This provision, usually called a "confession of judgment," allowed judgment to be entered for the creditor automatically when the creditor sued the debtor for breach of the contract. The Rule now prohibits creditors from including confession of judgment provisions, such as the following, in consumer credit contracts:

To secure payment hereof, the undersigned jointly and severally irrevocably authorize any attorney of any court of record to appear for any one or more of them in such court in term or vacation, after default in payment hereof and confess a judgment without process in favor of the creditor hereof for such amount as may then appear unpaid hereon, to release all errors which may intervene in any such proceedings, and to consent to immediate execution upon such judgment, hereby ratifying every act of such attorney hereunder.

The Rule's prohibition against "confessions of judgment," does not prohibit power-of-attorney provisions that allow you to repossess and sell collateral, as long as these provisions do not interfere with the consumer's right to be heard in court. The Rule also does not prohibit a consumer from acknowledging liability after suit has been filed and the consumer has been duly notified. The Rule is not intended to interfere with whatever rights you have to repossess secured property.