Question & Answer
Question: We are thinking about buying dealer paper from furniture companies. Are there any special compliance issues we should be concerned about?
Answer: Yes. Furniture companies are subject to the credit practices rules of the Federal Trade Commission. Although banks have their own credit practices rule in the FRB's Regulation AA, the FTC rules are slightly different and apply to non-bank institutions. If the prohibited clauses are present or the mandatory clauses are missing, the contracts may be illegal. In any event, the credit contracts are subject to the FTC rules, whether the clauses are correctly placed or not.
Some of the rules should be familiar to you. These include the co-signer rule and the prohibition against taking security in certain household goods. To establish a clear compliance policy that works, it would be a good idea to purchase only credit contracts that take the items being purchased as security. Then you can be certain that the paper does not violate the household goods rule because items being purchased are exempt.
The FTC's co-signer rule differs slightly from the FRB's rule for banks. The FTC rule requires the co-signer notice to be on a separate piece of paper. Make this a checklist item for those making purchase decisions and include in your monitoring and auditing. If the notice was not properly given, you might not be able to hold the co-signer liable.
Finally, there is the rule eliminating the concept of holder in due course. This is known as the preservation of consumer claims and defenses. Review the contracts you are considering purchasing to determine whether they contain the language that preserves any claims the consumer might have against the seller of the goods and makes these enforceable against the holder of the credit contract. The "holder" rule is designed to prevent sellers of goods from cheating the customer and then selling the note to a "holder in due course," making the consumer's claims ineffective.
Copyright © 1998 Compliance Action. Originally appeared in Compliance Action, Vol. 3, No. 16, 12/98
First published on 12/01/1998