Problem.FTC Rule

A.  The facts of this problem are derived from documents filed in a bankruptcy proceeding commenced in San Jose, California, in 1993.

      I.T.T. Financial Services (ITT) loaned debtor $3,081.89. ITT paid $999.39 directly to the debtor for purposes undisclosed in the loan documents and paid itself $1,552.76 to retire an outstanding loan from ITT to the debtor. ITT paid the balance of the loan proceeds to an insurance company to insure the debtor and the collateral: $61.63 for credit life insurance; $283.20 for credit disability insurance; $184.91 for insurance of the collateral against "multiple perils". ITT charged the debtor interest of 27.38% per annum, totalling $2,020.99 over the four year period of the loan.  The debtor's monthly payment was $106.31 and the total of payments to retire the debt over four years was $3,081.89 + $2,020.99 = $5,102.88.

      ITT took a security interest in the following personal property belonging to the debtor (with values, probably ascribed by ITT, stated in parenthesis): 1 baseball bat ($90); baseball gloves ($100); 1 Weber barbeque ($150); 1 television set ($400); 1 stereo system ($1600); 30 tapes ($350); auto repair equipment ($60); 1 diamond-14kt gold ring ($1600); 2 gold man's rings ($300); 1 VCR ($300).  

      Why would a debtor take this "deal?" Why did ITT take security? What explains the values ascribed to the collateral? (One of your authors owns a Weber barbeque and can assure you that it is not worth $150).  To whom do you think the insurance premiums are paid? Is the security interest in this collateral permitted by the FTC Credit Practices Rule? If so, has the Federal Trade Commission failed to sufficient constrain creditor leverage in these kinds of transactions?

B.   Carlos Morales owned a valuable collection of rare books. The books were on indefinite loan to and in the possession of the Rose Garden Public Library ("Library"). The Library permits patrons to read the rare book collection on the premises but
does not permit patrons to borrow them.

       Carlos approached ABC Finance ("Finance") for a $40,000 loan, to be used in part to help finance his sister's
education and in part to retain a lawyer as counsel to a non-profit association Carlos wanted to form to help
preserve Lake Tahoe from the adverse consequences of development. Carlos offered the books as collateral.
Finance was willing to make the loan, secured by the books (which would remain on loan to the Library).

       Is it permissible under the FTC Credit Practices Rule for Finance to take a security interest in the rare books?  Would the case for permissibility of the security interest be aided if Carlos sent the Library an e-mail message informing it that the Library should hold the books as collateral for a loan from Finance and if the Library forwarded Carlos' e-mail message to Finance as an attachment to its own e-mail message to Finance that read in full as follows: "We received the attached from Carlos Morales."?  U.C.C. 9-313(c), U.C.C. 9-102(a)(7), (69).