Credit Practices Rule - Overview

The Credit Practices Rule

The Credit Practices Rule is a federal law that became effective on March 1, 1985. The Rule imposes certain requirements upon entities that issue credit to consumers.

Applicability of the Credit Practices Rule

The Credit Practices Rule applies to all creditors that are subject to the jurisdiction of the Federal Trade Commission (FTC), including finance companies, credit unions, and retailers, such as department stores and automobile retailers, that issue credit to consumers. The Rule does not apply to banks, savings and loan associations, or certain non-profit organizations. (However, the Federal Reserve Board and the Federal Home Loan Bank Board have enacted similar rules for such entities.)

The Credit Practices Rule applies to consumer credit transactions. The Rule does not apply to business credit. The Rule does not apply consumer credit transactions involving purchases of real estate. However, the Rule applies to a loan issued for the purchase of goods or services for personal, family, or household use, even if the loan is secured by the borrower's real estate. The Rule applies to a sale of goods or services under a lease-purchase plan. Some of the requirements of the Rule do not apply to contracts signed before March 1, 1985.

A state may petition the FTC for a state-wide exemption from any requirement of the Rule. The FTC may grant such an exemption if it determines that state law provides protection to consumers that is equivalent to or greater than the protection afforded by the Rule and that the state has the ability to effectively enforce the law. In addition, any person, including a creditor, may petition the FTC for an exemption from the Rule.

Requirements and Prohibitions of the Credit Practices Rule

The Credit Practices Rule:

(1) prohibits contract provisions involving confessions of judgment, waivers of exemptions, wage assignments, or security interests in household goods;

(2) requires creditors to provide cosigners with notice of their potential liability; and

(3) prohibits the assessment of certain late charges.

Penalties for Violations of the Credit Practices Rule

The FTC may file a lawsuit against a creditor that violates the Rule. A creditor may be liable for a civil penalty of up to $ 10,000 for each violation of the Rule. In addition, a court may issue an order prohibiting further violations of the Rule.

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