The “Credit Practices Rule” and How It Protects You

This year, tens of millions of Americans will borrow money, buy with credit, or cosign for another person's debt. And many do these things without becoming familiar with the protections they have under Federal Trade Commission's Credit Practices Rule. The Rule, which became effective March l, l985, prohibits creditors from including certain anti-consumer provisions in their contracts. It requires creditors to provide written notice to a person before they cosign for another’s obligations about their potential liability if the other person fails to pay. Finally, it prohibits a specific method of assessing late charges. 

What types of contracts are covered?

The Rule applies to consumer credit contracts offered by finance companies, retailers (such as auto dealers and furniture or department stores), and credit unions for any personal purpose except buying real estate. It does not apply to banks or bank credit cards, savings and loan associations; or some non-profit organizations (however, these organizations are similarly regulated by different agencies). The Rule does not apply to business credit.  

What contract provisions are prohibited?

The Rule dictates that credit contracts can no longer include provisions that:

• Require you to agree in advance, should the creditor sue you for non-payment, to give up your right to be notified of a court hearing, present your side of the case, or to hire an attorney to represent you.
• Require you to give up state-law protections that allow you to keep certain personal belongings even if you do not pay your debt as agreed. State law generally allows you to keep your home or part of it, clothing, dishes, and other belongings of a fixed minimum value. However, if the debt was incurred to purchase an item also used as security for the debt, the creditor can repossess that item.
• Permit you to agree in advance to wage deductions that would pay the creditor directly if you default, unless you can cancel that agreement at any time. However, a wage or payroll deduction payment method is permissible under the Rule.
• Require you to use as collateral certain household and personal items of significant value to you but little economic value to a creditor. Such items include appliances, linens, china, crockery, kitchenware, wedding rings, family photographs, personal papers, the family Bible, and household pets. However, if the debt was incurred to purchase an item also used as security for the debt, the creditor can repossess that item.

What notices must be given to cosigners?

A cosigner on someone else's debt is guaranteeing to pay if that person does not. The Rule requires potential consigners are given a notice explaining the responsibility being undertaken and its potential consequences. This notice is not required when the cosigner is an equal “co-borrower”, as with a joint credit account.  

What form of late charge is no longer allowed?

A creditor can certainly charge a late fee if you do not make your loan payment on time. However, it is illegal under the Rule for a creditor to access additional late fees or add payments simply because you have not yet paid a previous late fee. This means that if the late fee owed is not included with the next regular payment, it is illegal for a creditor to subtract the late fee from that payment and then charge a second late fee because the current payment is insufficient. However, if you skip one month's payment entirely, the creditor can charge late fees on all subsequent payments until you bring your account up to date.