An important part of any traditional consumer finance company’s business model is purchasing and taking assignment of retail installment sales contracts (RISCs). Being a purchaser of RISCs introduces a whole new level of concern for the finance company. That is, in addition to being concerned with the credit standing and repayment ability of the consumer, the company must also be concerned with the consumer product that is the subject of the RISCs and with the integrity and financial strength of the retail merchant with whom it is doing business.

I say this because, as a general proposition, the finance company depends upon the retailer both to follow the laws and regulations pertaining to consumer credit sales, and to stand behind the consumer products that are the subject of the RISCs. So, there is much more to be concerned with in a retail credit sale transaction than there is in a loan transaction.  

Both sales and loan transactions have federal and state substantive credit transaction requirements that must be followed. For example, there are limitations on interest rate, on holders in-due-course of consumer credit contracts, on attorneys’ fees, on dishonored checks, on sales of credit insurance products, and so forth.

Both have the federal and state disclosure rules to follow. While slightly different, the basic Regulation Z, Regulation B, Regulation P, Credit Practices Rule, etc., disclosures come into play in both types of transactions.

But, then, there are some unique rules applicable to sales, that are not applicable to loans. On the federal level, for example:

• The FTC Home Solicitation Sales Rule may apply.
• Other FTC regulations addressing deceptive pricing, advertising, consumers’ claims and defenses, and the sale of motor vehicles must be considered.
• Warranty and Service Contract limitations and restrictions have to be given attention.

And, on the state level:

• The Uniform Commercial Code provisions of Article 2 on Sales apply.
• There may be limits on Going-out-of-business or distress merchandise sales.
• Deceptive sales and advertising rules abound.
• And, often, individual consumer products are addressed by separate state statutes.

In addition to being mindful of the product or service sold, and knowing the credit standing of the customer, it is vital that the consumer finance company know the capacity and character of the retail merchant as well.  After all, if there are problems with the retail merchant’s products and services, or its business practices and ethics, these problems can come back to haunt the consumer finance company as assignee of the RISCs. Both the FTC holder in-due-course doctrine, and many other laws and agency rules lay the problems of the assignor retailer, directly upon the doorstep of the assignee finance company. And, while there may (and should) be recourse provisions in the assignment documents, having the right to collect, and collecting, are two different matters—financial recovery from a problem retail merchant is a “whole ‘nother kettle of fish.”

Practice Pointer: It is just as important, if not more so, to carefully scrutinize the retail merchant of the RISCs, as it is to assess each consumer buyer.