Consumers who use installment credit gained added protection from abusive debt collections under a federal regulation that took effect Friday.
The new Federal Trade Commission rule--the product of a decade of debate and drafting--bans creditors from requiring consumers to give up certain rights, limits the use of wage assignments for repayment and gives increased protection to household goods in the event of a loan default.
"Up until now, finance companies would frequently give small loans and require all household goods to be put up as security. The companies would then threaten to seize items as worthless to them as beds and cribs in an effort to pressure consumers who were behind in their payments. The rule prohibits this practice," said Robert Hobbs of the private National Consumer Law Center.
Loans made before Friday, the effective date of the regulation, are not affected, however. In addition, the rule does not apply to banks, although similar regulations are being considered for those institutions by the Federal Reserve Board and the Federal Home Loan Bank Board.
The rule is designed to protect consumers from abusive practices by finance companies, credit unions and retailers--such as auto dealers and furniture and department stores--that extend credit. It covers any agreement under which consumers get credit for a personal purpose except to buy real estate.
Basically, it prohibits creditors from including in their consumer-credit contracts provisions that the commission found to be unfair.
It also requires that people who co-sign a loan to help another person obtain credit be specifically informed of their responsibilities. By signing the loan form, the co-signers commit themselves to paying off the full amount if the person borrowing the money fails to do so.
Under the new rule, the notice to co-signers must say, in part: "You are being asked to guarantee this debt. . . . Be sure you can afford to pay it if you have to."
The practice of "pyramiding" late charges is also banned by the rule, which says that lenders can assess only one penalty on a payment that is delinquent.
Pyramiding occurred in the past when a consumer failed to include the late charge with his late payment. The creditor, in some cases, would simply deduct the late fee from the consumer's next installment payment, thus rendering that payment incomplete and late. Then a new late fee could be charged and such fees could build over time to a large sum.
The household goods section bans creditors from including in their contracts provisions that allow them to repossess all household goods if a loan is not paid.
Goods protected from repossession include clothing, furniture, appliances, one radio, one television set and such personal items as wedding rings.