Concurrently with a proposal from the Fed to repeal Regulation AA (12 CFR part 227), the CFPB and the federal banking agencies (Fed, OCC, FDIC and NCUA) have issued interagency guidance regarding unfair or deceptive credit practices.
The Fed adopted Reg AA in 1985 pursuant to a directive in Section 18(f)(1) of the FTC Act requiring the Fed to issue rules applicable to banks that were substantially similar to rules issued by the FTC to prohibit unfair or deceptive acts or practices by nonbanks. Reg AA was patterned on the FTC’s credit practices rule (16 CFR sections 44.1-.5) (FTC Rule) and was adopted by the Fed in reliance on the FTC’s findings that the prohibited practices were unfair or deceptive.
Reg AA, as does the FTC Rule, generally prohibits (1) the use of certain provisions in consumer contracts such as confessions of judgment and security interests in household goods (other than purchase money security interests), (2) misrepresenting the nature and extent of a cosigner’s liability and failing to inform a cosigner of the nature of such liability prior to becoming obligated, and (3) pyramiding late fees.
The Fed’s proposed repeal of Reg AA results from the Dodd-Frank Act’s repeal of the banking agencies’ rulewriting authority under Section 18(f)(1) of the FTC Act. In addition, Reg AA was excluded from the Fed’s authority transferred to the CFPB under Dodd-Frank. However, Dodd-Frank gave the CFPB independent authority to issue rules prohibiting unfair, deceptive or abusive acts or practices. (The OCC never had authority to issue UDAP rules under the FTC Act and, for that reason, the OTS version of the FTC Rule was effectively repealed by the provisions of Dodd-Frank transferring certain OTS functions to the Fed. In its proposal, the Fed notes that the NCUA is also planning to repeal its version of the FTC Rule.)
The Guidance is intended to clarify that the repeal of Reg AA and other credit practices rules “should not be construed as a determination by the Agencies that the credit practices described in these former regulations are permissible.” The Guidance notes that notwithstanding the repeals, the agencies retain supervisory and enforcement authority regarding UDAPs. Accordingly the Guidance warns that the agencies “believe that, depending on the facts and circumstances, if banks, savings associations and Federal credit unions engage in the unfair or deceptive practices described in the former credit practices rules, such conduct may violate the prohibition against unfair or deceptive practices in Section 5 of the FTC Act and Sections 1031 and 1036 of the Dodd-Frank Act. The Agencies may determine that statutory violations exist even in the absence of a specific regulation governing the conduct.”
As the Guidance notes, the FTC Rule remains in effect for creditors within the FTC’s jurisdiction and, for nonbank creditors, can be enforced by the CFPB as well as the FTC. The Guidance also notes that the FTC Rule and the repealed credit practices rule required creditors to provide a prescribed “Notice to Cosigner.” The agencies state that that they believe creditors “have properly disclosed a cosigner’s liability if, prior to obligation, they continue to provide a “Notice to Cosigner.”
It bears noting that some states have statutory provisions exempting a creditor from a state law requirement to give a state cosigner notice if the creditor gives the required federal notice. Since banks will no longer be subject to a federal law cosigner notice requirement, they should consult with counsel regarding how to proceed in such states.