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CapitalOne Contract Not Just Creepy But Illegal?

posted by Dalié Jiménez

Shutterstock_144867838CapOne's taken a lot of flack today over its apparent desire to check what's in your wallet by visiting you at home and at work.  The LA Times story got even bigger when it made it to Twitter and  great (and lots of bad, see previous sentence) puns started rolling in.

The company answer seems to be that language from a security agreement for snowmobiles got "mixed in" with the credit card language (and no one over there is reading their 6-page contracts). They are now "considering creating two separate agreements given this language doesn’t apply to our general cardholder base."  

I wonder if that means that they'll also revisit the part of the credit card agreements that takes a security interest in anything you buy from Best Buy, Big Lots, Jordan's Furniture, Neiman Marcus/Bergdorf Goodman, or Saks?  (I should note, your clothes are only in danger if you have a Saks "retail" card; if your card is a Platinum or World card not only is your interest rate likely lower but it seems your stuff is also safe).

The relevant clauses seem to be the same for all of their contracts that include security interests (and there are quite a few, downloadable from the CFPB):

Except as noted below, you grant us a security interest (which we may or may not perfect) in the following items financed using your Account:
• any goods you buy with your Card; and
• any proceeds you get from the following:
  a) insurance contracts, and returned premiums: and/or 
  b) mechanical failures and/or
  c) extended service contracts. 

Each good you buy using your Account:
secures your entire Account balance until that good is paid in full; and
• may be taken from you if you do not pay on time.

(emphasis mine).  Purchase money security interests in consumer/household goods (something you're likely to buy with your Big Lots card) are automatically perfected under the UCC.  At first blush it seems like that's what these are and that they're thus steering clear of Reg AA which bans as an unfair practice the taking of non-purchase money security interests in household goods (since the purpose of taking a security interest in your cell phone or pots and pans is of no economic benefit to the creditor except for its in terrorem effect on the consumer). But while the first item you buy on the card is secured by a PMSI, the second item you buy is purporting to secure not just its purchase price but also "your entire account balance."  

What's more, it's very unclear when the bank would cease to have a security interest in your stuff.  The contracts say:

Once you have fully paid for any good, we will release our purchase money security interest in that good.

But how can you determine when you've paid for a good if you keep making purchases and making partial payments every month?

To decide when a purchase is paid off and no longer subject to a security interest, your payments will be first applied to: described in the “How We Apply Payments” section of this agreement. 

The How to Apply Payments" section, however, says nothing about how partial payments will be applied to specific items:

The amount of your payment that is equal to the Minimum Payment Due is:
• applied as we determine within legal guidelines; and
• usually applied to the minimum due on each credit plan.

Any payment amount over the Minimum Payment Due is applied to higher APR balances before lower ones.

Am I missing something? Is this the newest version of Walker Thomas Furniture? Perhaps now that they are revisiting these contracts they'll take a look at this part too.  

Full credit goes to Bob Lawless for pointing out the  effect of the clause and to Adam for pointing out it's Reg AA and not the FTC's Credit Practices Rule that applies here.

Stock Vector: Debt Collectors from Shutterstock.

Comments

We old -- I mean, "historically well informed" -- folks know that back closer to the time of Walker Thomas (1965), these lien issues were a hot area in consumer law, and of high practical significance due to the hardball practices of some consumer loan companies. That sort of lender has pretty much gone the way of the dodo bird. From a front row seat as a consumer bankruptcy lawyer, I am confident that the attempted enforcement rate on these consumer goods liens, legal or not, can fairly be approximated as zero.

It may be a difference of localities, but I have seen quite a few secured claims filed due to products purchased on a credit card at Best Buy, but not really at other places. One secured claim even claimed a PMSI in a bottle of Coca Cola Zero, amongst other purchases.

Ken T - I'd love to see those claims! Do you mind sharing where you are?

Ken T -- assuming that you are talking about Chapter 13 claims, I would acknowledge seeing a few of those occasionally. If in tactical context it makes sense to object for lack of adequate documentation, the claim of security is frequently abandoned. I would maintain the position that these liens overall are of negligible practical consequence.

All R.C. Willey cards are secured. I've seen them repo truck tires, water heaters, all sorts of things. they also like to show up at 341 meetings and make noise about adequate protection.

The signal on Capital One's intent will be if they start using these questionable NPMSI's to try to browbeat consumers into signing reaffirmations, like Sears back in the day.

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