FTC Rule

     Until 1985, certain lenders (sometimes known as personal property brokers or small loan companies) routinely secured non-purchase money loans to individuals with a blanket security interest in the entire contents of the borrower's residence (typically household appliances, furnishings, wearing apparel, entertainment and sporting equipment, china and silverware, bedding, etc.). As a result of rulemaking proceedings in the early 1980's, the Federal Trade Commission, exercising its powers under the Federal Trade Commission Act, concluded that this practice should be considered an unfair trade practice, based in part upon its finding that such security interests gave lenders too much leverage to force repayment or unfavorable refinancing of existing loans by debtors in financial difficulty.   Leverage was exerted by the lenders' threats of repossession of the collateral, an effective threat because debtors wish to avoid the emotional and replacement costs associated with repossession and because debtors are often unaware that the lender really isn't likely to make good on the threat.

     Accordingly, as part of its Credit Practices Rules, effective March 1, 1985, the Federal Trade Commission outlawed non-possessory, non-purchase money security interests in household goods in connection with any loan or retail installment sale to a consumer.  We explore the operation of this rule in Problem.FTC Rule. 

     The Federal Trade Commission Act grants the Federal Trade Commission authority to remedy violations of FTC rules through actions for injunctive relief, civil penalties, or restitution, but the Act does not authorize private rights of action by individuals claiming injury by violation of an FTC rule.  Becaue Congress gives the Federal Trade Commission limited funds to perform a wide range of both antitrust and other consumer protection functions, such FTC enforcement actions are selective.   Moreover, under the case law, individuals claiming injury do not have an implied private right of action for damages or other relief.  Nonetheless, compliance with the Credit Practices Rules, at least among institutional lenders (almost invariably represented by experienced and competent counsel), appears to be widespread if not universal. 

     California statutory law mimics the FTC restriction on non-possessory, non-purchase-money security interests but, unlike the FTC Rule, provides a private right of action for damages, equitable relief, attorney's fees and costs for violation of the statutory restriction.  Cal. Civ. Code 1799.100.