American Financial Services Ass'n v. F.T.C.

• Decision Date: 12 July 1985
• Docket Number: Nos. 84-1081,84-1167,s. 84-1081
• Citation: 767 F.2d 957,247 U.S.App.D.C. 167
• Parties: , 54 USLW 2080, 1985-2 Trade Cases 66,702 AMERICAN FINANCIAL SERVICES ASSOCIATION, Petitioner, v. FEDERAL TRADE COMMISSION, Respondent, Silas Brown, et al., American Conference of Uniform Consumer Credit Code States, Intervenors. The SOUTH CAROLINA DEPARTMENT OF CONSUMER AFFAIRS, Petitioner, v. FEDERAL TRADE COMMISSION, Respondent, American Conference of Uniform Consumer Credit Code States, American Financial Services Association, Department of Commerce of the State of Montana, Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 957

767 F.2d 957

247 U.S.App.D.C. 167, 54 USLW 2080,

1985-2 Trade Cases 66,702

AMERICAN FINANCIAL SERVICES ASSOCIATION, Petitioner, v.FEDERAL TRADE COMMISSION, Respondent,Silas Brown, et al., American Conference of Uniform Consumer

Credit Code States, Intervenors.

The SOUTH CAROLINA DEPARTMENT OF CONSUMER AFFAIRS, Petitioner, v.FEDERAL TRADE COMMISSION, Respondent,

American Conference of Uniform Consumer Credit Code States,

American Financial Services Association,

Department of Commerce of the State of

Montana, Intervenors.

Nos. 84-1081, 84-1167.

United States Court of Appeals District of Columbia Circuit.

Argued Feb. 22, 1985.

Decided July 12, 1985.

Petitions for Review of an Order of the Federal Trade commission.

David H. Remes, Washington, D.C., with whom William H. Allen, Washington, D.C., was on the brief, for petitioner/intervenor American Financial Services Ass'n in Nos. 84-1081and84-1167.

Steven W. Hamm, Columbra, S.C., with whom Philip S. Porter, Pikens, S.C., and J.M. Edouard Mille, Columbra, S.C., were on the brief, for petitionerSouth Carolina Dept. of Consumer Affairs in No. 84-1167.Philip S. Porter, Pickens, S.C., and J.M. Edouard Mille, Columbra S.C., were also on the brief for intervenor American Conference of Uniform Consumer Credit Code States in Nos. 84-1081and84-1167.

Ernest J. Isenstadt, Asst. General Counsel, F.T.C., with whom Howard E. Shapiro, Deputy General Counsel, and Lawrence DeMille-Wagman, F.T.C., Washington, D.C., were on the brief, for respondent in Nos. 84-1081and84-1167.

J. Alan Galbraith, Washington, D.C., for intervenorsSilas Brown, et al. in No. 84-1081.Charles Hill, Washington, D.C., entered an appearance for intervenors.

Francis X. Bellotti, Boston, Mass., was on the brief, for Com. of Mass., et al., amicus curiae, in Nos. 84-1081and84-1167.Rex Butler, Anchorage Alaska, entered an appearance for amicus curiae in No. 84-1081.

Edwin Lloyd Pittman, Jackson, Miss., was on the brief for the Commissioner of Banking and Consumer Finance of the State of Miss., amicus curiae, in Nos. 84-1081and84-1167.

R. Stuart Broom, Washington, D.C., was on the brief for Nat. Ass'n of Consumer Credit Administrators, amicus curiae, in Nos. 84-1081and84-1167.

Before TAMM, WALD and EDWARDS, Circuit Judges.

Opinion for the Court filed by Circuit Judge WALD.

Dissenting opinion filed by Circuit Judge TAMM.

WALD, Circuit Judge:

In these consolidated cases, the petitioners, American Financial Services Association(AFSA) and South Carolina Department of Consumer Affairs(SCDCA) seek review of the Federal Trade Commission's ("the FTC" or "the Commission") Trade Regulation Rule on Credit Practices ("the Credit Practices Rule" or "the Rule"), pursuant to section 18(e) of the Federal Trade Commission Act ("the FTC Act"), 15 U.S.C. Sec. 57a(e)(1)(A).¹ After thorough consideration of the record, we find the promulgation of the Credit Practices Rule was within the Commission's authority under sections 5(a)(1)and18(a)(1)(B) of the FTC Act, that the Rule is supported by substantial evidence in the record, and that the Rule does not effect an unlawful preemption of state law.

I.THE RULEMAKING AND PETITIONERS' CHALLENGE

The Commission's rulemaking on creditor remedies originated as a result of two national studies of consumer credit transactions.As part of the Consumer Credit Protection Act of 1968, Congress established the National Commission on Consumer Finance and charged it with conducting a study of consumer credit transactions including an assessment of existing regulatory measures to protect against unfair practices and to ensure the informed use of consumer credit.The National Commission on Consumer Finance's final report, based on an extensive survey, identified a number of abusive practices and recommended curtailment of a variety of boilerplate provisions commonly found in consumer credit contracts.SeeConsumer Credit in the United States, Report of the National Commission on Consumer Finance (1972), Joint Appendix ("J.A.")at 3[hereinafter cited as NCCF study].Between 1972 and 1974, the FTC's Bureau of Consumer Protection also conducted an investigation of the consumer finance industry to determine whether the use of certain collection remedies was an unfair practice within the meaning of section 5 of the FTC Act.As a result of this investigation, the Bureau of Consumer Protection recommended that the FTC propose a trade regulation rule branding certain creditor remedies as unfair trade practices.SeeMemorandum to Commission from Division of Special Projects, Bureau of Consumer Protection, Creditor Remedies Project (April 1974), J.A.at 74[hereinafter cited as Creditor Remedies Project].

On April 11, 1975, the Commission published its initial notice of rulemaking on consumer credit practices.Credit Practices Rule, 40 Fed.Reg. 16,347(1975).The initial notice of rulemaking proposed a rule proscribing or restricting the use of eleven creditor practices or remedies: confessions of judgment; waivers of exemption; wage assignments; security interests in household goods; cross-collateralization; blanket security interests; resale of repossessed collateral; imposition of attorneys' fees in connection with debt collection; pyramiding of late charges; third party contacts; and co-signer liability.Following the comment and hearing stages of the rulemaking, ² reports were prepared and submitted to the Commission by the Presiding Officer, seeReport of the Presiding Officer on Proposed Trade Regulation Rule: Credit Practices (August 1978), J.A.at 330[hereinafter cited as P.O. Report], and by the Commission staff, seeCredit Practices: Staff Report and Recommendation on Proposed Trade Regulation Rule (August 1980), J.A.at 704[hereinafter cited as Staff Report].The publication of the Staff Report triggered a 60-day comment period, see16 C.F.R. Sec. 1.13(h)(1985), which was extended until January 16, 1981.On April 14, 1983, the rulemaking staff's memorandum recommending a final modified proposed rule and memoranda from the Commission's Bureau of Economics and Bureau of Consumer Protection were placed on the public record.³ Prior rulemaking participants were invited to present their views orally directly to the Commission on June 6 and 7, 1983.On June 13, 1983, the Commission met to consider whether to promulgate a rule and what form the rule should take.The Commission rejected several provisions of the rule and modified others.⁴ On July 20, 1983, the Commission tentatively adopted, by unanimous vote, the revised proposed rule.The final rule was published on March 1, 1984, to become effective March 1, 1985.Credit Practices Rule, 49 Fed.Reg. 7740(1984)(codified at 16 C.F.R. pt. 444).In sum, the Credit Practices Rule was painstakingly considered and significantly modified in response to the extensive comments and recommendations received during this long rulemaking proceeding.

The Credit Practices Rule as finally promulgated contains provisions relating to the following creditor remedies: confessions of judgment; wage assignments; security interests in household goods; waivers of exemption; pyramiding of late charges; and cosigner liability.Petitioners, as a whole, specifically challenge the provisions relating to wage assignments and security interests in household goods.The challenged provisions read in pertinent part:

(a) In connection with the extension of credit to consumers in or affecting commerce as commerce is defined in the Federal Trade Commission Act, it is an unfair act or practice within the meaning of Section 5 of that Act for a lender or retail installment seller directly or indirectly to take or receive from a consumer an obligation that:

....

....

(3) Constitutes or contains an assignment of wages or other earnings unless:

(i) The assignment by its terms is revocable at the will of the debtor, or

(ii)The assignment is a payroll deduction plan or preauthorized payment plan, commencing at the time of the transaction, in which the consumer authorizes a series of wage deductions as a method of making each payment, or

(iii)The assignment applies only to wages or other earnings already earned at the time of the assignment.

(4) Constitutes or contains a nonpossessory security interest in household goods other than a purchase money security interest.

16 C.F.R. Sec. 444.2(a)(3)-(4).Household goods are defined as:

(i) ... Clothing, furniture, appliances, one radio and one television, linens, china, crockery, kitchenware, and personal effects (including wedding rings) of the consumer and his or her dependents, provided that the following are not included within the scope of the term "household goods":

(1) Works of art;

(2) Electronic entertainment equipment (except one television and one radio);

(3) Items acquired as antiques; and

(4) Jewelry (except wedding rings).

(j) Antique.Any item over one hundred years of age, including such items that have been repaired or renovated without changing their original form or character.

16 C.F.R. Sec. 444.1(i)-(j).

A non-purchase, non-possessory security interest in household goods ("HHG security interest") allows the creditor to seize and sell the debtor's household goods upon default without a judgment or court order.Similarly, a wage assignment allows the creditor to file the assignment with the debtor's employer and receive all or part of the debtor's wages until the debt is satisfied without first obtaining a court judgment.The Commission found that both these creditor remedies were "unfair" because they cause substantial and unavoidable injury to consumers which is not outweighed by countervailing benefits to consumers or competition.Petitioners argue that the Rule is beyond the Commission's section 5 authority to proscribe unfair practices because in the absence of seller overreaching in the form of deceit, coercion or nondisclosure of material information,...