Did the Requirements Within Regulation AA Go Away With Its Repeal?

On March 21, 2016, the Federal Reserve Board’s (the Board’s) repeal of Regulation AA (Unfair or Deceptive Acts or Practices) became effective. Since the announcement of the repeal, we have been receiving questions regarding what happened to the requirements that were within the regulation. More specifically, financial institutions want to know whether they can discontinue providing a Notice to Cosigner and whether they are now allowed to take a security interest in household goods.

The short answer is that financial institutions should continue to follow the rules that were contained within the regulation. In August 2014, when the Board published its proposal to repeal Regulation AA, it joined the Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation, National Credit Union Administration, and Office of the Comptroller of the Currency (the agencies) in issuing interagency guidance that stated:

• The agencies believe that, depending on the facts and circumstances, if banks, savings associations, and federal credit unions engage in the unfair or deceptive practices described in these former credit practices rules, such conduct may violate the prohibition against unfair or deceptive practices in Section 5 of the FTC Act and Sections 1031 and 1036 of the Dodd-Frank Act.
• The agencies may determine that statutory violations exist even in the absence of a specific regulation governing the conduct.

So what did Regulation AA cover and what was considered under the rule to be an unfair or deceptive act or practice?

The Board adopted Regulation AA in 1985, and it contained rules substantially similar to the Federal Trade Commission’s (FTC’s) Credit Practices Rule that prohibits practices considered to be unfair or deceptive. Such prohibited practices are:

• Using certain provisions in consumer contracts. Generally, the types of contract provisions prohibited include confessions of judgment, waivers of exemptions, wage assignments, and security interests in household goods (other than purchase money security interests).
• Misrepresenting the nature and extent of a cosigner’s liability and failing to inform a cosigner of the nature of such liability prior to becoming obligated.
• Pyramiding late fees.

Let’s take a closer look at the prohibition for taking a security interest in household goods. In the preamble to the Credit Practices Rule, published on March 1, 1984, the FTC concluded that, “Evidence of record establishes that non-purchase money security interests in household goods are the products of contracts the terms of which consumers cannot reasonably avoid, and that their use occasions substantial injury. We further conclude, based on the evidence, that such security interests produce injury which is not outweighed by countervailing benefits to consumers or competition. Based on the preponderance of evidence in this record, the Commission therefore finds the use of non-purchase money security interests in consumer transactions is an unfair practice.” The evidence noted in the preamble is still relevant today and the same argument can be made that such security interests are unfair. Therefore, financial institutions would be engaging in what is deemed to be an unfair practice by taking such a security interest.

One of the disclosures required by the FTC's Credit Practices Rule, and that was required by Regulation AA, is a Notice to Cosigner explaining the cosigner's obligations and his or her liability if the borrower fails to pay. The agencies stated in their interagency guidance that they believe that creditors have properly disclosed a cosigner's liability if, prior to obligation, they continue to provide a Notice to Cosigner. Based on this guidance, it appears the requirement to provide the Notice to Cosigner is still in a financial institution’s best interest and, in the spirit of full disclosure, is in the cosigner’s best interest.

So despite the repeal of Regulation AA, the agencies still have supervisory and enforcement authority regarding unfair or deceptive acts or practices, which based on the guidance provided, includes the requirements that were contained within Regulation AA.