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Repossessions: 3.5.2.1 Renewals Versus Novations

Courts generally find that a “renewal” of a loan automatically keeps preexisting collateral as security for the new loan, even if the security is not mentioned in the new loan. Unless the original obligation is extinguished and the new note creates a new obligation, the new note just extends the payment period.431

Repossessions: 3.5.3.2 Continuation of Security Interest in Goods Purchased Does Not Violate FTC Credit Practices Rule

If the refinancing of a debt extinguishes the purchase-money nature of the debt, then a refinanced note could be considered to conflict with the FTC Credit Practices Rule447 if it takes a security interest in household goods that were purchased in the original transaction. But the FTC has stated that a security interest retains its purchase-money character after refinancing for purposes of the FTC Rule, even if the refinancing extends new credit or consolidates additional loans. The Rule’s statement of basis and purpose states:

Repossessions: 3.5.3.3 State Law Restrictions on Non-Purchase-Money Security Interests May Preclude Security Interests After Refinancing

State law restrictions on non-purchase-money security interests may come into play when a purchase-money loan is refinanced.452 The FTC has stated that states can provide greater protections to consumers than those found in the Credit Practices Rule.453 Moreover, courts should not utilize FTC standards determining when collateral loses its purchase-money status when the courts are interpreting state statutes, and when the very concept of a purchase-money security interest is one created by state

Repossessions: 3.6.1 Overview

A future advance clause, also known as a dragnet or anaconda456 clause, allows a creditor to continue its security interest not only in the present loan, but also in future loans between that creditor and that debtor, even though the future loan does not explicitly grant the security interest. The clause in the first loan states that the collateral in that loan also secures any future indebtedness between the lender and the consumer.

Repossessions: 3.6.2.1 UCC Authorization

The UCC explicitly authorizes future advance clauses459 and provides no special protections for consumer goods.460 Despite this authorization, numerous courts, using a number of different justifications, have refused to enforce future advance clauses, as examined in §§ 3.6.2.2 to

Repossessions: 3.6.2.2 Ambiguous Future Advance Clauses Will Not Be Enforced

Many courts will enforce future advance clauses if the terms are clear and unambiguous.461 But the security agreement must clearly indicate that the collateral secures future advances; failure to do so invalidates the clause.462 For example, a provision that the collateral secures “all other indebtedness from buyer to secured party” does not clearly include future advances.463 Similarly, when the future advance “box” in a form agreement is not chec

Repossessions: 3.6.2.3 Must the Advance Be of the Same “Class” As the Original Loan

Some courts rule that future advance clauses do not apply to advances which are not the same type or “class” as the earlier advance.468 However, an official comment to revised Article 9 states: “This Article rejects the holdings of cases decided under former Article 9 that applied other tests, such as whether a future advance clause or other subsequently incurred obligation was of the same or a similar type or class as earlier advances and obligations secured by the collateral.”469 A number of c

Repossessions: 3.6.2.4 Application to Future Advances Not Within the Parties’ Contemplation

Many courts have refused to apply future advance clauses to future advances that are not within the contemplation of the parties at the time the agreement was signed.473 This position is supported by a UCC official comment indicating that a future advance clause’s applicability is based upon “construing the parties’ agreement under applicable law.”474 For example, a court may find the application of a future advance clause not within the parties’ intent when the clause was in a standard form con

Repossessions: 3.6.3 Judicial Reluctance to Enforce Antecedent Debt Clauses

Because of the similarity of antecedent debt clauses to future advance clauses, courts are likely to show a similar reluctance to enforce them, and may only do so when the preexisting debt is explicitly identified.487 As it is such a simple matter for a note to identify an existing debt, a court may be particularly leery of enforcing an antecedent debt clause that does not do so.488

Repossessions: 3.6.4 FTC Rule Restricts Future Advance and Antecedent Debt Clauses That Result in Non-Purchase-Money Security Interests in Household Goods

A future advance or antecedent debt clause may violate the FTC Credit Practices Rule490 because it can result in a non-purchase-money loan being secured by household goods. For example, if a consumer purchases household goods on credit, they can be collateral for the transaction without violating the FTC Rule. But if, because of a future advance or antecedent debt clause, the household goods also become collateral for a non-purchase-money debt, that is a violation of the FTC Rule.

Repossessions: 3.6.5 Truth in Lending Act Implications

When lenders use future advance clauses in one loan, subsequent loans with that lender must disclose under the Truth in Lending Act (TILA) that collateral securing the first indebtedness also secures that subsequent loan. An official interpretation of the TILA regulations states that the lender must disclose in the new disclosure statement that collateral for preexisting credit with the lender is being used to secure the new debt.

Repossessions: 3.7.2 Cross-Collateral Clauses

One way merchants can include previously purchased items as collateral for a new extension of credit is to include a cross-collateral clause in the new security agreement. The clause states that the present credit-sale obligation is secured not only by the item being purchased, but also by any other item purchased from the same merchant in the past. The clause is ineffective if the creditor for whose benefit the clause operates is not the same in each transaction.503

Repossessions: 3.7.3 Consolidation of Several Credit Sales

Merchants can avoid the FTC Credit Practices Rule’s restriction on cross-collateral clauses while achieving the same result by consolidating several different credit sales into one debt secured by all of the items purchased. The FTC Rule does not prohibit cross-collateral if the collateral is taken in a refinancing or consolidation of the original purchase-money transaction.517

Repossessions: 3.8.1 Overview

Automobiles, manufactured homes, and related vehicles are the most important forms of personal property collateral in consumer loans. This section details special issues concerning the creation of security interests in such property, including the question whether a seller’s retention of the certificate of title creates a security interest, and whether a security interest extends to items attached to a car or manufactured home before the sale, to items attached after the sale, and to insurance proceeds and trade-ins.

Repossessions: 3.8.2.2.1 Introduction

Issues arise when a consumer signs an installment sales agreement to purchase a vehicle and is given possession of that vehicle, but the dealer has not yet signed the title over to the consumer. Is the consumer the vehicle owner, with the dealer holding only a security interest in the vehicle, or does the dealer still own the vehicle and is the consumer just a bailee?

Repossessions: 3.8.2.2.2 Nature of transaction in strict title states

In a “strict title” state like Missouri, in which the failure to transfer title means that title remains with the seller even if the buyer has possession, the buyer apparently has nothing but possession to support a claim to the vehicle and cannot resort to UCC Article 9.549 Instead, the buyer’s rights and obligations are primarily determined by bailment law.550

But, even if a title statute is of the strict title variety, courts may interpret it not to apply in every circumstance.

Repossessions: 3.8.2.2.3 Nature of transaction in other states

In states without strict title statutes, UCC § 2-401553 governs whether and when ownership passes to the buyer,554 and when the dealers is left with at most only a security interest in the vehicle. UCC § 2-401(1) states that any reservation of title by the seller is limited to a security interest if the goods have been shipped or delivered.

Repossessions: 3.8.3 Property Added to a Vehicle or Manufactured Home Pre-Dating a Security Agreement

Prior to the sale, the seller of a motor vehicle or manufactured home often adds items that are not necessarily integral to the vehicle or home, such as a sound system or appliances. Whether a creditor has the right to seize and sell those additional items when it repossesses the vehicle or home depends on how integral the item is to the collateral, what the security agreement states, and whether the security interest is a purchase-money security interest.

Repossessions: 3.8.5 Insurance Proceeds and Trade-Ins

Another issue concerning automobile and manufactured home collateral is whether the creditor’s security interest continues in insurance proceeds when the property is damaged or stolen and in after-purchased cars or homes when the amount paid for the new purchase includes a trade-in of the collateral. Secured parties automatically have a security interest in any proceeds from their collateral. Creditors do not have to specify in the security agreement that they are retaining an interest in proceeds.