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f a s t f a c t s

Federal Trade Commission  November 1992

for

Consumers

Bureau of Consumer Protection

Office of Consumer & Business Education

(202) FTC-HELP

www.ftc.gov

The Credit

Practices Rule

If you are one of the millions of Americans who

borrows money, buys items on installment

credit, or cosigns for another persons debt, you

may want to know about the Federal Trade

Commissions Credit Practices Rule. The Rule,

which became effective March l, l985, prohibits

many creditors from including certain provisions

in consumer credit contracts. It also requires

creditors to provide a written notice to consumers before they cosign obligations for others

about their potential liability if the other person

fails to pay. Finally, it prohibits one method of

assessing late charges.

What Contracts are Covered?

The Rule applies to consumer credit contracts

offered by finance companies, retailers (such as

auto dealers and furniture and department

stores), and credit unions for any personal

purpose except to buy real estate. It does not

apply to banks or bank credit cards; to savings

and loan associations; or to some non-profit

organizations. (However, similar rules for banks

 under the Federal Reserve Board  and for

savings and loans  under the Office of Thrift

Supervision  went into effect January 1,

1986.) The Rule does not apply to business

credit.

What Contract Provisions are

Prohibited?

The Rule prohibits creditors from including

certain provisions in their consumer credit

contracts. Specifically, credit contracts no longer

can include provisions that:

● Require you to agree in advance, should the

creditor sue you for non-payment of a debt,

to give up your right to be notified of a court

hearing to present your side of the case or to

hire an attorney to represent you. (These

clauses were often called confessions of

judgment or cognovits.)

● Require you to give up your state-law

protections that allow you to keep certain

personal belongings even if you do not pay

your debt as agreed. (These clauses were

called waivers of exemption.) State law

generally allows you to keep your home,

clothing, dishes, and other belongings of a

fixed minimum value. However, when the

debt incurred is to purchase an item and that

item is used as security for the debt, it is

permissible under the Rule for a creditor to

repossess that item.

● Permit you to agree in advance to wage

deductions that would pay the creditor

directly if you default on the debt, unless

you can cancel that permission at any time.

(These clauses were called wage assignments.) However, a wage or payroll

deduction plan, through which you arrange

to repay a loan, is a common payment

method and is permissible under the Rule.

● Require you to use as collateral certain

household and uniquely personal items that

are of significant value to you but are of

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. (These

were called household goods security

clauses.) However, if you borrowed money

to buy any of these household or personal

items, and use the items as collateral, the

creditor can repossess the purchased item if

you do not repay the loan.

Under the Rule, creditors cannot:

● Require you to use as collateral

certain household items and

uniquely personal items of significant value to you but which are of

little economic value to a creditor.

or

● Permit you to agree in advance to

wage deductions that would pay the

creditor directly if you default on

the debt, unless you can cancel that

permission at any time.

or

● Require you to give up your statelaw protections that allow you to

keep certain personal belongings

even if you do not pay your debt as

agreed.
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What Notices Must be Given to

Cosigners?

When you agree to be a cosigner for someone

elses debt, you are guaranteeing to pay if that

person fails to pay the debt. The Rule requires

that you be given a notice that explains the

responsibility you are undertaking. Under the

Rule, the cosigner notice must say:

You are being asked to guarantee this

debt. Think carefully before you do. If

the borrower doesn’t pay the debt, you

will have to. Be sure you can afford to

pay if you have to, and that you want to

accept this reponsibility.

You may have to pay up to the full

amount of the debt if the borrower does

not pay. You may also have to pay late

fees or collection costs, which increase

this amount.

The creditor can collect this debt from

you without first trying to collect from

the borrower.* The creditor can use the

same collection methods against you

that can be used against the borrower,

such as suing you, garnishing your

wages, etc. If this debt is ever in default,

that fact may become a part of your

credit record.

This notice is not the contract that

makes you liable for the debt.

*Depending on your state, this may not apply. If

state law forbids a creditor from collecting from

a cosigner without first trying to collect from the

primary debtor, this sentence may be crossed out

or omitted on your cosigner notice.

This notice is not required when you receive

benefits from the contract, such as when you

buy goods, take out a loan, or open a joint

credit-card account with another person. In these

cases, you would be a co-buyer, co-borrower, or

co-applicant (co-cardholder) rather than a

cosigner. Therefore, the creditor would not be

required to provide the notice.

How Can Late Charges Be

Assessed?

A creditor can 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 charge

you late fees or payments simply because you

have not yet paid a late fee you owe. This

practice is called pyramiding late fees. Under

the Rule, this means that if you do not include

the late fee you owe with your next regular

payment, it is illegal for a creditor to subtract

the late fee from your payment and then charge

you a second late fee because the current payment is insufficient. For example, your loan

contract may state that your monthly payments

are $100 and that you will be assessed a $10 late

fee if you pay after the grace period. If you

make your $100 loan payment after that time

and you do not include the $10 late fee with

your next $100 payment, a creditor cannot first

deduct the missing $10 late fee from the $100

payment, claim you have now paid $90, and

then charge you an additional late fee. But, if

you skip one months payment entirely, the

creditor can charge late fees on all subsequent

payments until you bring your account up to

date.

For More Information

For more information about the Credit Practices

Rule, write: Consumer Response Center, Federal

Trade Commission, Washington, D.C. 20580.