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6500 - Consumer Protection
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PART 227UNFAIR OR DECEPTIVE ACTS OR PRACTICES
(REGULATION AA)
Subpart AConsumer Complaints
Sec. 227.1
Definitions.
227.2
Consumer complaint procedure.
Subpart BCredit Practices Rule
227.11
Authority, purpose, and scope.
227.12
Definitions.
227.13
Unfair credit contract provisions.
227.14
Unfair or deceptive practices involving cosigners.
227.15
Unfair late charges.
227.16
State exemptions.
AUTHORITY: 15 U.S.C. 57a.
SOURCE: The provisions of this Part 227 appear at 41 Fed. Reg.
44362, October 8, 1976, and 58 Fed. Reg. 50512, September 28, 1993,
except as otherwise noted.
Subpart AConsumer Complaints
§ 227.1 Definitions.
For the purposes of this part 1
unless the context indicates otherwise, the following definitions
apply:
(a) "Board" means the Board of Governors of the Federal
Reserve System.
(b) "Consumer complaint" means an allegation by or on behalf
of an individual, group of individuals, or other entity that a
particular act or practice of a state member bank is unfair or
deceptive, or in violation of a regulation issued by the Board pursuant
to a federal statute, or in violation of any other Act or regulation
under which the bank must operate.
(c) "State member bank" means a bank that is chartered by a
state and is a member of the Federal Reserve System.
(d) Unless the context indicates otherwise, "bank" shall be
construed to mean a "State member bank" and "complaint" to
mean a "consumer complaint."
[Codified to 12 C.F.R.
§ 227.1]
§ 227.2 Consumer complaint procedure.
(a) Submission of complaints. (1) Any consumer having
a complaint regarding a state member bank is invited to submit it to
the Federal Reserve System. The complaint should be submitted in
writing, if possible, and should include the following information:
(i) A description of the act or practice that is thought to be
unfair or deceptive, or in violation of existing law or regulation,
including all relevant facts;
(ii) The name and address of the bank that is the subject of the
complaint; and
(iii) The name and address of the complainant.
(2) Consumer complaints should be made to--Federal Reserve
Consumer Help Center, P.O. Box 1200, Minneapolis, MN 55480, Toll-free
number: (888) 851--1920, Fax number: (877) 888--2520, TDD number: (877)
766--8533.
The addresses of the Federal Reserve Banks are as follows:
Federal Reserve Bank of Boston, 600 Atlantic Avenue, Boston, MA
02210.
Federal Reserve Bank of New York, 33 Liberty Street, New York, New
York 10045.
Federal Reserve Bank of Philadelphia, 10
Independence Mall, Philadelphia, PA 19106.
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Federal Reserve Bank of Cleveland, 1455 East Sixth Street,
Cleveland, Ohio 44101.
Federal Reserve Bank of Richmond, 100 North Ninth
Street, Richmond, Virginia 1000 Peachtree Street, N.E. 23261.
Federal Reserve Bank of Chicago, 230 South LaSalle
Street, Chicago, IL 60604.
Federal Reserve Bank of St. Louis, P.O. Box 442, St. Louis, MO
63166-0442.
Federal Reserve Bank of Minneapolis, 90 Hennepin
Avenue, Minneapolis, MN 55401.
Federal Reserve Bank of Kansas City, 925 Grand
Boulevard, Kansas City, MO 64198.
Federal Reserve Bank of Dallas, 2200 North Pearl Street, Dallas,
TX 75201.
Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E.,
Atlanta, GA 30309.
Federal Reserve Bank of San Francisco, 101 Market
Street, San Francisco, CA 94105.
(b) Response to complaints. Within 15 business days of
receipt of a written complaint by the Board or a Federal Reserve Bank,
a substantive response or an acknowledgment setting a reasonable time
for a substantive response will be sent to the individual making the
complaint.
(c) Referrals to other agencies. Complaints received
by the Board or a Federal Reserve Bank regarding an act or practice of
an institution other than a State member bank will be forwarded to the
Federal agency having jurisdiction over that institution.
[Codified to 12 C.F.R. § 227.2]
[Section 227.2 amended at 42 Fed. Reg. 2950, January 14, 1977; 71
Fed. Reg. 11297, March 7, 2006; 72 Fed. Reg. 55021, September 28, 2007,
effective October 29, 2007]
Subpart BCredit Practices Rule
§ 227.11 Authority, purpose, and scope.
(a) Authority. This subpart is issued by the Board
under section 18(f) of the Federal Trade Commission Act, 15 U.S.C.
57a(f) (section 202(a) of the Magnuson-Moss Warranty--Federal Trade
Commission Improvement Act, Pub. L. 93-637).
(b) Purpose. Unfair or deceptive acts or practices in
or affecting commerce are unlawful under section 5(a)(1) of the Federal
Trade Commission Act, 15 U.S.C. 45(a)(1). This subpart defines unfair
or deceptive acts or practices of banks in connection with extensions
of credit to consumers.
(c) Scope. This subpart applies to all banks and their
subsidiaries, except savings banks that are members of the Federal Home
Loan Bank System. Compliance is to be enforced by:
(1) The Comptroller of the Currency, in the case of national
banks, banks operating under the code of laws for the District of
Columbia, and federal branches and federal agencies of foreign banks;
(2) The Board of Governors of the Federal Reserve System, in the
case of banks that are members of the Federal Reserve System (other
than banks referred to in paragraph (c)(1) of this section), branches
and agencies of foreign banks (other than federal branches, federal
agencies, and insured state branches of foreign banks), commercial
lending companies owned or controlled by foreign banks, and
organizations operating under section 25 or
25A of the Federal Reserve Act; and
(3) The Federal Deposit Insurance Corporation, in the case of
banks insured by the Federal Deposit Insurance Corporation (other than
banks referred to in paragraphs (c)(1) and (c)(2) of this section), and
insured state branches of foreign banks.
(d) The terms used in paragraphs (c) of this section that are not
defined in the Federal Trade Commission Act or in section 3(s) of the
Federal Deposit Insurance Act (12
U.S.C. 1813(s)) shall have the meaning given to them in section
1(b) of the International Banking Act of 1978
(12 U.S.C. 3101).
[Codified to 12 C.F.R. § 227.11]
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[Section 227.11 added at 50 Fed. Reg. 16697, April 29, 1985,
effective January 1, 1986; amended at 57 Fed. Reg. 20401, May 13,
1992]
§ 227.12 Definitions.
For the purposes of this subpart, the following definitions apply:
(a) "Consumer" means a natural person who seeks or acquires
goods, services, or money for personal, family, or household use other
than for the purchase of real property.
(b)(1) "Cosigner" means a natural person who assumes
liability for the obligation of a consumer without receiving goods,
services, or money in return for the obligation, or, in the case of an
open-end credit obligation, without receiving the contractual right to
obtain extensions of credit under the account.
(2) "Cosigner" includes any person whose signature is
requested as a condition to granting credit to a consumer, or as a
condition for forbearance on collection of a consumer's obligation that
is in default. The term does not include a spouse whose signature is
required on a credit obligation to perfect a security interest pursuant
to state law.
(3) A person who meets the defintion in this paragraph is a
"cosigner," whether or not the person is designated as such on
the credit obligation.
(c) "Earnings" means compensation paid or payable to an
individual or for the individual's account for personal services
rendered or to be rendered by the individual, whether denominated as
wages, salary, commission, bonus, or otherwise, including periodic
payments pursuant to a pension, retirement, or disability program.
(d) "Household goods" means clothing, furniture, appliances,
linens, china, crockery, kitchenware, and personal affects of the
consumer and the consumer's dependents. The term "household
goods" does not include:
(1) Works of art;
(2) Electronic entertainment equipment (other than one television
and one radio);
(3) Items acquired as antiques; that is, items over one hundred
years of age, including such items that have been repaired or renovated
without changing their original form or character; and
(4) Jewelry (other than wedding rings).
(e) "Obligation" means an agreement between a consumer and a
creditor.
(f) "Person" means an individual, corporation, or other
business organization.
[Codified to 12 C.F.R. § 227.12]
[Section 227.12 added at 50 Fed. Reg. 16697, April 29,
1985, effective January 1, 1986]
§ 227.13 Unfair credit contract provisions.
It is an unfair act or practice for a bank to enter into a consumer
credit obligation that contains, or to enforce in a consumer credit
obligation purchased by the bank, any of the following provisions:
(a) Confession of judgment. A cognovit or confession of
judgment (for purposes other than executory process in the State of
Louisiana), warrant of attorney, or other waiver of the right of notice
and the opportunity to be heard in the event of suit or process
thereon.
(b) Waiver of exemption. An executory waiver or a
limitation of exemption from attachment, execution, or other process on
real or personal property held, owned by, or due to the consumer,
unless the waiver applies solely to property subject to a security
interest executed in connection with the obligation.
(c) Assignment of wages. An assignment of wages or
other earnings unless:
(1) The assignment by its terms is revocable at the will of the
debtor;
(2) The assignment is a payroll deduction plan or preauthorized
payment plan, commencing at the time of the transaction, in which the
consumer authorizes a series of wage deductions as a method of making
each payment; or
(3) The assignment applies only to wages or other earnings
already earned at the time of the assignment.
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(d) Security interest in household goods. A
nonpossessory security interest in household goods other than a
purchase money security interest.
[Codified to 12 C.F.R. § 227.13]
[Section 227.13 added at 50 Fed. Reg. 16697, April 29,
1985, effective January 1, 1986]
§ 227.14 Unfair or deceptive practices involving cosigners.
(a) Prohibited practices. In connection with the
extension of credit to consumers, it is:
(1) A deceptive act or practice for a bank to misrepresent the
nature or extent of cosigner liability to any person; and
(2) An unfair act or practice for a bank to obligate a cosigner
unless the cosigner is informed prior to becoming obligated of the
nature of the cosigner's liability.
(b) Disclosure requirement. (1) A clear and conspicuous
disclosure statement shall be given in writing to the cosigner prior to
becoming obligated. The disclosure statement shall be substantially
similar to the following statement and shall either be a separate
document or included in the documents evidencing the consumer credit
obligation.
Notice to Cosigner
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 responsibility.
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 bank can collect this debt from you without first trying to
collect from the borrower. The bank 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.
(2) In the case of open-end credit, the disclosure statement
shall be given to the cosigner prior to the time that the cosigner
becomes obligated for fees or transactions on the account.
(3) A bank that is in compliance with this paragraph may not be
held in violation of paragraph (a)(2) of this section.
[Codified to 12 C.F.R. § 227.14]
[Section 227.14 added at 50 Fed. Reg. 16697, April 29, 1985,
effective January 1, 1986]
§ 227.15 Unfair late charges.
(a) In connection with collecting a debt arising out of an
extension of credit to a consumer, it is an unfair act or practice for
a bank to levy or collect any delinquency charge on a payment, when the
only delinquency is attributable to late fees or delinquency charges
assessed on earlier installments, and the payment is otherwise a full
payment for the applicable period and is paid on its due date or within
an applicable grace period.
(b) For the purposes of this section, "collecting a debt"
means any activity, other than the use of judicial process, that is
intended to bring about or does bring about repayment of all or part of
money due (or alleged to be due) from a consumer.
[Codified to 12 C.F.R. § 227.15]
[Section 227.15 added at 50 Fed. Reg. 16698, April 29, 1985,
effective January 1, 1986]
§ 227.16 State exemptions.
(a) General rule. (1) An appropriate state agency may
apply to the Board for a determination that:
(i) There is a state requirement or prohibition in effect that
applies to any transaction to which a provision of this subpart
applies; and
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(ii) The state requirement or prohibition affords a level of
protection to consumers that is substantially equivalent to, or greater
than, the protection afforded by this subpart.
(2) If the Board makes such a determination, the provision of
this subpart will not be in effect in that state to the extent
specified by the Board in its determination, for as long as the state
administers and enforces the state requirement or prohibition
effectively.
(b) Applications. The procedures under which a state
agency may apply for an exemption under this section are the same as
those set forth in Appendix B to Regulation Z
(12 CFR Part 226).
[Codified to 12 C.F.R. § 227.16]
[Section 227.16 added at 50 Fed. Reg. 16698, April 29, 1985,
effective January 1, 1986]
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STAFF GUIDELINES ON THE CREDIT PRACTICES RULESUBPART B
OF REGULATION AA
Introduction
1. Background. On March 1, 1984, the Federal Trade
Commission (FTC) adopted its Credit Practices Rule, effective March 1,
1985, pursuant to the authority granted the FTC under 18(a)(1)(B) and
5(a)(1) of the Federal Trade Commission Act (FTC Act),
15 U.S.C. 57a(a)(1)(B) and
15 U.S.C. 45(a)(1). Under this
statute the FTC is authorized to promulgate rules that define and
prevent "unfair or deceptive acts or practices" in or affecting
commerce with respect to extensions of credit to consumers. Section
18(f) of the FTC Act, 15 U.S.C. 57a(f), provides that, whenever the FTC
promulgates a rule prohibiting practices which it has deemed to be
unfair or deceptive, the Board of Governors of the Federal Reserve
System (Board) must adopt a substantially similar rule prohibiting such
practices by banks. The Board must adopt a rule within 60 days of the
effective date of the FTC's rule unless the Board finds that such acts
or practices by banks are not unfair or deceptive, or that the adoption
of similar regulations for banks would seriously conflict with
essential monetary and payment systems policies of the Board.
In April, 1985, the Board adopted a rule substantially similar to
the FTC's Credit Practices Rule, thereby amending the Board's
Regulation AA, Unfair or Deceptive Acts or Practices (12 CFR Part 227).
The Board modified certain provisions of the FTC's rule in order to
take into account the needs and characteristics of the banking
industry. The effective date of the Board's rule is January 1, 1986.
2. Summary of Rule. The Board's rule applies to all
consumer credit contracts other than those for the purchase of real
estate. It prohibits banks from using certain remedies to enforce
consumer credit obligations. Under the rule, banks may not include
these remedies in their consumer credit contracts, and, if banks
purchase contracts that contain a prohibited provision(s), banks are
prohibited from enforcing the provision(s).
The prohibited provisions are: (1) A confession of judgment clause,
(also known as a cognovit or warrant of attorney)
whichpermits a creditor to obtain a judgment
based on the borrower's agreement in advance that, in the event of a
suit on the obligation, the borrower waives the right to notice and the
opportunity to be heard; (2) a waiver of exemption in which the
consumer relinquishes a statutory right protecting his or her home and
other necessities from seizure to satisfy a judgment, unless the waiver
applies solely to property that serves as security for the obligation;
(3) an irrevocable assignment of future wages which gives the bank the
right to receive the consumer's wages or earnings directly from the
consumer's employer, unless the assignment constitutes a payroll
deduction plan or other preauthorized payment plan; and (4) the taking
of nonpossessory security interests in household goods, unless such
goods are purchased with the credit extended by the bank.
The rule also prohibits a practice known as "pyramiding late
charges." Under the pyramiding provision, a bank is prevented from
assessing multiple late charges based on a single late payment that is
subsequently paid.
The rule also prohibits a bank from misrepresenting a cosigner's
liability and requires the bank to give a cosigner, prior to becoming
obligated in a consumer credit transaction, a disclosure notice which
explains the nature of the cosigner's obligations and liabilities under
the contract.
3. Scope; enforcement. The Board's rule applies to
all banks and their subsidiaries. Institutions that are members of the
Federal Home Loan Bank System and nonbank subsidiaries of bank holding
companies are covered by the rules of the Federal Home Loan Bank Board
and the FTC, respectively.
The Board has enforcement responsibility for state-chartered banks
that are members of the Federal Reserve System. The Office of the
Comptroller of the Currency has enforcement responsibility for national
banks. The Federal Deposit Insurance Corporation has enforcement
responsibility for insured state-chartered banks that are not members
of the Federal Reserve System.
{{4-28-00 p.7412.04}}
4. State Exemptions. The rule provides that states
may seek exemptions from the requirements of the rule when the state
law provides a level of protection substantially equivalent to, or
greater than, the protection afforded by the rule.
5. Format of Staff Guidelines. The staff guidelines
on the Credit Practices Rule--Subpart B of Regulation AA--are in
question and answer format. The questions are identified by hyphenated
numbers. The first part of the number indicates the regulatory section;
the second part, the sequential order of a particular question within
that section. For example, 13(d)-1 indicates the first question in
§ 227.13(d). Headings are included to make it easier for users to
locate questions.
Section 227.11--Authority, Purpose, and Scope.
Q11(c)-1: Penalties for noncompliance. What are the
penalties for noncompliance with the rule?
A. Administrative enforcement of the rule for banks may involve
actions under section 8 of the Federal Deposit Insurance Act
(12 U.S.C. 1818), including
cease-and-desist orders requiring that actions be taken to remedy
violations. If the terms of the order are violated, the federal
supervisory agency may impose penalties of up to $1,000 per day for
every day that the bank is in violation of the order.
Q11(c)-2: Industrial loan companies. Are industrial loan
companies subject to the Board's rule?
A: Industrial loan companies that are insured by the Federal
Deposit Insurance Corporation are covered by the Board's rule.
Section
227.12--Definitions.
12(a) "Consumer"
Q12(a)-1: Type of transaction covered. What type of
transaction is covered by the rule?
A: The rule covers credit obligations of consumers to acquire
goods, services, or money primarily for personal, family or household
use. The rule does not apply, however, to loans made for the purchase
of real property.
Q12(a)-2: Business vs. consumer purpose. How
can a bank determine whether credit extensions are for business
purposes and, therefore, not covered by the rule?
A: While there is no precise test for what constitutes
business-purpose credit--as opposed to credit primarily for personal,
family or household purposes--banks may consider the factors described
in the Official Staff Commentary to Regulation Z (Truth in Lending,
12 CFR 226) on this
issue. The factors include:
The relationship of the borrower's primary occupation to the
acquisition. The more closely related, the more likely it is to be
business purpose.
The degree to which the borrower will personally manage the
acquisition. The more personal involvement there is, the more likely it
is to be business purpose.
The ratio of income from the acquisition to the total income
of the borrower. The higher the ratio, the more likely it is to be
business purpose.
The size of the transaction. The larger the transaction, the
more likely it is to be business purpose.
The borrower's statement of purpose for the loan.
Examples of business-purpose credit include:
A loan to expand a business, even if it is secured by the
borrower's residence or personal property.
A loan to improve a principal residence by putting in a
business office.
A business account used occasionally for consumer purposes.
Examples of consumer-purpose credit include:
Credit extensions by a company to its employees or agents if
the loans are used for personal purposes.
A loan secured by a mechanic's tools to pay a child's
tuition.
A personal account used occasionally for business purposes.
Q12(a)-3: Agricultural purpose loans. What about
loans made for agricultural purposes? Are they covered by the rule?
A: A loan made for an "agricultural purpose"--as that term is
defined in the Official Staff Commentary to Regulation Z--would not be
a loan made primarily for personal, family, or household use and,
therefore, would not be subject to the rule. An "agricultural
purpose" loan would include loans for the planting, propagating,
nurturing, harvesting, catching, storing, ex-
{{4-28-00 p.7412.05}}hibiting,
marketing, transporting, processing, or manufacturing of food,
beverages (including alcoholic beverages), flowers, trees, livestock,
poultry, bees, wildlife, fish, or shellfish by a natural person engaged
in farming, fishing, or growing crops, flowers, trees, livestock,
poultry, bees, or wildlife.
Q12(a)-4: Real property loan--not secured by property
purchased. Does the rule apply where a consumer obtains a loan to
purchase real property but secures the loan with some other collateral,
such as a savings account or other real property?
A: No, the rule would not apply since the purpose of the loan is to
purchase real property.
Q12(a)-5: Home improvement loans. What happens when a
bank makes a home improvement loan to a consumer and secures it with
the consumer's home? Is the transaction subject to the rule?
A: Yes, the transaction is subject to the rule since the
purchase of real property is not the purpose of the loan.
Q12(a)-6 Mobile home and houseboat purchases. Is a
purchase of a mobile home or houseboat exempt from the rule as a
purchase of real property?
A: The issue of whether purchases of mobile homes or houseboats are
covered by the rule depends on how these dwellings are treated under
state law. If the applicable state law considers them real property, as
opposed to personal property, then transactions for their purchase
would be exempt from the rule.
Q12(a)-7: Construction loans. Are construction loans
and loans made to provide permanent financing exempt from the rule as
purchases of real property?
A: Yes, construction loans and loans made to provide permanent
financing are considered loans for the purchase of real property and,
therefore, not subject to the rule.
Q12(a)-8: Assumptions. A bank makes a loan for the
purchase of real property. The loan is assumed by a new purchaser.
Would the assumption be considered a transaction "for the purchase
of real property," and therefore, not covered by the rule?
A: Yes, as assumption of a loan made for the purchase of real
property is considered a transaction "for the purchase of real
property," and not covered by the rule.
Q12(a)-9: Refinancings of real property loans. What
happens if a bank refinances a loan that had been made to purchase real
property and, therefore, was exempt from the rule? Is the new loan
still exempt from the rule?
A: The new loan will be exempt from the rule as long as the primary
purpose of the new loan is in fact the refinancing of the original debt
(for example, in order to take advantage of lower interest rates). The
amount outstanding on the original loan--which is now being
refinanced--must represent substantially the entire amount of the new
loan; any additional credit extended as part of the new loan must be
incidential to the primary purpose of refinancing.
Q12(a)-10: Lease transactions. Are consumer lease
transactions covered by the rule?
A: The rule covers only consumer credit obligations. A lease
transaction would be covered by the rule only if the transaction is a
credit sale as defined in Regulation Z.
Q12(a)-11: Trusts. Are extensions of credit made to a
consumer through a trust covered by the rule?
A: Yes, such extensions of credit are covered by the rule,
unless the credit is being extended through a nonprofit trust (as the
rule does not apply to nonprofit organizations).
12(b) "Cosigner"
Q12(b)-1: Cosigner--basic definition. Who is a
cosigner under the rule?
A: Any natural person who assumes liability for the obligation of a
consumer (including, for example, a surety, guarantor or other
accommodation party), and who does so without receiving goods, services
or money in return for the obligation, or, in the case of open-end
credit, without receiving the contractual right to obtain extensions of
credit on the account, would be considered a cosigner for purposes of
the rule.
Q12(b)-1a: Business entities as cosigners. If a
partnership or a corporation cosigns a consumer credit obligation, is
such an entity a cosigner for purposes of the rule? Must the bank
provide a cosigner notice?
A: No, the rule applies only to natural persons who are
cosigners. Consequently, the rule does not require a bank to provide a
cosigner notice when a partnership, corpora-
{{4-28-00 p.7412.06}}tion, or other
business entity serves as a cosigner on a consumer credit obligation.
Q12(b)-1b: Dealer guarantee. Where a bank and an
automobile dealer, for example, enter into an agreement whereby the
bank purchases a consumer credit obligation from the dealer and the
dealer guarantees the obligation, must the bank provide a cosigner
notice to the dealer?
A: No, the rule is not intended to apply in such recourse agreement
situations where the bank is purchasing dealer paper.
Q12(b)-2: Person's signature requested as a condition to
credit or as a condition of forbearance. If a bank requests a
person's signature as a condition to granting credit to another
individual, or as a condition for forbearance on collection of a
consumer's obligation that is in default, is that person a cosigner?
A: Yes, if such a person is asked to sign as a condition to
granting credit to another individual, or as a condition for
forbearance on collection of an obligation that is in default, such a
person would be a cosigner, provided that the person assumes liability
for a consumer's obligation without receiving goods, services or money
in return. If the person who is asked to sign the credit obligation
(for example, for the purchase of an automobile, or for an open-end
credit card account) decides that he or she wishes to be reflected on
the title to the automobile being purchased, or to have access to the
credit card line, that person is not a cosigner for purposes of the
rule.
Q12(b)-3: Joint applicants. What happens when two
people visit a bank to apply for a loan and appear to be applying
jointly? Can the bank assume that they are applying as joint
applicants, or does the rule require the bank to determine if both of
the applicants will actually be "receiving goods, services, or money
in return for the obligation"?
A: Where two people visit a bank to apply for a loan and appear to
be applying jointly, the rule does not require a bank to conduct a
detailed inquiry into the extent to which both persons are
"receiving goods, services, or money in return for the
obligation." In the great majority of situations, individuals
applying together will be co-borrowers and will not be covered by
therule. The cosigner provision would not
apply, for example:
If two people apply together for a loan to purchase items
for their shared use or to be owned jointly.
If two people apply jointly for a credit card account and
both have the contractual right to draw on the account, even if one of
the applicants eventually chooses not to use the account. The cosigner
provision would apply, for example:
If a consumer applies for a loan with a friend or relative
and during the application process it becomes apparent to the loan
officer that the purpose of the loan is such that the friend or
relative will not receive any benefit from the loan and that the friend
or relative is applying with the consumer solely to aid the consumer in
obtaining credit (for example, where the proceeds of the loan are to be
used to pay the consumer's dental expenses, or to buy furniture for the
consumer's home or apartment.)
Q12(b)-4: Signature to perfect security
interest--relationship to Regulation B. The rule does not
consider a spouse, whose signature is required on a credit obligation
to perfect a security interest pursuant to state law, to be a cosigner.
Does this affect a creditor's obligation under the signature rules of
Regulation B (Equal Credit Opportunity, 12 CFR Part 202) which limit
the circumstances in which a creditor may require a cosigner?
A: No, the rule in no way permits a creditor to obtain the
signature of a nonapplicant spouse, or any person, in violation of
Regulation B. The rule merely addresses whether a bank must give a
cosigner notice when a person's signature is required on the credit
obligation in order to perfect a security interest; whether a bank is
in fact permitted to obtain such a signature, however, is controlled by
Regulation B.
Q12(b)-5: Hypothecating security. Is a person who
hypothecates security for another's obligation a cosigner?
A: No. A person who merely offers security for a loan, and in so
doing signs a security agreement--but not the note, contract or other
document that would render the cosigner liable on the underlying
obligation--is not a cosigner under the rule.
{{4-28-00 p.7412.07}}
12(d) "Household Goods"
Q12(d)--1: Basic definition of household goods. What is
included in the term "household goods"?
A: "Household goods" includes clothing, furniture,
appliances, linens, china, crockery, kitchenware, and personal effects
of the consumer and the consumer's dependents. The term does not
include works of art, electronic entertainment equipment (other than
one television and one radio), items acquired as antiques, and jewelry
(except wedding rings).
Q12(d)--2: Duplicates of household goods. Can duplicate
items of household goods be used to secure a consumer credit
obligation?
A: The definition of household goods includes one television and
one radio; but it does not similarly limit furniture or any of the
other items included in the definition. Consequently, duplicates of any
items included in the definition--other than duplicates of a television
or a radio--are covered by the prohibition.
Q12(d)--3: Personal effects. What are "personal
effects" for purposes of the household goods definition?
A: The term "personal effects" is to be narrowly construed
and is limited to those items that an individual would ordinarily carry
about on his or her person and possessions of a uniquely personal
nature. This includes items such as personal papers, family
photographs, or a family Bible. It does not include musical
instruments, typewriters, firearms, bicycles, snowmobiles, cameras and
camera equipment, sporting goods, and stamp and coin collections.
Q12(d)--4: Appliances as fixtures. What happens
when appliances are considered "fixtures" under state law? Do
they still come within the household goods definition?
A: No. Under some state laws, appliances are considered fixtures,
and, as such, they become part of the realty. A bank that takes a
security interest in realty in such cases would not violate the rule's
prohibition against taking a security interest in household goods.
12(e) "Obligation"
Q12(e)--1: Transactions over $25,000. Is a credit
transaction exceeding $25,000 excluded from the rule's requirements?
A: Unlike Regulation Z, the Credit Practices Rule does not have any
dollar amount cut-off for determining if a transaction is covered by
the rule. However, the dollar amount of a transaction is one of the
factors that can be considered in determining whether a transaction is
for a business or a consumer purpose. (See Q12(a)-2.)
Section
227.13--Unfair Credit Contract Provisions.
Q13--1: Retroactive effect--bank's own contract. If a
bank entered into a contract with a consumer prior to the effective
date of the rule, and that contract contained a provision ultimately
prohibited by the rule, may the bank enforce the provision?
A: Yes, the rule is not intended to have retroactive effect. (See,
however, Q15-8.)
Q13--2: Retroactive effect--purchased paper written before
effective date of rule. What happens if, after January 1, 1986, a
bank buys paper from a third party that was written prior to the rule's
effective date and that contains a provision ultimately prohibited by
the rule? May the bank enforce the provision?
A: Yes, the bank could enforce the provision since, at the time the
paper was written, the provision was not prohibited.
Q13--3: Refinancings and renewals--original credit obligation
entered into prior to effective date of rule. Assume that a bank
entered into a credit obligation prior to the effective date of the
rule and that the credit obligation contained a provision ultimately
prohibited by the rule. Assume further that the credit obligation is
refinanced after the effective date of the rule. May the refinanced
obligation contain the prohibited provision, or is the refinancing
subject to the rule? Does the same hold true of renewals of the
original credit obligation?
A: There is no distinction in the treatment of renewals and
refinancings for purposes of the rule. A refinancing or renewal entered
into after the effective date of the rule is subject to the rule and,
therefore, may not contain a contract provision prohibited by the rule.
Q13--4: Open-end account--future advances made under
the plan. If a bank entered into an open-end credit obligation
with a consumer prior to the effective date of the rule and that
agreement contained con-
{{4-28-00 p.7412.08}}tract
provisions ultimately prohibited by the rule, may the bank enforce
those contract provisions as to future advances made under the plan
after January 1, 1986?
A: Yes, contract provisions ultimately prohibited by the rule can
be enforced in such a situation since the advances are being made as
part of an open-end agreement that was entered into before the
effective date of the rule, and the rule is not intended to have
retroactive effect. (See, however, Q15--8.)
Q13--5: Prohibited provisions in cosigner
agreement. May a bank include any of the provisions prohibited by
the rule in the documents obligating a cosigner on a consumer credit
obligation (for example, in a guaranty agreement)?
A: A bank may not include any of the prohibited provisions in the
documents obligating a cosigner. The agreement between the bank and the
cosigner, even if executed separately, is part of the consumer credit
obligation and is therefore subject to the rule's prohibitions.
13(a) Confession of Judgment
Q13(a)--1: Basic definition; coverage. What is a
confession of judgment provision?
A: A confession of judgment is a contract clause in which the
debtor consents in advance to allow the creditor to obtain a judgment
against the debtor without giving the debtor prior notice or an
opportunity to be heard in court. Such provisions are sometimes
referred to as "cognovit" provisions. The Board's rule prohibits
confessions of judgment that involve anticipatory waivers of procedural
due process in the context of consumer credit obligations. It does not
prohibit a debtor from acknowledging liability, or from otherwise
entering into a negotiated settlement, after a legal action has been
instituted.
The confession of judgment provision also does not affect a
power of attorney in a mortgage loan obligation or deed of trust for
purposes of foreclosure; nor does the provision affect a power of
attorney given to expedite the transfer of pledged securities or the
disposal of repossessed collateral, or to allow the prompt cancellation
of insurance in an insurance premium finance contract.
Q13(a)--2: Language limiting confession of judgment
provision. If a bank uses multi-purpose credit contracts, may the
bankinclude a confession of judgment clause
with qualifying language indicating that the clause is not applicable
in a consumer purpose loan--such as, "You confess judgment to the
extent the law allows," or "This clause applies only in business
purpose loans"?
A: No. Given the public policy purpose of the rule, a bank may not
have a confession of judgment clause in a consumer credit contract,
even with limiting language. Therefore, when a multi-purpose form is
used for a consumer purpose loan, the bank must cross out, blacken in,
or otherwise indicate clearly the removal of the prohibited clause from
the loan document.
13(b) Waiver of Exemption
Q13(b)--1: Basic definition. What is a waiver of
exemption clause?
A: A waiver of exemption clause is a contract provision under which
the debtor agrees to waive a property exemption provided by state law.
Generally, state property exemptions protect the debtor's home and
other necessary items, such as furniture and clothing, from attachment
or execution in order to satisfy the judgment debt. Under the rule, a
waiver is permitted if it applies solely to property which was given as
security in connection with the consumer credit obligation.
Q13(b)--2: Nonpurchase money transactions. Does a
waiver of a state homestead exemption for a nonpurchase money security
interest (such as a second trust or a home equity line of credit)
violate the rule if the waiver applies only to the property that is
subject to the security interest?
A: No, the waiver of homestead exemption provision in the rule is
not violated in the nonpurchase money security interest situation, as
long as the waiver only applies to the property that is in fact
securing the transaction.
Q13(b)--3: Language of contract provision limiting
applicability of waiver. If a bank's consumer credit contracts
contain a clause that states "I waive my state property exemption to
the extent the law allows," would such a clause be permitted under
the rule?
A: No, in spite of the limiting language "to the extent the law
allows," the clause is an overly broad waiver and,
therefore,
{{4-28-00 p.7412.09}}would be
prohibited by the rule. A clause in a consumer credit contract
providing that the consumer waives an exemption "as to property that
secures this loan," for example, would be a permissible waiver of
exemption provision under the rule.
13(c) Assignment of Wages
Q13(c)--1: Basic definition. What is an assignment of
wages clause?
A: Under an assignment of wages clause the debtor assigns future
wages to the creditor in the event of default. Unlike a garnishment, a
court judgment is not required. Typically, once a debtor defaults, the
creditor presents the assignment of wages to the debtor's employer who
then pays the agreed portion of the employee's wages directly to the
creditor.
Q13(c)--2: Exceptions. Are there any exceptions to the
assignment of wages prohibition? exceptions to the assignment of wages
prohibition?
A: Yes, the following types of wage assignments are permitted under
the rule:
Assignments that are revocable at the will of the debtor;
Payroll deduction plans regardless of revocability;
Revocable preauthorized payment plans (governed by the
Electronic Fund Transfer Act, 15 U.S.C. 1693 et seq. ) for
electronic fund transfers to accounts from wages; and
Assignments of wages already earned at the time of the
assignment.
Q13(c)--3: Retroactivity. Does the rule's basic
prohibition against wage assignments apply to a loan agreement entered
into by the bank prior to the effective date of the rule?
A: No. The rule does not invalidate or prevent enforcement of any
wage assignments that were executed prior to January 1, 1986, the
effective date of the rule, even though such wage assignments may cover
wages payable or earned after the effective date.
Q13(c)--4: Payment plans entered into after transaction
begins. What happens if, sometime after entering into a credit
transaction, a consumer decides that he or she would like to make
payments by payroll deduction or by having the payments deducted from
wages and electronically transferred to the bank as payment on an
account. Would this be considered a prohibited wage assignment under
the rule?
A: While most consumers authorize payroll deduction plans and
preauthorized payment plans at the commencement of the credit
obligation (as is contemplated by the rule), a consumer's enrolling in
a payroll deduction plan or preauthorized payment plan after the
obligation has begun is permissible under the rule as long as it is
done voluntarily by the consumer and at the consumer's request.
Q13(c)--5: Offer of a commission as security. Is the
rule's prohibition against a bank's taking an assignment of a
consumer's future wages violated if a bank takes as security for a loan
a consumer's commission (for example, a real estate agent's commission)
that has been earned but not yet received by the consumer?
A: No, this would not be a prohibited wage assignment since the
consumer's commission has already been earned at the time of the
assignment; the fact that it has not yet been received by the consumer
does not affect its treatment under the rule.
13(d) Security Interest in Household Goods
Q13(d)--1: Definition of type of security interest
prohibited. What type of security interest is prohibited by the
Board's rule?
A: The Board's rule specifically prohibits banks from taking
nonpossessory security interests--other than purchase money security
interests--in items defined as household goods. The purpose of the rule
is to prevent consumers from losing basic necessities, which usually
have little resale value to the creditor. The Board's rule does not
prohibit a security interest in real property, a security interest in
items not defined as household goods, or a possessory security interest
(for example, a pawn or pledge) in a consumer's household goods.
Q13(d)--2: Voluntary offerings of household goods. What
happens if a consumer voluntarily offers household goods as collateral
on a nonpurchase money loan? Is the bank allowed to accept them?
A: No. The bank is prohibited from accepting household goods as
collateral even if offered voluntarily.
Q13(d)--3: Refinancings--original loan purchase
money. Assume that a bank entered into a loan transaction with
the con-
{{4-28-00 p.7412.10}}sumer--either
before or after the effective date of the rule--that involved the
taking of a purchase money security interest in household goods. Assume
further that the loan is refinanced. May the bank retain its security
interest in the household goods? Does it make a difference if the new
loan is for a larger amount? What if the loan is refinanced more than
once?
A: The bank may retain its security interest in household goods
even if the new transaction is for a larger amount, and without regard
to how many times the loan is refinanced.
Q13(d)--3a: Refinancing (new creditor)--original loan
purchase money. On the same facts as those detailed in Q13(d)--3,
assume that the consumer refinances the loan with a different bank. May
that bank acquire the security interest of the purchase-money lender in
household goods without violating the rule?
A: Yes, the bank may acquire the security interest of the
purchase-money lender without violating the rule.
Q13(d)--4: Cross-collateral and future advances
clauses. Does the rule prohibit a cross-collateral or future
advances clause in a security agreement for household goods which
provides that the household goods would serve as security for other
loans--both current and future--that the bank makes to the debtor?
A: A cross-collateral or future advances clause would violate the
rule's prohibition on taking a security interest in household goods
where the clause is so broad in its applicability that it goes beyond
loans that are refinancings or consolidations of the original loan
(which contained the purchase money security interest in household
goods) and extends to other loans--whether current or future--that the
bank makes to the debtor.
Q13(d)--5: Refinancings--releasing a portion of security
interest. When a bank has entered into a purchase money loan
transaction secured by household goods and then advances additional
funds to the consumer in subsequent refinancings of that transaction,
is the bank required to release a proportionate amount of the security
interest in the household goods, as the original loan amount decreases?
A: The rule does not require a proportionate reduction of the
security interest as the original loan amount decreases; such may be
required, however, under state law.
Q13(d)--6: Bill consolidation loans. May Bank A, in
making a bill consolidation loan, secure its loan with the security
interest in household goods taken in the original credit transaction
with Bank B (which was a purchase money credit transaction) and which
will be paid in full by the bill consolidation loan?
A: Yes, no distinction is made under the rule between a
consolidation loan made by a creditor who already holds the purchase
money security interest and a consolidation loan made by a different
creditor.
Q13(d)--7: Refinancing by sales contract vs. direct
loan. May a purchase money security interest in household goods
that is acquired by a sales contract be retained if that sales contract
is consolidated or refinanced by a direct loan instead of another sales
contract?
A: Yes, a bank may retain the security interest in the household
goods even though the sales contract is consolidated or refinanced by a
direct loan.
Q13(d)--8: Documentation of purchase money loan. How is
the purchase money nature of a loan to be documented?
A: The rule contains no specific documentation requirements. For
purposes of evidencing compliance, however, the creditor may, for
example: place a note or statement in the loan file attesting to the
purchase money nature of a loan; include a check-box in the contract
which would indicate whether the transaction was a purchase money loan;
or reserve a place in the contract for indicating the purpose for which
the proceeds will be used.
Q13(d)--9: Appliances as fixtures. When a bank takes a
security interest in realty and, under state law, fixtures are part of
the realty, does the bank violate the prohibition against taking a
security interest in household goods?
A: No. See Q12(d)--4.
Q13(d)--10: Security interest in substituted household
goods. Does a bank violate the rule by retaining a security
interest in household goods that have been substituted by the consumer
for household goods in
{{4-28-00 p.7412.11}}which the bank
originally had a permissible purchase money security interest?
A: A security interest in substituted household goods would violate
the rule's prohibition on taking a nonpurchase money security interest
in household goods unless the goods were substituted pursuant to a
warranty; as such, the goods would be considered part of the original
money transaction for purposes of the rule.
Section
227.14--Unfair or Deceptive Practices Involving Cosigners
Q14--1: State-required cosigner notice. If a state law
also requires that a notice be given to a cosigner, how should a bank
handle the dual requirement? Can the state-required notice substitute
for the federal notice?
A: No, a state notice cannot be substituted for the federal notice,
unless a state has obtained an exemption from the federal cosigner
provision as provided for in § 227.16 of the rule. In those instances
in which state law requires that a notice be given to cosigners, the
bank may give both notices.
The bank could, for example, include both notices in the documents
evidencing the credit obligation or on a separate document, unless such
would be prohibited by state law. (See Q14(b)--7 on how to handle
language in the federal notice that is inconsistent with state law
provisions.)
Q14--2: Record retention. Must a bank retain a copy of
the cosigner notice it gives its customers?
A: As a general matter, the rule does not contain any record
retention requirements. A bank should be able, however, to demonstrate
that it has procedures in place that ensure that the cosigner notice is
provided as required by the rule. (See Q14(b)--9 which discusses the
inclusion of acknowledgment statements and signature lines on the
cosigner notice.)
14(a) Prohibited Practices
Q14(a)--1: Retroactivity of cosigner provision. If a
bank has entered into a loan transaction prior to January 1, 1986, in
which a cosigner was involved, but at which time the cosigner notice
was not required, can the bank attempt to collect against the cosigner
after January 1, 1986, should the debtor default?
A: Yes, the bank can attempt to collect from the cosigner, since
the rule does not apply retroactively to obligations entered into
before the rule's effective date.
Q14(a)--2: Purchase of third-party paper. What happens
if a bank, after January 1, 1986, purchases an obligation in which a
cosigner notice should have been given under the rule, but was not?
Would a bank's purchase of the obligation violate the rule? Would the
bank's attempt to collect from the cosigner in such a situation violate
the rule?
A: A bank that purchases an obligation in which the cosigner notice
was not given would not be considered to have obligated the cosigner in
violation of the rule. The purchasing bank would violate the rule in
such a case, however, if it attempts to collect the debt
from the cosigner.
14(b) Disclosure Requirement
Q14(b)--1: Timing of cosigner notice. At what point in
the transaction must the cosigner notice be given?
A: The cosigner notice must be given to the cosigner before the
cosigner becomes obligated on the transaction. This means that the
cosigner should receive the notice prior to the event that makes the
cosigner liable. In the case of open-end credit the cosigner should
receive the notice before becoming obligated for any fees or
transactions on the account.
Q14(b)--2: Oral vs. written notice. May the cosigner
notice be given orally to a cosigner?
A: No, the cosigner notice must be in writing.
Q14(b)--3: Form of cosigner notice. Does the cosigner
notice have to be given in a form that the cosigner can keep?
A: No, the rule does not require that the cosigner notice be in a
form that the cosigner can keep.
Q14(b)--4: Acknowledgment of receipt. Must the
cosigner notice be signed by the cosigner?
A: The rule does not require that the cosigner sign the cosigner
notice, or otherwise acknowledge its receipt. (See, however, Q14(b)--9
on permissible additions to the cosigner notice.)
{{4-28-00 p.7412.12}}
Q14(b)--5: Type size, format requirements. Does the
cosigner notice have to be in a particular type size or format?
A: No, the rule does not specify a particular type size, style or
format. The rule does require, however, that the notice be clear and
conspicuous.
Q14(b)--6: Clear and conspicuous. What is meant by the
rule's requirement that the cosigner notice be "clear and
conspicuous"?
A: A cosigner notice is clear and conspicuous if it is noticeable,
readable and understandable. In those instances in which the notice is
included in the body of the documents evidencing the obligation,
special attention should be given to ensure that the cosigner notice is
prominent or distinctive--that is, to insure that it is noticeable and
readable. Any modifications or additions to the notice should not
jeopardize its clarity.
Q14(b)--7: Modifying the cosigner notice; inconsistency with
state law provisions. Must a bank give a cosigner notice that is
identical to that set forth in the rule, or can the bank modify the
notice? What if language in the federal notice is inconsistent with
state law provisions?
A: Under the rule, a bank must give a cosigner notice that is
substantially similar to the one set forth in the rule; the notice does
not have to be identical. Language in the notice may be deleted or
modified to take into account the rights and responsibilities of
cosigners under applicable state law. Language may be deleted or
modified if it is inapplicable or if it inaccurately reflects the
agreement with the cosigner. For example, the federal cosigner notice
states that a bank can collect from a cosigner without first collecting
from the borrower. It also states that a bank can garnish a cosigner's
wages. If either of these statements is inaccurate under state law,
then the inaccurate language may be deleted or modified. In addition,
minor editorial changes can be made to the notice, such as changing the
word "borrower" to "accountholder," or changing the word
"debt" to "account," as appropriate.
Q14(b)--8: Guarantee language in cosigner notice. The
cosigner notice in the rule states "You are being asked to guarantee
this debt." If a bank does not consider the cosigner a guarantor,
may the bank modify the notice?
A: The word "guarantee" is used in the cosigner notice in its
generic or colloquial sense merely as a way to describe the fact that
the cosigner has an obligation to repay the debt. The underlying
contract--not the notice--is what defines or determines a cosigner's
liability. However, if use of the term conflicts with or causes
confusion under state law, language such as, "You are being asked to
become liable on this debt" can be substituted.
Q14(b)--9: Additional information included on
notice. If the cosigner notice is given on a separate document,
may a bank place additional information on the document? May the bank
print the notice on its letterhead?
A: Yes, a bank may print the notice on its letterhead. The bank may
also include additional information on the document such as:
The date of the transaction
The loan amount
Name(s) and addresses
The account number and other information describing or
identifying the debt in question
Acknowledgment of receipt language
A signature line
As a general rule, any additional information should be concisely
written so as not to detract from the notice's message. Moreover, care
should be taken not to add unnecessary information to the notice.
Q14(b)--10: Cosigner notice on credit application. May
the cosigner notice be placed on a credit application form?
A: Yes, the cosigner notice may be placed on a credit application
form.
Q14(b)--11: Documents of principal debtor vs. those of
cosigner. What happens if the document obligating the cosigner is
separate from that obligating the principal debtor? May the cosigner
notice be included in the document obligating the cosigner.
A: Yes. Where the cosigner is required to sign a separate document
that obligates the cosigner, the cosigner notice may be included in
that document.
Q14(b)--12: Multiple cosigners. What happens if there
are two or more cosigners involved in a transaction? Must each one
receive the cosigner notice?
A: Yes, each cosigner must be given the cosigner notice. However,
since there is no
{{4-28-00 p.7412.13}}requirement in
the regulation that the cosigner notice be given in a form that the
cosigner can retain (See Q14(b)--3), each cosigner does not have to
receive his or her own notice. One notice that serves to notify all
cosigners is sufficient.
Q14(b)--13: Continuing guaranties. When must a bank
give the cosigner notice to a guarantor who has executed a guaranty for
not only the original loan, but also for future loans of the primary
debtor? Must a cosigner notice be given to the guarantor with each
subsequent loan to the primary debtor?
A: The cosigner notice should be provided before the guarantor
becomes obligated on the guaranty--that is, at the time the guaranty is
executed. The cosigner notice need not be given to the guarantor with
each subsequent loan made to the primary debtor, since the cosigner is
already obligated under the original contract to guarantee future
indebtedness. However, since the guarantor is being asked to guarantee
not only the original debt, but also the future debts of the primary
obligor, the cosigner notice should be modified to accurately reflect
the extent of the guaranty obligation. For example, the first sentence
of the cosigner notice could read "You are being asked to guarantee
this debt, as well as all future debts of the borrower entered into
with this bank through December 31, 1987."
Q14(b)--13a: Continuing guaranties--open-end plan. If a
cosigner executes a guaranty on an open-end credit plan (that is, one
guaranteeing all advances made under the plan), does the bank have to
modify the cosigner notice to indicate that all advances made under the
plan are being guaranteed?
A: No, the bank is not required to modify the cosigner notice since
the future advances are all being made as part of the same open-end
credit plan.
Q14(b)--14: Renewal or refinancing of credit
obligation. What happens when a credit obligation involving a
cosigner is renewed or refinanced? Must a bank give the cosigner
another notice at the time of renewal or refinancing?
A: If under the terms of the original credit agreement the cosigner
is obligated for renewals or refinancings of the credit obligation, a
bank would not be required to give another cosigner notice
at the time of each renewal or refinancing.
Q14(b)--15: Placement of cosigner notice above signature
line. When the cosigner notice is included in the documents
evidencing the consumer credit obligation, does the notice have to be
located above the place reserved for the consigner's signature?
A: The regulation does not specify the location of the cosigner
notice when it is contained in the documents evidencing the consumer
credit obligation. Since a bank must, however, provide the notice to
the cosigner prior to the cosigner's becoming obligated on the consumer
credit transaction, placement of the notice above the cosigner's
signature line would seem wise.
Q14(b)--16: Foreign language translation. May a foreign
language translation of the cosigner notice be provided?
A: Yes, a foreign language translation of the cosigner notice may
be provided.
Q14(b)--17: Contract in foreign language. What if the
underlying contract is in a foreign language? Must the cosigner notice
be in the same language?
A: Yes, the cosigner notice should be provided in the same language
as that used in the underlying contract.
Section
227.15--Unfair Late Charges.
Q15--1: Basic definition of unfair late charges
prohibition. What does the rule prohibit with regard to the
imposition of late charges?
A: Under the rule banks are prohibited from levying or collecting
any delinquency charge on a payment, when the only delinquency is
attributable to late fees or delinquency charges assessed on earlier
installments, and the payment is otherwise a full payment for the
applicable period and is paid on its due date or within an applicable
grace period.
Q15--2: Skipped and partial payments. What happens if a
consumer misses or partially pays a monthly payment and fails to make
up that payment month after month? May the bank assess a delinquency
charge for each month that passes in which the consumer fails to make
the missed or "skipped" payment or to pay the outstanding balance
of the partial payment?
A: Yes, the rule does not prohibit the bank from assessing a
delinquency charge
{{4-28-00 p.7412.14}}for each month
that the skipped or partial payment remains outstanding.
Q15--3: Multiple late charges assessed on payment
subsequently paid. Assume the following: A consumer's payments
are $40 a month. The consumer makes his or her February payment in
full, but makes it late. The bank assesses a $5 late charge. The
consumer makes the March payment of $40 on time, but fails to pay the
$5 late charge. The bank uses part of the March payment to pay off the
outstanding late charge, and then considers the March payment
deficient. May the bank then assess another late charge?
A: No, the bank cannot assess another late charge since the March
payment was made in full and on time.
Q15--4: Subsequent payment made late. Assume the same
facts as those detailed in Q15--3, but that the consumer makes the
March payment of $40 late. May the bank assess another late charge?
A: Yes, the bank may assess another late charge since the consumer
failed to make the March payment on time.
Q15--5: Partial payment short more than amount of outstanding
late fee. Assume the same facts as those detailed in Q15--3, but
that the consumer only pays $20 of the $40 March payment. May the bank
assess another late charge?
A: Yes, the bank may assess another late charge since the consumer
failed to make the March payment in full.
Q15--5a: Allocation of excessive payment. Assume that
beginning in January a consumer's payment on an installment loan is $40
a month. The consumer pays only $35 of a $40 January payment and a late
charge of $5 is imposed on the account. If the following month's
payment is for $45, may the creditor use the extra $5 to pay off the
late charge and impose another late charge since the previous month's
payment is still deficient $5?
A: If a consumer's payment could bring the account current except
for an outstanding late charge, no additional late charge may be
imposed.
Q15--6: Open-end credit plans. Does the rule's late
charge provision come into play in an open-end credit plan that
involves a periodic statement that reflects a late charge upon its
imposition, as well as a minimum payment amount that serves to inform
the consumer of the full amount due to remain current on the account?
A: No, in an open-end credit plan where the bank discloses late
charges to the consumer as they are imposed and informs the consumer of
the full amount that the consumer must pay for the applicable period in
order to remain current on the account, the rule's provision on late
charges does not come into play.
Q15--7: Interest limitations. Does the rule prohibit a
bank from imposing interest on an unpaid late fee?
A: The rule does not address the issue of whether interest may be
imposed on unpaid late fees.
Q15--8: Retroactivity of unfair late charges
prohibition. Does the unfair late charges prohibition reach
obligations entered into prior to the rule's effective date?
A: Yes. Unlike the other provisions in the rule which do not
affect obligations entered into prior to the rule's effective date, the
unfair late charges prohibition applies to all outstanding consumer
credit obligations regardless of when they were entered into.
Section 227.16--State
Exemptions.
Q16--1: Applicability of exemption granted by another
agency. If the FTC grants an exemption from a provision(s) of its
rule, are banks, which are subject to the Board's rule, able to take
advantage of that exemption or must the state apply to the Board for an
exemption?
A: Exemptions that are granted by the FTC apply only to those
creditors that are covered by that agency's rule. The state agency
would have to apply to the Board for an exemption for banks under the
Board's rule.
16(a) General Rule
Q16(a)--1: Who may request an exemption. May a private
individual or a bank apply for an exemption?
A: No, neither private individuals nor banks may apply for an
exemption from the rule's provisions. The rule provides that "an
appropriate state agency" may apply for an exemption.
Q16(a)--2: Criteria for exemption. When may a state
agency apply for an exemption?
A: A state agency may apply for an exemption from the rule's
provisions:
{{4-28-00 p.7412.15}}
When there is a state requirement or prohibition in effect
that applies to any transaction(s) to which a provision of the rule
applies; and
When the state requirement or prohibition affords a level of
protection to consumers that is substantially equivalent to, or greater
than, the protection afforded by the rule's provision.
16(b) Applications
Q16(b)--1: Board guidelines on exemption
applications. Does the Board have guidelines for applying for an
exemption from the rule?
A: Yes, a state agency applying for an exemption should use the
procedures set forth in Appendix B to Regulation Z. These procedures
indicate: where an application should be filed; what should be
contained in the application; what types of supporting documents should
accompany the application; factors on which the Board bases its
determination; the consequences of favorable and adverse Board
determinations; and the procedures involved in revoking an exemption.
Q16(b)--2: Deadline for exemption application. Is there
a time by which a stateagency must submit its
exemption application in order to receive consideration? Must it be
submitted by the effective date of the rule?
A: There is no deadline for submitting an exemption application.
Applications can be submitted anytime before or after the effective
date of the rule.
Q16(b)--3. Exemption granted. What states have been
granted an exemption from the Board's rule?
A: The state of Wisconsin was granted an exemption from all
provisions of the Board's rule effective November 20, 1986, for
transactions of $25,000 or less. The state of New York was granted an
exemption from the cosigner provisions of the Board's rule effective
January 21, 1987, for transactions of $25,000 or less. In both
Wisconsin and New York, transactions over $25,000 are subject to the
Board's rule but compliance with state law is deemed compliance with
the federal law. The state of California was granted an exemption from
the cosigner provisions of the Board's rule effective August 1, 1988.
These exemptions do not apply to federally chartered institutions.
[Source: 50 Fed. Reg. 47037, November 14, 1985, effective January
1, 1986; amended at 51 Fed. Reg. 39647, October 30, 1986, effective
November 1, 1986; 53 Fed. Reg. 29226, August 3, 1988, effective August
1, 1988]
[The page following this is 7413.]
1 The words "this part," as used herein, mean Title 12,
Chapter II, Part 227 of the Code of Federal Regulations, cited as 12
CFR Part 227 and designated as Regulation AA. Go Back to Text
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