Request By:
Hon. Joseph S. Elder II, P.S.C.
Attorney at Law
119 South Seventh Street
Louisville, Kentucky 40202
Opinion
Opinion By: Chris Gorman, Attorney General; Everett C. Hoffman, Assistant Attorney General
Re: Home Solicitation Sales Where Financing is Arranged by Seller; KRS 367.410 to 450
You have raised a number of questions regarding a consumer's three-day right to cancel in home solicitation sales. Specifically, you have asked on what date does the three-day period begin to run in transactions where there is both a contract to sell goods and services (a sales contract) and a retail installment obligation or consumer loan contract financing the purchase (a credit contract). You have also asked about the effect of these provisions in second mortgage transactions covered by the rescission provisions of the Federal Truth-in-Lending Act.
A. The FTC Rule.
In 1974, the Federal Trade Commission (FTC) adopted a Trade Regulation Rule requiring sellers to give buyers three days in which to cancel any home solicitation sale, and notice of this cancellation right. The FTC considers any violation of the rule to be an unfair and deceptive trade practice in violation of the FTC Act, 15 U.S.C. § 45. The text of the rule may be found in the Code of Federal Regulations at 16 C.F.R. Part 429.
The FTC Rule applies to sales of consumer goods or services in which the seller or his representative personally solicits the sale, and the buyer's agreement or offer to purchase is made at a place other than the seller's place of business. The term includes transactions in which the seller's solicitation was in response to an invitation from the buyer. Note 1(a) to the Rule contains a number of exceptions to this definition.
It is also important to note that "consumer goods and services" include all goods and services purchased, leased or rented for personal, family and household purposes, including "repairs to the home or to other real property." See , Statement of Basis and Purpose, 37 Fed. Reg. 22947 (Oct. 26, 1972).
The FTC Rule requires sellers to do the following in all covered transactions:
a. Provide the buyer with a fully completed copy of the contract at the time it is signed by the buyer, including, among other specified items, the following statement in no less than ten point bold-face type immediately next to the space reserved for the buyer's signature:
YOU, THE BUYER, MAY CANCEL THIS TRANSACTION ANY TIME PRIOR TO MIDNIGHT OF THE THIRD BUSINESS DAY AFTER THE DATE OF THIS TRANSACTION. SEE THE ATTACHED NOTICE OF CANCELLATION FORM FOR AN EXPLANATION OF THIS RIGHT.
b. Attach to the contract an easily detachable form, in duplicate, captioned "NOTICE OF CANCELLATION, " and which shall contain in 10-point, bold-face type, a specified text explaining the consumer's right to cancel.
c. The seller shall fill out both copies of the Notice prior to giving them to the buyer, including the date of the transaction and the date by which the buyer may cancel, which shall not be earlier than the third business day following the date of the transaction.
d. The seller shall not include in the contract any waiver of the buyer's cancellation rights.
e. The seller shall inform each buyer orally at the time he signs the contract of his right to cancel.
f. The seller shall not misrepresent in any manner the buyer's right to cancel.
g. The seller shall not refuse to honor any valid notice of cancellation by a buyer, and shall, within 10 business days after receipt of such notice (i) refund all payments made under the contract (ii) return any goods or property traded in (iii) cancel and return any credit contract executed by the buyer in connection with the contract or sale, and terminate any security interest.
h. The seller shall not negotiate, transfer, sell, or assign any note or other evidence of indebtedness to a finance company or other third party prior to midnight of the fifth business day following the date of the transaction.
i. The seller shall, within ten business days of receipt of the buyer's notice of cancellation, notify the buyer whether the seller intends to repossess or to abandon any shipped or delivered goods.
B. State Law.
At the time the FTC Rule came into effect in 1974, Kentucky already had a statute concerning home solicitation sales, KRS 367.410 to 367.450. Although the manner of notifying a buyer of his right to cancel is somewhat different in the state statute, a seller's use of the FTC's language and forms is sufficient to comply with state law. See , OAG 74-729 (compliance by buyer with requirements of FTC Rule constitutes substantial compliance with state statutes). Until a seller has provided a buyer with the required notice, the buyer may cancel the transaction by notifying the seller in any manner and by any means of his intention to cancel. If the seller has performed any services pursuant to the home solicitation sale prior to its cancellation, the seller is entitled to no compensation whatsoever . KRS 367.450(3).
C. Effective Date of Combined Sales/Credit Transactions.
When the buyer agrees to pay in cash, or when the buyer states that she will arrange her own financing, the date of the transaction for the purposes of the buyer's three-day right to cancel is ordinarily the date on which the sales contract is signed. However, the situation is very different when the buyer is either unwilling or unable to pay cash, and it is understood by the parties that the seller will help the buyer arrange financing.
In such circumstances, there is no enforceable contract at the time the sales document is signed, since the buyer does not know what she is obligating herself to pay until she has received a copy of the credit contract and the Truth-in-Lending disclosures, which will give her such material information as the total amount financed (including fees), the total finance charges, the interest rate, the total and schedule of payments, prepayment rights, and the nature of security. The buyer's obligations under the sales contract are contingent upon the seller being able to make financing available on terms that are acceptable to her.
In the language of common law contract principles, the availablity of acceptable financing becomes a "condition precedent" to the enforceability of the sales contract. Alternatively, the sales contract can be viewed as an "agreement to agree;" i.e., an agreement to make a binding contract in the future once acceptable financing is made available. In either event, the signing of a sales contract in no way obligates the buyer to sign a subsequent credit contract when it is presented to her, and the consumer's obligation to pay is not final until a credit contract is executed. 1
Thus, for the purposes of Kentucky's home solicitation sales statute, the effective date of the transaction does not occur until a credit contract is completed and signed, and the buyer is provided with the Truth-in-Lending disclosures required by federal law. Regardless of when the original sales contract may have been signed, the buyer's three-day right to cancel will not begin to run until after she is provided with a copy of the completed and signed credit contract and the accompanying Truth-in-Lending disclosures. If this were not the case, a consumer unable to pay cash might be forced to sign a credit contract she had never seen simply because her right to cancel the sales contract had expired. This would eliminate the protection of the state and federal cooling off periods.
This is the rule for all "combined sales/credit transactions," whether they involve (a) retail installment obligations, where the seller is the initial creditor and may assign the contract to a financial institution, or (b) loans directly from a financial institution to whom the consumer has been referred by the seller. The determining factor is that the seller offers to assist the buyer in arranging the financing. 2 If the financing fails to come through, if the consumer declines the financing offered, or if the consumer cancels within three business days after signing the credit contract, then both the sales agreement and the credit contract are completely null and void.
In combined credit/sale transactions such as these, the seller must make sure that the date of the transaction given on the notice of buyer's right to cancel, and the deadline for exercising the buyer's right to cancel, are stated with reference to the final transaction date on which the credit contract is signed, and not the date on which the sales agreement may have been signed. Backdating the notice of right to cancel is a clear violation of both state and federal law and will subject the seller to possible cancellation by the buyer until such time as a new cancellation notice is provided.
Since the transaction is not final, and the consumer is not contractually bound until she signs the credit contract, it is extremely important that the seller not do anything to lead the consumer to believe that she is bound prior to that time. Similarly, a seller in a home solicitation sale is at risk if the seller provides any goods or services prior to expiration of three days following execution of the credit contract. Under KRS 367.450, if the seller has performed any services pursuant to a home solicitation sale prior to its cancellation, the seller is entitled to no compensation. Moreover, if the seller performs the work in order to discourage the buyer from exercising her cancellation rights, this is potentially an unfair trade practice in violation of KRS 367.170 (the Kentucky Consumer Protection Act).
D. Second Mortgage Transactions.
As you are aware, in certain credit transactions, the federal Truth-in-Lending Act also creates a three-day right of rescission -- specifically, in any credit transaction in which a security interest is or will be retained in a consumer's principal dwelling. 15 U.S.C. § 1635; 12 C.F.R. 226.15. In transactions covered by the Truth-in-Lending Act, the creditor shall deliver to the consumer two copies of a prescribed "Notice of Right to Cancel. "
Thus, when a home solicitation sale is financed with a second mortgage loan, the consumer may be entitled to two separate rights to cancel -- one from the seller and one from the lender. This will occur when a consumer offers to obtain his own financing independent of any assistance or referral from the seller. In such a fact situation, the sale of goods and services and the financing are truly separate transactions. The seller's obligation to offer a three day right to cancel under the Home Solicitation laws is not affected by the financial institution's obligations under the Truth-in-Lending Act.
However, as discussed above, when the seller assigns its own retail installment obligation to a financial institution, refers the consumer to a specific financial institution, or otherwise offers to assist the consumer in finding financing, the sale and the financing constitute a single transaction.
The FTC Rule on home solicitation sales specifically states that it does not apply to transactions in which there is a Truth-in-Lending right to rescind, i.e., in second mortgage loan transactions. However, the Kentucky statute does not have such an exemption. Thus, in a combined sales/credit transaction involving a second mortgage, a seller/ creditor is not exempt from the state home solicitations statute just because it has complied with the federal Truth-in-Lending Act. See ,
Hines v. Thermal-Gard of Ohio, 546 N.E.2d 487 (Ohio Mun. 1988);
Cole v. Lovett, 672 F. Supp. 947 (S.D. Miss. 1987).
In such a transaction, compliance with the rescission provisions of the federal Truth-in-Lending Act will serve as substantial compliance with KRS 367.410, et seg ., only if the following conditions are also met:
(a) In addition to providing the consumer with two copies of the separate "Notice of Right to Cancel" form required by the Truth-in-Lending Act, the consumer's right to cancel must also be disclosed in the sales contract itself under the conspicuous caption, "BUYER'S RIGHT TO CANCEL. " KRS 367.430.
(b) The seller/ creditor shall not require use of the federal Truth-in-Lending form to cancel, but shall accept any form of written notice indicating "by any form of written expression the intention of the buyer not to be bound." KRS 367.420(4).
(c) In transactions where the seller and creditor are separate parties, the seller shall be bound by a consumer's timely cancellation regardless of which party receives the notice of cancellation.
(d) The seller/ creditor shall take the steps required by KRS 367.440 (return of payments, note, and goods traded-in) within ten days following any cancellation, rather than the twenty days permitted by the Truth-in-Lending Act.
Where the seller/ creditor has taken the above steps, a consumer's timely delivery of a written notice indicating that she desires not to be bound serves as rescission of both the credit and sales contracts, regardless of which party she so notifies.
E. Summary.
The major points in this Opinion may be summarized as follows:
1. In a home solicitation sale, a seller's use of forms that comply with FTC Rule constitutes substantial compliance with state law as well.
2. When a seller writes its own retail installment obligation to finance a home solicitation sale, refers the consumer to a specific lender to obtain financing, or otherwise offers to help the consumer obtain financing, the consumer is not bound under the sales contract until a credit contract is executed. Under these circumstances, the sales contact and the credit contract become a single transaction for the purposes of the Kentucky home solicitation sales statute.
3. In a home solicitation sale that is a combined sales/credit transaction, the three day right to cancel does not begin to run until the date that the credit contract is signed and the consumer is given the credit disclosures required by the federal Truth-in-Lending Act.
4. Where a combined sales/credit transaction involves the taking of a second mortgage on the consumer's residence, compliance with the rescission provisions of the federal Truth-in-Lending Act constitutes substantial compliance with the state statute on home solicitations, only if the four additional steps listed in Part D of this Opinion are also followed.
I hope that this Opinion has answered your questions adequately. If you have any further questions, please do not hesitate to call upon us.
Footnotes
Footnotes
1 This might also be the case where the buyer offers to obtain her own financing, if the buyer and seller understand that the validity of the sales contract is dependent on the consumer finding such financing.
2 This distinction is consistent with the treatment of financed sales and purchase money loans in other consumer protection statutes and regulations. See , FTC Trade Regulation Rule Concerning Preservation of Consumer Claims and Defenses, 16 C.F.R. Part 433; KRS 367.610.