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Facts For Credits, Loans and Leases

Business Financing

Facts for Business

Advertising Consumer Leases

If you advertise consumer leases, the Federal Trade Commission has important information for you: Your ads must comply with the streamlined rules for lease advertising found in the Consumer Leasing Act (CLA) and Regulation M. These requirements focus on essential lease information for consumers and are designed to help consumers shop and compare lease terms. The current rules became effective January 1, 1998.

This brochure answers frequently asked questions about the general advertising requirements of the CLA and Regulation M, the specific disclosure requirements, and the liability for violations.

General Requirements

Q. What's a consumer lease?

A. A lease of personal property to an individual for more than four months for personal, family or household use where the total contractual obligation is not more than $25,000.

Q. Who's covered?

A. Lessors, automobile dealers, merchants - in short, anyone who advertises consumer leases - must comply with the advertising disclosure requirements spelled out in the CLA and Regulation M.

Q. Are the media covered?

A. No.

Q. What's a lease ad?

A. Any message that invites, offers or announces to the public the availability of a consumer lease, whether in visual, oral or print (including electronic) media. That includes:

  • Messages in newspapers, magazines, leaflets, catalogs, and fliers;
  • Messages on radio, television and public address systems;
  • Direct mail;
  • Telephone solicitations;
  • Signs or displays; and
  • Online information, such as the Internet.

Q. What's clear and conspicuous disclosure?

A. The required disclosures in your ad must be reasonably understandable. That is, consumers must be able to see and read or hear, and understand, the information. Many factors, including the size, duration, and location of the required disclosures, and the background or other information in the ad, can affect whether the information is clear and conspicuous. This requirement applies to all mandatory disclosures, including those offered through a toll-free (or collect or local) telephone number.

Q. What terms can the ad offer?

A. The terms offered must be usually and customarily available.

Specific Requirements

Q. What terms trigger disclosures in the revised regulation?

A. If your ad includes any of these triggering terms:

  • A statement of any capitalized cost reduction or other payment required before or at lease consummation, or by delivery if delivery takes place after con- summation, or that no payment is required - or
  • The amount of any payment,

It must include these disclosures clearly and conspicuously:

  • That the transaction advertised is a lease,
  • The total amount due before or at consummation, or by delivery if delivery takes place after consummation,
  • The number, amounts and due dates or periods of scheduled payments under the lease,
  • Whether or not a security deposit is required, and
  • In leases where the consumer's liability is based on the difference between the property's residual value and its realized value at the end of the lease term, that an extra charge may be imposed at the end of the lease term.

Q. What disclosure rules apply to the total amount due at consummation or delivery?

A. Keep in mind the following:

  • The total amount due at consummation or delivery must be stated. If you also choose to itemize the total amount due at consummation or delivery, the total amount due at consummation or delivery must still be clear and conspicuous, that is, readable and understandable to consumers.
  • Except for the periodic payment, any positive or negative reference to a charge that is part of the total amount due at consummation or delivery cannot be more prominent than the total amount due at consummation or delivery.
  • If third-party fees that vary by state or locality - such as taxes, license or registration - are involved, your ad may give a total amount due at consummation or delivery including the fees based on a particular state or locality while explaining that fact and the fact that such fees vary by state or locality or, exclude the fees from the total amount due at consummation or delivery but disclose that fact. The disclosures about third-party fees also must be clear and conspicuous.

Q. What if my ad promotes several leased items?

A. If a triggering term appears, you can use an example of one or more typical leases - if you disclose the required terms that apply to each. The examples must be labeled as such and must reflect representative lease terms made available to consumers.

Q. Is there a special option for radio and TV ads?

A. The triggering terms and required disclosures described above apply to all lease ads. But, if your radio or TV ad refers clearly and conspicuously to a toll-free (or collect or local) phone number through which consumers can obtain the required lease information, and if you follow certain procedures, you can somewhat limit the information provided in your radio or TV ad. To use this approach, your radio or TV ad still must clearly and conspicuously state:

  • That the transaction advertised is a lease,
  • The total amount due before or at consummation, or by delivery if delivery occurs after consummation, and
  • The number, amounts, and due dates or periods of scheduled payments under the lease.

Your radio or TV ad also must clearly and conspicuously indicate that consumers can get all the required disclosures through the toll-free (or collect or local) phone number or print ad. Your radio or TV ad also must include the publication's name and date.

Q. Are there other special procedures for the toll-free (or collect or local) phone number and print ads?

A. Yes, the toll-free (or collect or local) phone number described above - which only applies to radio and TV ads - must be established no later than the ad's air date. It also must continue for at least 10 days after the air date. Callers must be given all the required disclosures early in the message. A clear and conspicuous written copy of the disclosures also must be given to anyone who asks for it.

Print ads described above must appear in a general circulation publication in the community served by the media station. A newspaper circulated nationally, such as USA Today or the Wall Street Journal, could meet this requirement. The print ad must appear at least three days before the radio or TV ad airs, and continue for at least 10 days after the air date. The print ad must clearly and conspicuously include all the required disclosures.

Q. Are there special rules for advertising a lease rate?

A. Yes, your ad must include the following statement near the rate without any intervening language or symbols: "This percentage may not measure the overall cost of financing the lease." In addition, except for the notice, the rate cannot appear more prominently than any terms in the ad that are required written disclosures under the amended CLA and Regulation M, such as "gross capitalized cost," "residual value" and others. You also cannot refer to the lease rate as an "annual percentage rate," "annual lease rate," or other equivalent term.


If your ads don't comply with the law, you could face enforcement actions or civil lawsuits. For advertisers under the FTC's jurisdiction, that could mean:

  • Orders to cease and desist. If you violate an order, you could be fined up to $11,000 per day per violation.
  • Injunctions by federal district courts. Violations of these orders could result in civil or criminal contempt proceedings.
  • Refunds to consumers for actual damages in civil lawsuits.

Businesses Must Provide Victims and Law Enforcement with Transaction Records Relating to Identity Theft

The Fair Credit Reporting Act (FCRA) spells out rights for victims of identity theft, as well as responsibilities for businesses. Identity theft victims are entitled to ask businesses for a copy of transaction records ó such as applications for credit ó relating to the theft of their identity.

Indeed, victims can authorize law enforcement officers to get the records or ask that the business send a copy of the records directly to a law enforcement officer. The businesses covered by the law must provide copies of these records, free of charge, within 30 days of receiving the request for them in writing. This means that the law enforcement officials who ask for these records in writing may get them from your business without a subpoena, as long as they have the victimís authorization.

The Federal Trade Commission (FTC), the nationís consumer protection agency, enforces the FCRA including this requirement, which is known as Section 609(e). Here is some additional information to help your business comply with this provision of the law:

Q. Who must comply with Section 609(e) of the FCRA?
A. The law applies to a business that has provided credit, goods, or services to, accepted payment from, or otherwise entered into a transaction with someone who is believed to have fraudulently used another personís identification. For example, if your business opened a cell phone account in the victimís name or extended credit to someone misusing the victimís identity, you may be required to provide the records relating to the transaction to the identity theft victim or the law enforcement officer acting on that victimís behalf.

Q. What documents must my business provide?
A. Your business must provide applications and business transactions records, maintained either by your business or by another entity on your behalf, that support any transaction alleged to be a result of identity theft. Records like invoices, credit applications, or account statements may help victims document the fraudulent transaction and provide useful evidence about the identity thief.

Q. What are the procedures for requesting these materials?
A. Requests for documents must be submitted in writing. Your business may specify an address to receive these requests. You may ask the victim to provide relevant information, like the transaction date or account number, if they know it. You also can require that victims provide:

1. proof of identity, like a government-issued ID card, the same type of information the identity thief used to open the account, or the type of information you are currently requesting from applicants; and

2. a police report and completed affidavit. Victims can use the FTCís ID Theft Affidavit, available at ftc.gov/idtheft, or another affidavit you accept.

Q. Is it ever appropriate not to provide documents?
A. You can refuse to provide the records if you determine in good faith that:
  • you cannot verify the true identity of the person asking for the information;
  • the request for the information is based on a misrepresentation; or
  • the information requested is Internet navigational data or similar information about a personís visit to a website or online service.

Your business may not deny disclosure of these records based on the financial privacy provisions of the Gramm-Leach-Bliley Act (see Subtitle A of Title V of Public Law 106-102). Nevertheless, you may refuse to disclose them if state or another federal law prohibits you from doing so.

Q. Are there recordkeeping requirements of Section 609(e)?
A. Section 609(e) does not require any new recordkeeping procedures for your business.

Complying with the Credit Practices Rule


The Federal Trade Commission staff prepared this business booklet to help finance companies, retailers, and other creditors comply with the Credit Practices Rule, which went into effect March 1, 1985. This booklet tells you what the Credit Practices Rule requires, who must comply, and what transactions are covered. It also discusses liability for rule violations and how exemptions are granted.

How the Credit Practices Rule Affects Consumer Contracts

What the Rule Requires

The Credit Practices Trade Regulation Rule has three major provisions. First, it prohibits creditors from using certain contract provisions that the Federal Trade Commission found to be unfair to consumers. The prohibited contract provisions are confessions of judgment, waivers of exemption, wage assignments, and security interests in household goods. Second, the Rule requires creditors to advise consumers who cosign obligations about their potential liability if the other person fails to pay. Third, the Rule prohibits late charges in some situations.

Who Must Comply

This Rule applies to all creditors subject to the jurisdiction of the Federal Trade Commission. It includes all finance companies, retailers (such as auto dealers and furniture and department stores), and credit unions that offer consumer credit contracts. Similar rules have been passed by the Federal Reserve Board and the Federal Home Loan Bank Board for banks, savings and loan associations, and other institutions under their jurisdiction.

What Transactions Are Covered

The Rule covers all consumer credit transactions, except those involving the purchase of real estate. It covers loans made to consumers who purchase goods or services for personal, family, or household uses, even though those loans may be secured by real estate owned by the consumers. The Rule also applies to the sale of goods or services under lease-purchase plans.

However, contracts with your customers signed before March 1, 1985, which contain the four prohibited provisions -- confessions of judgment, waivers of exemption, wage assignments, or security interests in household goods -- are enforceable and not in violation of the Rule. Similarly, you may collect debts from cosigners who became obligated before the effective date of the Rule, even though they did not receive the notice that the Rule requires. On the other hand, after March 1, 1985, you may not collect late fees that are prohibited by the Rule, even if the contract was signed before that date.

How Penalties Are Assessed

The Federal Trade Commission can sue violators of the Credit Practices Rule in federal court. The court can impose civil penalties of up to $10,000 for each violation and can issue an order prohibiting further violations.

How Exemptions Are Granted

A state may petition the Commission at any time for a state-wide exemption from any of the Rule's provisions, as noted under 16 C.F.R. Section 444.5 of the Rule. If the Commission finds that the state law affords a level of protection to consumers that is substantially equivalent to, or greater than the protection afforded by the Rule and the state has the ability to enforce and administer that law effectively, an exemption may be granted. Filing an exemption petition, however, does not stay the Rule, which remains in effect in that state until the exemption is granted.

Any person to who the Credit Practices Rule applies, including creditors, also may petition the Commission for exemption from any of the Rule's provisions (Federal Trade Commission's Rules of Practice, 16 C.F.R. Section 1.16).

How to Comply with the Rule

This section points out the important parts of the Rule and explains how to comply. It discusses the prohibition against certain contract provisions; the required use of a certain cosigner notice; and the prohibition against late charges in certain situations.

Prohibited Contract Provisions

Certain consumer provisions, which you may have used in consumer credit contracts, are now prohibited. These include: confessions of judgment; waivers of exemption; wage assignments; and security interests in household goods. If your consumer credit contracts contain language that requires a debtor to confess judgment, to waive exemptions, to assign wages or income, or to give you a blanket security interest in all household goods, you should remove that language from all contracts signed on or after March 1, 1985. If you have not done so, you are in violation of the Rule.

Confessions of Judgment

In states that have not specifically outlawed the practice, certain consumer credit contracts have contained language taking away certain rights that consumers being sued would ordinarily have. The include the right to receive notice of the suit, to appear in court, and to raise any defenses that they may have. This provision, usually called a "confession of judgment," allowed judgment to be entered for the creditor automatically when the creditor sued the debtor for breach of the contract. The Rule now prohibits creditors from including confession of judgment provisions, such as the following, in consumer credit contracts:

To secure payment hereof, the undersigned jointly and severally irrevocably authorize any attorney of any court of record to appear for any one or more of them in such court in term or vacation, after default in payment hereof and confess a judgment without process in favor of the creditor hereof for such amount as may then appear unpaid hereon, to release all errors which may intervene in any such proceedings, and to consent to immediate execution upon such judgment, hereby ratifying every act of such attorney hereunder.

The Rule's prohibition against "confessions of judgment," however, does not prohibit power-of-attorney provisions that allow you to repossess and sell collateral, as long as these provisions do not interfere with the consumer's right to be heard in court. The Rule also does not prohibit a consumer from acknowledging liability after suit has been filed and the consumer has been duly notified. The Rule is not intended to interfere with whatever rights you have to repossess secured property.

Waivers of Exemption

Previously, some consumer credit contracts contained "waiver of exemption" provisions that permitted creditors to seize (or threaten to seize) specific possessions or possessions of a specified value, even if state law treated them as exempt from seizure. Every state has a law that defines certain property (generally, property considered necessities) that a debtor is allowed to keep even if a creditor sues and obtains a judgment. By signing a waiver of exemption, a debtor made that property available to a creditor who obtained a judgment to satisfy a debt. Clauses such as the following are no longer permissible under the FTC Rule:

Each of us hereby both individually and severally waives any or all benefit or relief from the homestead exemption and all other exemptions or moratoriums to which the signers or any of them may be entitled under laws of this or any other State, now in force or hereafter to be passed, as against this debt or any renewal thereof.

The Rule's prohibition against "waiver of exemption" provisions does not prevent you from using particular kinds of collateral. However, if state law provides an exemption for certain kinds or amounts of property, the contract cannot contain a provision causing the consumer to give up that protection. In that case, an unsecured creditor who obtained a judgment could not seize that property. Nonetheless, if you have a valid security interest in property, your security interest would not be affected, even if that property is exempt by state law. However, this provision of the Rule should be considered with another Rule provision that prohibits the taking of a security interest in certain property defined as household goods.

Wage Assignments

Previously, if consumers did not pay as agreed, some consumer credit contracts permitted creditors to go directly to the consumers' employers to have their wages, or some part of them, paid directly to the creditors. Under the Rule's prohibition against "wage assignments," your consumer contracts may not provide for the irrevocable advance assignment to you of any money due consumers because of their personal services (usually through employment) if they do not pay as agreed. The Rule prohibits irrevocable assignments to creditors of salaries, commissions, bonuses, pensions, and disability benefits, as well as wages due to consumers.

Below is an example of a wage assignment provision that is no longer permitted in consumer credit contracts:

If default be made in payment of the above-described debt, which is the time balance (Total of Payments) due on a retail installment contract, each of the undersigned hereby assigns, transfers and sets over to the above-named assignee, wages, salary, commissions, bonuses and periodic payments pursuant to a retirement or pension plan due or subsequently earned from his present employer or from any future employer within a period of two (2) years from the date of execution hereof. This assignment shall remain effective as to all of the undersigned Debtors.

The amount that may be collected by assignee here on shall not exceed the lesser of (1) 15% of the gross amount paid assignor for any week, or (2) the amount by which disposable earning for a week exceed thirty times the Federal Minimum Hourly Wage in effect at the time the amounts are payable; and shall be collected until the total amount due under this assignment is paid or until expiration of employer's payroll period ending immediately prior to 30 days after service of the demand hereon, which first occurs. This Wage Assignment shall be valid for a period of three years from date hereof.

The term "disposable earnings" means that part of the earnings remaining after deduction of any amounts required by law to be withheld.

The assignor(s) hereby authorize, empower, and direct his/their said employer(s) to pay assignee any and all moneys due or to become due assignor(s)_ hereon, authorize assignee to receipt for the same and release and discharge employer from all liability to assignor(s) on account of moneys paid in accordance herewith. no copy hereof shall be served on employers(s) except in conformity with applicable law.

However, the Rule specifically permits you to use payroll deduction plans where consumers choose to pay by regular deductions from paychecks. Such payroll deduction plans may provide that, if borrowers change employers, final paychecks will be assigned to you to be credited toward balances due on loans, without notice to debtors and without allegations of default or delinquency. Your contracts also may provide for wage assignments that can be revoked at will by consumers and for assignments of wages already earned at the time of the assignment. In addition, you may require that the revocation of a voluntary wage assignment be in writing.

The Rule's prohibition against "wage assignments" does not prohibit garnishment. If a creditor obtains a court judgment against a debtor, the creditor may continue to use wage garnishment to collect that judgment, subject to the consumer protections provided by federal (and sometimes state) law.

Security Interests in Household Goods

Previously, some consumer credit contracts contained non-purchase money security agreements that allowed a creditor to repossess many household goods in the consumer's home if the consumer did not pay as agreed. Now your contracts cannot use language, such as the following, that provide for repossession of certain household goods specified in the Rule:

This not is secured by a security interest in consumer goods consisting of all household goods, furniture, appliances, and bric-a-brac, now owned and hereinafter acquired, including replacements, and located in or about the premises at the Debtor's residence (unless otherwise stated) or at any other location to which the goods may be moved. In addition, all other goods and chattels of like nature hereafter acquired by the Debtor and kept or used in or about said premises and substituted for any property mentioned. Proceeds and products of the collateral are also covered.

The Rule's definition of "household goods" includes household necessities such as clothing, appliances, and linens, and some items of little economic value to you, but of unique, personal value to the consumer .These may include items such as family photographs, personal papers, the family Bible, and household pets. Excluded from the definition of household goods are:

Works of art, electronic entertainment equipment (except one television and one radio), items acquired as antiques (more than 100 years old), and jewelry (except wedding rings).

The rule permits consumers to offer as security these valuable possessions to obtain credit as well as pianos or other musical instruments, boats, snowmobiles, bicycles, cameras, hoe workshops, and similar items.

Under the Rule, you may continue to take "purchase money security interests" in any household goods when the consumer uses the loan proceeds or the credit advanced to purchase the household goods. If you refinance or consolidate an agreement with a purchase money security interest in household goods, you may retain the purchase money security interest as a part of the refinanced or consolidated agreement to the extent permitted by state law. If you take possession of the secured property (as in pledge agreements that pawnbrokers commonly use), the Rule permits a security interest even if the property pledged is household goods.

Notice to Cosigners

If you require a cosigner for a loan applicant who does not meet your standards of creditworthiness or for debtors in default, the Rule requires you to inform each cosigner of the potential liability involved before the cosigner becomes obligated for the debt. You must use the following statement:

Notice to Cosigner

You are being asked to guarantee this debt. Think carefully before you do. If the borrower doesn't pay the debt, you will have to. Be sure you can afford to pay if you have to, and that you want to accept this responsibility.

You may have to pay up to the full amount of the debt if the borrower does not pay. You may also have to pay late fees or collection costs, which increase this amount.

The creditor can collect this debt from you without first trying to collect from the borrower. The creditor can use the same collection methods against you that can be used against the borrower, such as suing you, garnishing your wages, etc. If this debt is ever in default, that fact may become a part of your credit record.

This notice is not the contract that makes you liable for debt.

If a state statute or regulation requires a different notice to cosigners, you may include that notice on the document if it is not inconsistent with the notice required by the Rule. If a statement in the FTC notice (such as one that says you can collect from the consigner without first trying to collect from the primary debtor) is inaccurate under sate law, you may omit it from the notice used in that state.

You need not give the notice to someone who signs a security agreement, when there is no personal liability for the debt. On a revolving charge account, you only need to give the notice to a cosigner once, when the account is opened.

You may print the cosigner notice on your letterhead and include identifying information, such as the credit account number, the name of the cosigner, the amount of the debt, and the date. You also may provide a signature line for the cosigner to acknowledge receipt of the notice. However, you may not include any additional statement in the notice that would distract the cosigner's attention from the message in the notice (But you may add whatever additional information you wish to your own file copy of the notice.) You may not attach the notice form to other documents unless is appears before any other document in the package.

The cosigner notice should be in the same language as the agreement to which it applies. For example, if the agreement is in Spanish, the cosigner notice also should be in Spanish.

If you use cosigners in your consumer credit contracts and these contracts were signed on or after March 1, 1985, you should provide those cosigners with the notice required by the Rule. If you are not doing so, you are in violation of the Rule.

A "cosigner" is different from a co-buyer, co-borrower, or co-applicant because a cosigner receives not tangible benefit from the agreement, but undertakes liability as a favor to the main debtor who would not otherwise qualify for credit. On the other hand, a co-buyer (one who shares in the purchased goods), a co-borrower (one who shares in the loan proceeds), or a co- applicant or co-cardholder (a person who is authorized to use a credit card account) do receive benefits. Therefore, they are not considered cosigners under the Rule, and you are not required to provide the notice to them.

Late Charges

Some creditors previously calculated late fees for delinquent payments using a practice called "pyramiding" of late charges. When one payment was made after its due date and a late fee was assessed but not paid promptly, all future payments were considered delinquent even though they were, in fact, paid in full within the required time period. As a result, late fees were assessed on all future payments. In other words, each successive payment was considered "short" by the amount of the previous late charge, with the result that another late charge was imposed.

How to Write Readable Credit Forms


If your company offers consumer credit, you probably communicate with your customers using many different standardized forms and notices. These may range from short notices to complicated contracts that explain the terms of your credit plan. This manual is intended to help you write consumer credit contracts and other forms in "Plain English" so that your customers can easily understand them.

Over the past ten years, a number of major insurance companies, retailers, and banks have voluntarily redrafted their consumer communications into "Plain English."

Many other companies have simplified their forms in response to state law developments. Since 1974, seven states have adopted "plain language" laws covering consumer contracts, including credit agreements. A number of other states are considering similar legislation.

Why do creditors use "Plain English" language in consumer credit communications? Here are four reasons that companies have discovered:

  1. "Plain English" is good for Customer Relations.
    When you communicate simply and directly with your customers, you show them that you value their business.
  2. Customers expect to understand what you have to say.
    Consumers expect clear information about matters that affect their financial decisions.
  3. Customers need to understand their obligations.
    Your customers can best understand credit terms that are easy to read and comprehend.
  4. "Plain English" communications can save you money.
    Companies that use easy-to-understand forms report fewer inquiries and less litigation. They also say that it is easier to train staff and handle complaints.

Obviously, there is no "right" way to write a letter or credit document. Except for certain federal and state requirements, the substance of your communications with you customers -- and even your decision whether communicate with them -- are choices for you to make.

As you read on, you may wish to check some of your company's contracts and form letters to see how they measure up against the "Plain English" principles presented below.

  • Does your document contain everything you want your customer to know about your credit arrangements?
  • Is the document's content limited to what is essential to protect your company's interest?
  • Does your form say everything the law requires -- in the manner the law requires?
  • Are your ideas organized logically so that necessary information is easy to find? Is the language clear and concise?
  • Does your layout help the reader follow your organization? Is the typesize easy to read?

Please note: While this manual generally discusses some of the federal statutes that apply to the consumer credit process, it is not a guide to compliance with consumer credit laws. Consult a lawyer to ensure that your document complies with all the federal and state laws that govern your business.


Planning is critical to "Plain English" writing, especially for complicated credit documents. Therefore, you should plan to:

  • determine the purpose of the document;
  • identify practical problems in existing forms;
  • eliminate superfluous provisions;
  • comply with legal requirements; and
  • organize the document logically.

Determine the Purpose of the Document

Think about the document from two points of view: your own and your customer's. Do you want the document to tell your customers how to take specific actions? Do you want it to define the rights and duties of both you and your customers? Make sure that the document says everything you want or need it to say.

Identify Practical Problems with Existing Forms

Ask your employees to tell you if and why they find certain sections of your current forms troublesome. For example, ask loan officers what problems they have explaining or interpreting credit agreement to prospective customers. Ask billing department and customer relations personnel how they would clarify your forms and letters to avoid or resolve problems. And then, check with your customers to get answers to the same questions.

Eliminate Unnecessary Provisions

Some credit contracts are more complicated than necessary because they cover contingencies that rarely occur in consumer credit transactions. Ask you lawyers how often the use protective clauses to collect debts and whether some or all of these clauses could be omitted to simplify the agreement.

Comply with Legal Requirements

As you plan any credit document, keep in mind applicable federal and state legal requirements. These laws often govern when you must communicate with your customers and determine the content and organization of the document.

  • Some laws determine when you have to disclose information to your customers. For example, the Equal Credit Opportunity Act requires a creditor to notify applicants of its action on their applications within 30 days after receipt of a completed application for credit. In addition, the federal Truth in Lending Act, Electronic Fund Transfer Act, Consumer Leasing Act, and comparable state laws require creditors to disclose specified information to the consumer in writing at specific times. These disclosures must be made before installment credit, electronic fund transfer, or lease agreements are entered into, or before the first transaction under an open-end credit plan or the first electronic fund transfer is made.
  • Some laws prescribe what information you must disclose or limit what information you may obtain. The Truth in Lending Act, for instance, requires creditors to inform consumers of credit costs for "closed-end" credit, such as a consumer loan or installment purchase. Required disclosures include the dollar amount of the finance charge, the "annual percentage rate," and the total cost of the credit transaction. That Act also requires creditors to use specific terms such as the "annual percentage rate" and the "finance charge" when making some of these required disclosures. (State laws governing credit cost disclosures may use different terminology and may require disclosure of additional information.

Regulation E, which implements the Electronic Fund Transfer Act, requires that certain disclosures, such as the "error resolution notice," must be said in a way that is "substantially similar" to the notice provided in the regulation.

Other laws, such as the Equal Credit Opportunity Act, limit the information you can get from your customers. That Act, for instance, generally prohibits creditors from asking about the applicant's sex, race, national origin, religion, marital status, or spouse. The Act also prohibits questions about income sources such as alimony, child support, or separate maintenance payments, except in specific circumstances.

  • Some laws also influence how you make certain disclosures. These laws may, for example, dictate the organization of the credit communication, including whether certain disclosures may have to appear in designated places in credit contracts or must be printed in specified typesizes.† The federal Truth in Lending Act, for example, requires that specified credit-cost disclosures "shall be grouped together and segregated from everything else." In addition, some state laws specify that certain information must appear immediately above the space for the consumer's signature.

Remember: When planning any credit document, be sure it also complies with all state laws that apply to the credit plans you offer as well as with all applicable federal laws. State laws that govern the timing, content, and organization of credit communications vary considerably. In addition, more than one state law may apply to any particular credit plan. For this reason, when drafting credit contracts and disclosures, remember to review with your lawyer the requirements of all state laws that may apply. These include:

  • laws regulating small loans made by licensed lenders (usually called "small loan act");
  • laws regulating credit sales of goods or services to consumers (usually called "retail installment sales acts");
  • laws regulating credit sale of credit insurance (which may be part of the state insurance law, or a state credit statute); and
  • laws limiting the interest rates on credit that are not covered by small loan, retail installment sales, or other specialized state laws (usually called "usury laws").

Note that in some states all of the pertinent state requirements are codified under the Uniform Consumer Credit Code (U.C.C.C.).

5. Organize the Document Logically

Once you determine the purpose of the document and the information it must contain, organize the information clearly and logically. Divide the document into sections and put related information together.


The actual wording of a "Plain English" credit document is just as important as planning what it will say and how it will look. When you compose a "Plain English" credit document, be sure that you:

  • write for your customers;
  • use a personal writing style;
  • choose words and phrases that are simple, clear, and precise; and
  • organize your words simply and clearly.

1. Write for your customers

Your first step is to identify your customers. What do your marketing statistics tell you about the average age, educational level, income, and other characteristics of your customers? For example, approximately 54 percent of the adult in this country read below the 11th grade level; 20 percent do not read well enough to follow the cooking instructions on a frozen dinner. These considerations might affect the reading level you aim for and the style you use in your communications.

2. Use a personal writing style

A personal writing style allows your message to come through clearly. Whenever possible, you want to indicate:

  • who is doing the talking (for example, "we" -- the creditor);
  • who is being spoken to ("you" -- the borrower or cardholder); and
  • who is responsible for doing what ("we figure your finance charge in the following way...")

You can make your writing style more personal by using personal pronouns and the active voice.

Use Personal Pronouns

Using personal pronouns is an easy way to make your communication more readable. When you use personal pronouns, instead of words like :"the lender" and "the borrower," you make clear from the start which party is "we" and which party is "you." For example:

In this contract, "you" means anyone who signs this contract as a buyer, and any buyer's heirs or legal representatives. "We" means the seller and anyone to whom we assign (give or sell) this contract.

In addition, try to use pronouns and nouns consistently. For example, avoid using "you" and "the owner" to refer to the same person in the same document.

Use the Active Voice

Using the active voice also will make your writing more personal and direct. The active voice tells the reader immediately who is responsible for an action. For example, "We subtract payments and credits..." is clearer than "Payments and credits are then subtracted...."

3. Choose Words and Phrases that are Simple, Clear, and Precise

"Plain English" requires using language that consumers can easily understand. For example, the following paragraph from a creditor's letter denying an application for credit words and phrases that are difficult to understand:

It would be advantageous for you to contact the reporting agency mentioned and review your credit file for discrepancies. Should there exist a discrepancy, and a revision to the file is initiated, we will be pleased to reconsider our evaluation of your request for credit.

Written in "Plain English," this paragraph would read:

You may contact the credit bureau that gave us the credit report we used to review your credit file. If you find an error in your report and the credit bureau corrects it, we will be pleased to reconsider your application for credit.

When choosing the words for credit contracts, disclosures, and other communications with your customers, remember: use common words; avoid jargon, explain necessary technical terms; and eliminate unnecessary words.

Use Common Words

Writers of "Plain English" recommend replacing complicated or legalistic words and phrases with simple, everyday words whenever possible.

Avoid Jargon

Where possible, replace technical or commercial terms that lawyers and other specialists may use. Otherwise, your customers may not understand what you mean. This contract clause, which sets out the cosignerís liability if the borrower defaults, sues legal jargon that is unfamiliar to many people:

It is understood that the licensee or holder shall not be compelled to resort first to the collateral securing this obligation, but may at his election require said obligation to be paid by any maker or makers, endorser or endorsers, surety or sureties hereon, and to this agreement said makers, endorsers, and sureties hereby specifically give their assent...

Compare the previous paragraph with this "Plain English" notice to cosigners that is required by the Federal Trade Commissionís Credit Practices Rule:

Notice to Cosigner

You are being asked to guarantee this debt. Think carefully before you do. If the borrower doesnít pay the debt, you will have to. Be sure you can afford to pay if you have to, and that you want to accept this responsibility. You may have to pay up to the full amount of the debt if the borrower does not pay. You may also have to pay late fees or collection costs, which increase this amount.

The creditor can collect this debt from you without first trying to collect from the borrower. The creditor can use the same collection methods against you that can be used against the borrower, such as suing you, garnishing your wages, etc. If this debt is ever in default, that fact may become a part of your credit record.

This notice is not the contract that makes you liable for debt.

The following words are examples of legal jargon that you can simplify:

  • aforementioned
  • aforesaid
  • foregoing
  • herein
  • hereinabove
  • hereinafter
  • heretofore

Even when the words you use are common, you should be sure their meaning is clear in context. For example, some creditors use the phrase "excessive inquiries" to tell rejected applicants why the creditor denied them credit. What the creditor really means is "you have made too many recent applications for credit." Other creditors use phrases such as "residence too short" or "your residency is insufficient in duration" when what they really mean is "you have not lived at your current address long enough."

Explain Technical Terms

If you cannot avoid technical terms (for example, those that are required by state or federal law), explain the m in the text not in a separate "definitions" section. You might put the explanation in parentheses immediately after the technical term. For example, revised Regulation Z, which implements the 1980 Truth in Lending Simplification Act, suggests that creditors use the explanations shown here in parentheses:

Annual Percentage Rate (the cost of your credit as a yearly rate)

Finance Charge (the dollar amount the credit will cost you)

You can use other punctuation, such as dashes, to help the leader recognize and explanation, as show here:

If you have a credit balance -- that is, if you have paid us more than you owe on the charge account --

Be careful, however, not to replace technical words that have become widely understood. In fact, one study of a lease agreement showed that its simplified explanation of "security deposit" actually confused tenants.

Eliminate Unnecessary Words

Consumer Credit documents often contain unnecessary words. In the following example from a credit contract drafted before the FTCís Credit Practices Rule became effective, all of the capital letter words could have been eliminated:

Each of us HEREBY BOTH INDIVIDUAL AND SEVERALLY waives ANY OR all benefit OR RELIEF from homestead exemption to which the signers OR ANY OF THEM may be entitled under the laws of this or any other state, NOW IN FORCE OR HEREAFTER TO BE PASSED, as against this debt or any renewal THEREOF.

Simply translated, this sentence means: "If I do not repay this loan, you can take the real estate that state law would otherwise allow me to keep."

To simplify credit documents and other communications, avoid using strings of words with similar meanings, such as "cease and desist" or "due and payable." Instead, choose one word that best expresses the idea.

Consider using action verbs instead of "verbal nouns" (or gerunds). For example, "describe" is shorter than "give a description"; "collect" is simpler than "make collection of."

4. Organize Your Words Simply and Carefully

How you put your words together is as important as the words you select.

For example, try to use the same words each time you express the same idea. If you use different words for similar concepts in legal documents, consumers may assume and courts may decide that you intended different meanings. For example, if you use the phrases "late payment" and "overdue payment" interchangeably, readers may think each phrase means something different.

In addition, as you draft your document, try to use short sentences, descriptive subtitles and headings appropriate lists, examples, and parallel construction.

Keep Sentences and Paragraphs Short

Long sentences with prepositional phrases and subordinate clauses are hard to follow. Try shortening sentences to an average of 25 words. Consider the following example that explains the "Average Daily Loan Balance." (It is part of the method used to compute finance charges in some open-end credit plans.)

To get the "Average Daily Loan Balance," the Bank took the unpaid cash advances balance at the beginning of the billing cycle, added to it any unpaid FINANCE CHARGE on cash advances from the prior billing cycle, then each day in the billing cycle, added any new cash advances, and subtracted any payments, credits, and unpaid finance charges. This gave the Bank the daily loan balance. Then, the Bank added up all the daily loan balances for the billing cycle and divided the sum by the number of days in the billing cycle. This gave the Bank the "Average Daily Loan Balance."

Compare it with this much simpler version:

We figure the Average Daily Previous Balance as follows:

  1. We start with the Previous Balance shown on your statement.
  2. Each day of the billing period, we subtract payments, credits, and unpaid finance charges, and add new purchases and debits, giving us the daily balance.
  3. We then total the daily balances and divide that total by the number of days in the billing period to arrive at the Average Daily Balance.

The second example is easier to understand because the sentences are short, and they show the sequence of the calculations in a series of steps.

Make Subtitles and Headings Descriptive

Subtitles and headings are particularly important in long, complex documents, such as credit agreements. Titles and headings help the reader separate ideas, see the logical flow of the document, and locate specific information quickly.

Make sure the heading explains what the section contains. For example, a section that follows the heading: "What to do if there is an error in your bill" should only explain what the consumer must do to resolve a billing error.

In composing shorter, less complicated notices or letters, consider using typical consumer questions as titles or headings. For example:

What should I do if my card is lost or stolen?

How can I get an extra credit card?

Use Lists

Lists are useful for explaining complicated procedures and conditions. Be sure to introduce a list with a straightforward "Plain English" statement such as:

If you think your bill is wrong or if you need more information about an item on your bill, here is what you must do to preserve your rights under the Fair Credit Billing Act.

Use Examples

People better understand information when it refers to specific situations. The following paragraph from a credit card agreement explains what happens when a customer has a "credit balance."

For example:

People better understand information when it refers to specific situations. The following paragraph from a credit card agreement explains what happens when a customer has a "credit balance."

For example: Your billing date is the first of each month, and you paid your August balance in full. In early September, you returned charged merchandise that cost $150.00. Because your balance was zero, we owe you $150.00. Your October 1 billing statement will show that we owe you $150.00. You may then choose to: (1) leave the money in your account and we will apply it against future purchases; or (2) ask us to return the money to you.

Use Parallel Construction

Parallel construction in "Plain English" documents basically requires agreement of phrasing in clauses and lists. For example, this list does not use parallel construction:

If you think there is an error on your bill, write to use and include:

  1. Name and account.
  2. Could you give us a description of the error?
  3. How big the error is.
  4. Please give us any other information to help us identify the transaction.

A simple adjustment is usually all that is needed to make the structure of a sentence or list parallel:

  1. your name and account number
  2. a description of the error
  3. the amount of the suspected error; and
  4. any other information that identifies the transaction.

Whenever possible, avoid inserting sentences in the middle of a list. They may break the readerís concentration and leave the rest of the list unconnected to its introduction. For example:

You may use the automobile in any way that you wish, as long as you do not:

  • use the automobile for illegal purposes;
  • use the automobile for hire (for example, as a taxicab);
  • permanently change the place where you told us you would keep the automobile. You must notify us if you want to permanently move the automobile;
  • sell or otherwise transfer your interest in the automobile to someone else. You must notify us if you want to sell or transfer the automobile.


Making your document visually clear and attractive will help your customers understand it better. If your "Plain English" forms have narrow margins, small type, and a sea of uninterrupted text, they could still be as difficult for your customers to read as if you had not made any improvements.

Good graphic design in a printed document involves a number of elements, including:

  • type,
  • white space,
  • capital letters, and
  • color (of both type and paper).

1. Choose Type that is Easy to Read

Credit contracts and disclosures will be easier to read if you pay particular attention to typesize, typeface, and weight of the type. Remember that some federal and state consumer credit laws require using certain typesizes. Other laws require using larger or boldface type to emphasize key disclosures.


Typesize greatly affects the legibility of written communications. The size of type is measured in "points." For example, 6-point type is used in classified newspaper advertising and 10-point type is used in newspaper articles. The size of type you choose to use in your credit documents can help make them easier to read.


Typeface also affects readability. There are two classes of typeface: serif (letters with small extensions) and sans-serif (letters without extensions). Whichever typeface you select, choose one that is easy to read. And, try not to mix typefaces; consistency aids the reader.

Weight of Type

Type comes in several weights (or thicknesses). A medium-weight type may be best for ordinary text. Boldface can be used for headings, emphasis, and for certain disclosures, as required by law.

2. Use White Space Effectively

White space can add to the attractiveness and legibility of your printed document. This involves use of margins, "leading" (space between lines), and line length.


Generous margins and ample space between paragraphs can make your text easier to read and call attention to your message. You can place headings in the left margin for emphasis or you can also indent lists of items to make them stand out.


"Leading" is the amount of space between the lines of print. One to three points of leading with 10-point type is usually adequate. A little extra leading can make a printed credit document easier to read.

Line Length

The length of the lines of print also affects ease of reading. A printed line that is too short requires too much eye movement for easy reading. The optimum line length for reading ease usually is between 50 and 70 characters.

3. Use Capital Letters Selectively

Many contracts use all capital letters for emphasis. This technique, however, actually makes copy more difficult to read. Compare this paragraph from a collection letter:


with the following "Plain English" version of the same collection letter:

Your payment is late. If you cannot make your payment now, please call at 123-456-7890. If we do not hear from you WITHIN 20 DAYS, we will take the steps necessary to collect THE ENTIRE AMOUNT that you now owe us.

If you want to emphasize more than a few words in a printed document, you also can use another technique, such as boldface, italic, larger, or colored type.

4. Use Color Wisely

Choose color for paper and ink that produce enough contrast for easy reading. In addition, use colors for emphasis. For example, printing the "ANNUAL PERCENTAGE RATE" and "FINANCE CHARGE" disclosures in red ink, when the rest of your copy is in black or blue ink, will emphasize those terms. Too many colors, however, can confuse the reader.

Testing and Evaluating

To evaluate how well your new forms work, try testing them out. You can test your documents in several ways. Some companies use survey and "focus group" research to determine whether their revised forms meet their objectives. Others use readability formulas that evaluate the document based on the average number of words per sentence or the number of syllables for each 100 words. Generally, the shorter the words, sentences, and paragraphs, the easier the document is to read.

You also can informally measure your customersí reactions to your new documents. Try showing the revised forms to a test group of customers, friends, and employees who fit your customer profile. To measure customer reaction, use criteria such as:

  • How long does it take people to read the forms?
  • How long does it take people to find the answer to a specific question?
  • How many times must people read the forms to paraphrase the information accurately?

This kind of testing can tell you if your revised forms meet your objectives, or whether they still need some adjustment before you use them. Finally, once you successfully simplify your letters and forms, you may find that publicizing your "Plain English" efforts attracts new customers to your services or products.

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