The Credit Practices Rule prohibits many creditors from
including certain provisions in consumer credit contracts. It also requires
creditors to provide a written notice to consumers about their potential
liability if the other person fails to pay, before cosigning for loans,
credit cards, and other financial obligations! It also prohibits one method
of assessing late charges.
If you have already co-signed or are thinking
about cosigning for another person's debt, you should know about the
Federal Trade Commission's Credit Practices Rule. The Rule,
which became effective March l, l985, prohibits many creditors from including
certain provisions in consumer credit contracts and requires creditors to
provide you with a written notice that outlines your potential liability if the
other person fails to pay.
Not ALL Credit Contracts are Covered under this
Rule:
The Rule applies to consumer credit
contracts offered by finance companies, retailers (such as auto dealers and
furniture and department stores), and credit unions that offer you credit 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.
Prohibited Contract Provisions:
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.
Mandatory Notices to Cosigners:
When you agree to be a cosigner for someone
else's debt, you are guaranteeing to pay the debt if the primary borrower fails
to pay the debt. The Rule requires that you be given a notice explaining 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 you will have to pay
the debt. 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 creditor can collect this debt
from you without first trying to collect from the borrower. (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)
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.
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 late charges can 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 month's payment entirely, the creditor can charge late fees on
all subsequent payments until you bring your account up to date.
If you've fallen behind on your bills, especially credit cards,
don't panic. You may have several good options available to you. Your success
starts by assessing your current situation and finding a trusted service
provider that is licensed in your state.
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