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Repossessions: 3.3.4.1 Generally

The Federal Trade Commission’s Trade Regulation Rule Concerning Credit Practices (FTC Rule)210 and a related federal interagency guidance211 prohibit non-possessory, non-purchase-money security interests in consumers’ household goods. The FTC Rule does not apply to possessory security interests such as pawns, to purchase-money security interests, or to collateral other than household goods. In addition, it has a relatively narrow definition of the “household goods” that are protected.

Repossessions: 3.3.4.2.1 Items that are household goods

The FTC Rule and staff interpretations have made fine distinctions as to what types of personal consumer items are or are not household goods for purposes of the prohibition of non-purchase-money security interests. The FTC’s informal staff letters interpreting the Credit Practices Rule are available online as companion material to this treatise.

Repossessions: 3.3.4.2.3 Other items that are not household goods

The FTC’s statement of basis and purpose for the Rule excludes boats, snowmobiles, cameras, planes, and home workshops from the definition of household goods.236 The FTC staff has enlarged on these exceptions over the years, indicating in opinion letters that the following items do not fall within the definition of “household goods”:

Repossessions: 3.3.4.4 Creditor Attempts to Evade the FTC Rule

One creditor response to the FTC Rule is to state in the loan agreement that it is taking a security interest in household goods unless prohibited by law or unless the FTC Rule applies. For example, one credit agreement stated that if the transaction was for personal, family or household purposes, then any household goods collateral was excluded from the agreement.

Fair Debt Collection: 16.2.1 Overview

State debt collection statutes provide the primary consumer remedy for debt collection abuse in many instances. For example, in many states these statutes apply to creditors who are not covered by the federal Fair Debt Collection Practices Act.53 Even in suits against collectors, state remedies, which often include statutory damages and attorney fees, may compare favorably to FDCPA remedies.

Repossessions: 3.3.4.5 Remedies for FTC Rule Violations

The FTC Rule states that it is an unfair and deceptive practice for a creditor to take a non-purchase-money security interest in household goods. Rule violations may lead to FTC enforcement actions.268 But the FTC Act provides no direct private right of action for a violation of an FTC Rule.269 Nor does the Rule state that security interests taken in violation of the FTC Rule are void or unenforceable.

Repossessions: 3.3.5 State Restrictions on Non-Purchase-Money Security Interests

A number of state laws limit non-purchase-money security interests. What follows is a listing of such restrictions. (Restrictions on cross-collateral and future advance clauses are discussed in later sections.279 This section covers state laws limiting collateral when the lender does not now have and never had a purchase-money interest in the collateral.)

Repossessions: 3.3.7.1 Generally

Another approach to challenging a creditor’s purported security interest in non-purchase-money collateral is to scrutinize whether the description of the collateral meets Article 9’s requirement that the collateral be adequately identified. Lenders often fail to describe their non-purchase-money collateral with much specificity. This omission is not surprising because creditors generally have little economic interest in specific items of non-purchase-money collateral.

Repossessions: 3.3.7.2 Does Collateral Description Distinguish After-Acquired Property?

One reason that an imprecise description of non-purchase-money collateral is insufficient to create a security interest is that it fails to distinguish between the collateral and similar items that the consumer acquires after consummation of the transaction. The UCC does not permit creditors to enforce security interests in consumer goods when the goods are acquired more than ten days after the secured party gives value.357

Repossessions: 3.3.7.3 Identification of Televisions, Radios, Musical Instruments, and Antiques

The FTC Credit Practices Rule prohibits non-purchase-money security interests in one television and one radio. If a creditor takes an interest in “second television” or “second radio,” how is the sheriff or repossessor to know which television or radio is the one that is collateral? To effectively take an interest, the creditor will have to identify the collateral to distinguish it from the consumer’s other television or radio.

Repossessions: 3.4.1 Overview

This section considers the continued enforceability of a security interest after the security interest is created. Issues arise when:

Repossessions: 3.4.2 Secured Party’s Interest in Proceeds of Collateral

Secured parties have a security interest in the proceeds of their collateral.368 Proceeds include, inter alia, whatever is acquired upon the sale, lease, license, exchange, or other disposal of the collateral.369 Even under the narrower definition of proceeds in former UCC § 9-306(1), courts held that the term included the proceeds of involuntary as well as voluntary dispositions.370 Creditors do not have to specify in the security agreeme

Repossessions: 3.4.3.1 Generally

A creditor may agree that the consumer can transfer collateral to another party free and clear of the security interest, often in consideration of payment of all or part of the obligation. The creditor’s authorization of the transfer terminates the creditor’s security interest in the collateral,384 although the creditor can enter into a separate security agreement with the transferee.

Repossessions: 3.4.3.2 Creditors with Unperfected Security Interests

Creditors with unperfected security interests are extremely vulnerable. A creditor with an unperfected security interest has rights subordinate to a buyer, even if the buyer is not in the ordinary course of business.390 The creditor’s rights are inferior to those of a third-party transferee, whether the transferee is another consumer or a dealer and whether the buyer knew of the creditor’s security interest or not.

Repossessions: 3.4.4 Assignment of Security Agreement

Consumer credit agreements are often assigned. For example, a dealer may assign a consumer’s note to a finance company. Upon the debtor’s default, the finance company, pursuant to a repurchase or recourse agreement, may assign the note back to the dealer. When an obligation is securitized, it may be assigned multiple times.

Repossessions: 3.4.5 When Underlying Obligation Is Extinguished; Creditor’s Duty to File Termination Statement

A security interest secures payment or performance of an obligation.415 If the obligation is extinguished, there is no security interest, and there can be no repossession.416 Consider whether an obligation still exists if the secured party fails to deliver the goods, if the obligation is based on a transaction that is usurious or violates installment sales or other statutes, or if the debtor has rejected or revoked acceptance of the underlying goods.

Repossessions: 3.4.6 After-Acquired Property

For non-consumer transactions, a provision in a security agreement creating a security interest in property acquired after its effective date is valid and enforceable.421 However this rule is almost entirely inapplicable to consumer goods, as an after-acquired property clause applies to consumer goods only if the debtor acquires rights in them within ten days after the secured party gives value, that is, within ten days after the original transaction is consummated.422

Repossessions: 3.5.1 Overview

A lender may refinance or consolidate obligations owed to other creditors, obligations originating with another creditor but then assigned to the refinancing lender, obligations that originated with the refinancing lender, or some combination of the three. New advances can also be folded into the refinancing or consolidation loan from the lender. A loan can also refinance a loan that itself was a refinancing several times over.