INFO ON HOUSEHOLD GOODS
AS COLLATERAL ON LOANS

Finance companies are often so intent on taking security interests on consumer goods of minimal economic value that they devise complicated schemes to avoid the Federal Trade Commission Credit Practices Rule which prohibits non-purchase money security interest in household goods. Under this rule a finance company or lender cannot take a security on a loan household goods which were not purchased by the proceeds of the loan. They can only take a collateral interest in products which are not considered household goods.

For example, a loan document may have boxes to check for security interest in lawn equipment, musical instruments, recreational equipment, or bicycles. These are all examples of items the FTC staff has indicated are not household goods and thus security interests and such items are not prohibited. However, a finance company cannot take a security interest on non-household goods which were purchased after the consumer received the loan. The law prohibits security interest in consumer goods where the goods are acquired more than ten days after the lender advances the loan.

The core problem with many finance company descriptions of security interest, is that the security agreement identifies a category of collateral, instead of specific items of collateral. Sometimes the finance company will write in "17-inch color television", or "22 caliber rifle" or similar descriptions. The question still remains whether this is adequate to help a repossessor distinguish between property purchased by the consumer prior to and subsequent to the loan and between similar property on the premises owned by others.

Even if the finance company never intends to enforce these illegal security interests, the debtor may be able to recover significant damages. If the security interest is invalid, the creditor should not be selling credit property insurance on that property, and should not be charging filing fees or non-filing insurance for the collateral.

Consumer damages thus are insurance premiums, filing fees and related financing costs. In addition, the practice of creditor selling credit property insurance on unsecured property and over disclosing its security interest may lead to claims for statutory damages under the Truth in Lending Act and the state credit legislation.

Finance companies often threaten delinquent debtors that they will repossess the loan collateral. The ability to make such threats is one of the main reasons lenders take collateral with little or no economic value. But if the security interest is not valid, the lender has no right to seize the property without first obtaining a court order. Moreover, even after the creditor obtains a court judgement, such goods are often exempt under state law from post judgement seizure. Consequently, such threats are false.

False threats to enforce a invalid security interest can run the collector afoul of the Federal Fair Debt Collection Practices Act (if an independent collection agency is collecting), state debt collection laws, and the state consumer fraud statutes. Statutory and actual damage for such false claims can be significant.

IF ANY OF THE FINANCE CONTRACTS YOU HAVE SIGNED CONTAIN A PROVISION WHERE HOUSEHOLD GOODS OR OTHER GOODS ARE COLLATERAL FOR THE LOAN, PLEASE SEND US A COPY OF THE LOAN AGREEMENT AND WE WILL DETERMINE WHETHER OR NOT THE FINANCE COMPANY OR LENDER HAS VIOLATED THE FEDERAL OR STATE LAWS.