Unfair Credit Practices – Security Interests in Household Goods
Written by Benjamin M. Litchfield, Regulatory Compliance Counsel
Greetings compliance fans and happy Friday! We recently received questions about whether credit unions can take security interests in household goods to secure non-purchase money loans. Since this issue is somewhat complex and involves some twists and turns, I decided to write this blog post to (hopefully) clarify the matter for you. The short answer is that, in general, this is considered an unfair practice under Section 5 of the Federal Trade Commission Act (FTC Act) and is prohibited.
The Federal Trade Commission's Credit Practices Rule states that it is an unfair act or practice within the meaning of Section 5 of the FTC Act for a lender or retail installment seller directly or indirectly to take or receive from a consumer an obligation that [c]onstitutes or contains a nonpossessory security interest in household goods other than a purchase money security interest. 16 C.F.R. 444.2(a)(4).
The rule defines household goods to include the following:
- One radio and television
- Kitchenware, and
- Personal effects (including wedding rings).
16 C.F.R. 444.1(i). Informal Staff Opinion Letters issued by FTC Staff have also indicated that items such as sewing machines, telephones and answering machines, household pets, ovens, and patio furniture are also considered household goods. The term household goods, however, does not include works of art, electronic entertainment equipment, items acquired as antiques, or jewelry (except wedding rings). FTC Staff have also said that bicycles, power tools, lawn equipment, boats, and livestock are not considered household goods. Furthermore, even if an item is considered a household good, the creditor can take a security interest if it is a fixture, meaning that it is attached to real property.
In the Statement of Basis and Purpose for the Credit Practices Rule, the FTC explained why it believes this type of conduct to be unfair:
The record reflects the fact that creditors rarely engage in actual repossession of household goods. When it does occur, the furniture and other items seized frequently have little or no economic value; occasionally, the act of seizure appears to be undertaken for punitive or psychological deterrent effect.
Although seizure of household goods is rare, when it occurs it can have severe economic consequences in the context of seizure the disproportionate economic impact of non-purchase money security interests is most apparent. Debtors lose property which is of great value to them and little value to the creditor. The value to the debtors consists primarily of the replacement cost of the goods seized, together with psychological and emotional value. The debtor is, in an economic sense, willing to pay more for the household goods than they are ever wroth to the creditor on the resale market.
49 Fed. Reg. 7740, 7763 (March 1, 1984). Since this practice appeared to the FTC to be likely to cause substantial injury to consumers that is not reasonably avoidable and not outweighed by benefits to consumers or competition, the FTC declared taking a non-possessory security interest in household goods to be unfair and a violation of the FTC Act.
In the past, NCUA had a similar rule that was applicable to federal credit unions. This rule was codified as Part 706 of NCUA's Rules and Regulations. Following the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, NCUA no longer has rule writing authority under the FTC Act so the rule has been repealed. See, 79 Fed. Reg. 59627 (Oct. 3, 2014). However, NCUA and the federal banking agencies issued supervisory guidance stating that the agencies still considered these practices to be unfair and will take appropriate action under their respective authorities to enforce Section 5 of the FTC Act. See, Interagency Guidance Regarding Unfair or Deceptive Credit Practices (Aug. 22, 2014).
So, practically speaking, what does this mean? For federal credit unions, this means that even though the FTC does not have authority over federal credit unions, the FTC's Credit Practices Rule applies since NCUA believes these practices to be unfair in themselves and to violate Section 5 of the FTC Act. For state-chartered credit unions, who have always been subject to the FTC's jurisdiction, this blog can serve as a reminder of what the Credit Practices Rule requires.