How to Comply with the Credit Practices Rule
If you decide to extend credit to your customers, there is a variety of laws that you will need to comply with when creating policies and practices. One of these laws is the Credit Practices Trade Regulation Rule ("Credit Practices Rule" or "the Rule"), which is a federal law that governs certain aspects of the extension of credit from a business to its customers.
A business that violates the Rule can be sued in federal court by the Federal Trade Commission and may have to pay a civil penalty of up to $16,000 per violation. This article provides information about how to comply with the Credit Practices Rule, including who must comply, what transactions it covers, what it requires, and the contract provisions it prohibits.
Who Must Comply and What Transactions Are Covered?
The Credit Practices Rule applies to any creditor who is under the jurisdiction of the Federal Trade Commission. Creditors included in this list are credit unions that offer consumer credit contracts, finance companies, and various retailers, including department stores and car dealers. The Federal Reserve Board and the Federal Home Loan Bank Board have passed similar rules for savings and loan associations, and banks.
The transactions that are covered by the Rule include all consumer credit transactions except for transactions that involve the purchase of real estate. Even though consumers may secure a loan with their real estate to purchase services or goods for family, household, or personal use, these loans are covered by the Rule. Any sale of services or goods under a lease-purchase plan is also covered under the Credit Practices Rule.
What Does the Credit Practices Rule Require?
There are three major provisions to the Credit Practices Rule. The first major provision prohibits creditors from including certain contract terms that the Federal Trade Commission has found to be unfair to consumers. The second requires creditors to explain the potential liability of cosigning with another person, who then fails to pay. The third major provision prohibits late fee charges in certain situations.
Prohibited Contract Provisions
The Credit Practices Rule prohibits certain provisions in consumer contracts. If your business will be extending credit to customers, it's important that you familiarize yourself with – and avoid including – the prohibited provisions. These include confessions of judgment, waivers of exemption, wage assignments, and security interests in household goods. Below are brief explanations of these four provisions that are no longer allowed under the Credit Practices Rule.
- Confessions of Judgment. Where allowed, contracts have contained language that takes away certain rights of a defendant in a lawsuit by allowing a judgment to be entered automatically in favor of the creditor/plaintiff when he or she sues the consumer/defendant.
- Waivers of Exemption. This type of contract provision allowed a creditor to threaten to seize, or actually seize, possessions even if under state law they were exempt from seizure.
- Wage Assignments. If a consumer did not pay according to the terms of the contract, this type of provision would allow creditors to go to the consumer's employer to have some or all of the consumer's wages paid directly to the creditor.
- Security Interests in Household Goods. In previous contracts, creditors would be able to include a provision that allowed them to repossess the consumer's household goods if the consumer didn't pay as outlined in the contract. The Rule defines household goods as necessities (i.e. appliances, clothes, linens) and personal items such as pets, family photos, and even a family Bible. Not included in the definition are: antiques, jewelry (except wedding rings), art, and electronic entertainment equipment (except a TV and a radio).
Please note that any contracts signed before March 1, 1985 with these provisions are still enforceable.
Get Legal Help Complying with the Credit Practices Rule
If you're planning on extending credit to customers, you may want to contact a local business and commercial attorney to make sure you're practices and policies will be in line with the Credit Practices Rule.
You can visit FindLaw's section on Business Finances for more information and resources related to this topic.