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Summary of Changes in Article 9 relating to consumer secured transactions
Uniform Commercial Code Article 9 revamps a key state statute addressing the taking and sale of consumer collateral other than real estate. It affects consumer loans secured by cars, household appliances, and consumer investment property, and well as commercial loans secured by personal property. Revised UCC Article 9 has been passed in some states and is now being introduced in other state legislatures.
Consumers Union has taken a neutral
position on the text of new UCC Article 9. The text contains some improvements
and some drawbacks for consumers, and it presents some special issues for states
to examine in fitting the new law into their existing statutory structure for
consumer loans. Our neutral position is dependant upon no alteration of the
pro-consumer sections. On balance, we find the revised Article 9 no better or
worse for consumers than current UCC Article 9. There are some provisions, however,
that should remain unchanged to ensure that the pro-consumer aspects of the
revision are not lost
in the state legislative process.
Here is a summary of the provisions and effects of new Article 9 for consumers.
New Protections for Consumers
a. New notice of calculation of deficiency. [9-616] (This is the key new benefit, although there are limited penalties for failure to comply.)
b. Some additions to notice of sale. [9-614]
c. Sales to affiliated parties must result in a credit of a commercially reasonable amount even if sale price lower, but no similar protection if sale is to an unaffiliated party. [9-615(f)] (improvement in some states, but a reduction in protection in those states that now treat price as a term which must be commercially reasonable in all disposition sales.]
d. Waivers require agreement. [9-624] (But note some states place stronger, nonconflicting, additional requirements on waiver.]
e. Protection against demands for multiple payment, but not for payment in good faith to the creditor who transferred the loan to another creditor after notice from the second creditor. [9-406]
f. Strictures of FTC Holder Rule apply even if holder notice omitted. [9-403 and 9-404]
Reductions in consumer protection
a. Constructive strict foreclosure doctrine eliminated. [Comment 5 to section 9-620]
b. Authorizes simultaneous exercise of creditor remedies, unless tort law would prohibit [9-601]
c. Allows creditor to repossess goods held by a third party, such as an auto repair shop. [9-620(a)(3)]
d. Raises fee for second accounting within six months to $25. [9-210(f), compare current 9-208]
e. Most consumer protections do not apply to business purpose loans secured by consumer purpose collateral.
f. Eliminates the statement of current section 9-504 that a transfer of collateral to a person who has a guaranty, repurchase agreement, "or the like" is not an Article 9 sale, so that the next sale is the one whose proceeds must be deducted from the debt to determine any deficiency. [9-618; compare current 9-504(5)]
Key provisions as to which any proposed change from the revised text should be carefully scrutinized because it may weaken the revised Article 9 for consumers
9-103 dual status rule restricted to nonconsumer transactions
9-108 higher level of detail required for security agreement taking interest in consumer goods
9-112(c)(17) no Article 9 security interest in deposit accounts in consumer loans
9-112(c)(15) scope excludes non-business tort claims
9-201(b) other consumer law trumps Article 9
9-403, 404, and 406 FTC holder rule, split payment demands
9-612 exception for consumers from ten day safe harbor for time of notice of sale
9-616 explanation of calculation of deficiency
9-614 notice in consumer goods transactions
9-615(f) affiliated party sale rule
9-620(g) no partial strict foreclosure against consumers (expanded to allow it in commercial transactions)
9-625 statutory damages preserved (old 9-507)
9-626(b) Section 9-626(a) adopts the rebuttable presumption rule for commercial transactions. Section 9-626(b) leaves the rule open for the states to decide, through the courts or otherwise, for consumer transactions. Any attempt to expand section 9-626(a) to also cover consumer transactions would be a serious weakening of the statute for consumers.
Various sections mentioning consumer obligors along with consumer debtors. If the cross-reference to a consumer obligor were to be removed, consumer guarantors could lose some protections that they have under current law.
Issues to trace through with individual state laws
Fit with RISA: Some state
Retail Installment Sales Acts or Automobile Conditional Sales Acts may cross
reference or otherwise rely in part on current section 9-504, which requires
both notice and commercially reasonable sale. Those two obligations are split
into different sections in the new Article 9. Notice is in 9-614 (for consumer
goods transactions) and
9-613 (for other consumer transactions, such as those secured by mutual fund
accounts, and for all commercial transactions).
Commercially reasonable sale is now found in 9-610(b), with an additional rule
for sales to self or affiliates in 9-615(f).
Statutes that now cross-reference 9-504, or cases that look to it, may now have
to look to 9-613, 9-614, 9-610, and 9-615.
Treatment of debtor and obligor: The draft splits persons who qualify as debtors under current Article 9 into debtors and obligors. The debtor owes the funds but may not have an interest in the collateral. The person who owns the collateral is now defined as the obligor. A guarantor is either a secondary obligor or a consumer obligor. These changes affect who has access to rights under Article 9. Any state statutes, which cross reference Article 9, which respect to the definition of or rights of debtors will have to be examined to see when they should now refer to both debtors and obligors.
9-605 Duties to unknown parties:
This section states that a secured party doesn't have a duty to persons it doesn't
know about, a simple proposition until one thinks about whether this includes
constructive notice, which it appears not to do.
Prepared by: Gail Hillebrand
Consumers Union
West Coast Regional Office
1535 Mission St.
San Francisco, CA 94103
(415) 431-6747
hillga@consumer.org
(Jan. 2000)
