I have written a couple of times about the FTC Rule on Credit Practices. Here, I generally spoke about the Rule; and here, I covered the element of pyramiding of late charges in more detail. I want to take a moment to discuss the Rule’s limitation on taking of certain household goods and personal effects as collateral on non-purchase money loans.

So, backing up for a moment, a non-purchase money loan occurs when the credit is not extended to purchase the collateral; but, rather, the goods offered as collateral are already owned by the consumer. Now, in that scenario, a creditor is limited on the types of household goods that it may take as collateral.

“Household goods” is a surprisingly complex term. The Rule gives specific examples including items that you would normally expect a consumer to have in his or her household: clothing, furniture, appliances, radios, TVs, linens, china, crockery, kitchenware, and personal effects—like a wedding ring. The term, however, specifically does not include works of art, electronic entertainment equipment (except one TV and one radio), items acquired as antiques, and jewelry (except for wedding rings). I can almost hear the horse trading that went on at the FTC in the development of this Rule!

All of this is important because the FTC Credit Practices Rule provides that it is an unfair credit practice to take a non-possessory security interest in household goods other than in a purchase-money credit transaction. As a result, creditors must be exceedingly careful about taking items for collateral that are found in or about the household but do not fall within the Rule’s exception.

Over the years, the FTC has also commented on what falls within and without the definition of household goods. Here are some good-to-know variations to the Rule:

• Household goods include sewing machines, vacuum cleaners, answering machines, fans, air conditioners, freezers and floor polishers, microwave ovens, and dishwashers—the so-called virtual necessities in modern life.
• Household goods do not include livestock, butane tanks, barbecue grills, luggage, carpet and rugs, hot tubs, fireplace equipment, and car seats. Also not included are fishing equipment, typewriters, firearms, bicycles, and power tools. And, personal effects do not include lawn equipment, mechanic, or carpenter tools because such would not ordinarily be carried on ones’ person.

Practice Pointer: Take a moment to review your “acceptable” collateral list for non-purchase money loan transactions.

Please note: This is the ninety-first blog in a series of Back-to-Basics blogs, in which relevant and resourceful information can be easily accessed by clicking here.