The Credit Practices Rule: Yes, It’s Still a Thing
Written by Jennifer Aguilar, Regulatory Compliance Counsel, NAFCU
Last week, the CFPB announced a settlement with NDG Financial Corp. and other lenders over various issues with their payday lending programs. A claim that the lenders used irrevocable wage assignments in violation of the Credit Practice Rule was among the alleged violations. Yes, you read that right – the Credit Practices Rule.
Once upon a time, the Credit Practices Rule was the UDAP regulation. However, its prominence declined after the Dodd-Frank Act passed and the CFPB was assigned authority over the new UDAAP provisions. Its prominence continued to decline once the other federal agencies began repealing their versions of the Credit Practices Rule. Today, only the FTC maintains the Credit Practices in its regulations. State-chartered credit unions and other businesses, such as auto dealers, are subject to the FTC’s jurisdiction; federal credit unions are exempt from the FTC’s regulations. While the NCUA has officially repealed its version of the rule, it signed on to Interagency Guidance in a letter to federal credit unions that explains the practices prohibited by the Credit Practices Rule may still be considered a violation of the UDAAP provisions outlined in the Dodd-Frank Act. So, let’s take a look at some of the key sections of the Credit Practices Rule.
The Credit Practices Rule generally applies to credit transactions that are made for personal, family or household purposes. Credit transactions to purchase real estate are excluded from the rule. The rule has three main sections that apply to covered credit transactions: prohibited contract provisions, requirements related to cosigners and limitations on late fees. Section 444.2 of the rule outlines four contract provisions that, if included in a contract for credit, are considered unfair:
- Confessions of judgement: A confession of judgement provision is one where the consumer agrees to give up certain rights in connection with a lawsuit to enforce the terms of the credit agreement, such as waiving the right to receive notice of the lawsuit or the opportunity to be heard in court.
- Waivers of exemption: Most states have laws that protect certain property from creditors. A waiver of exemption provision is one where a consumer agrees to waive these protections. This does not prohibit creditors from obtaining a valid security interest in protected property.
- Wage assignments: A wage assignment provision is one where a consumer gives the creditor an irrevocable interest in future wages or other earnings. This does not prohibit revocable assignments, preauthorized payment plans (including payroll deduction plans) where a portion of the consumer’s earnings go to the creditor as payment and assignments that apply to wages the consumer has already earned.
- Security interests in household goods: This includes provisions where the creditor is permitted to repossess household goods in the event the consumer defaults on the loan. This NAFCU blog further discusses these provisions.
Section 444.3 provides prohibitions and requirements for loans that involve a cosigner. A “cosigner” is any person who agrees to be liable on a loan to another person without compensation. The rule generally prohibits creditors from misrepresenting a cosigner’s liability and from obligating the cosigner on the loan without first informing the cosigner. In order to ensure creditors do not violate these prohibitions, the rule requires creditors to provide the “Notice to Cosigner” before the cosigner becomes obligated on the loan. The full text of the required notice is provided in section 444.3(c).
Lastly, section 444.4 prohibits creditors from pyramiding late fees. “Pyramiding” occurs when a credit union properly charges a late payment fee, the member makes a timely payment that does not include the amount of the late fee, resulting in the credit union assessing another late fee. Regulation Z also prohibits pyramiding late fees for mortgages and credit cards. This NAFCU blog also discusses pyramiding late fees.
The FTC’s Complying with the Credit Practices Rule guide provides a great summary and explanation of each of the rule’s requirements. For those interested in reading more about the alleged violations that led to the CFPB’s settlement agreement, you can find the complaints here. The settlement has yet to be approved by the court, but it provides insight into the potential consequences of violating the Credit Practices Rule.