What is a Waiver Of Exemption
A waiver of exemption was a provision in a consumer credit contract or loan agreement which allowed creditors to seize, or threaten the seizure, of specific personal possessions or property. The property attached by the loan could include a borrower's primary place of residence. Lenders could enact this clause, even if state law held the property exempt from seizure.
The Federal Trade Commission (FTC) banned these practices under the Credit Practices Rule of 1985.
Breaking Down Waiver Of Exemption
Before 1985, waivers of exemption were common in credit contracts. Their use was a way for creditors to secure a loan which may not have been available without the waiver clause. In case of a default, the provision provided the lender an avenue to recoup expenses through the selling of the property listed as securing the loan.
Every U.S. state exempts some personal property from seizure in a civil judgment. Generally, property considered necessities of life—such as an individual's primary home, car, and necessary household goods like a refrigerator or clothing—are exempt from seizure. One exemption to the ban on property seizure is a home mortgage. State personal property laws do not apply to mortgage loans where a creditor always retains the right to foreclose on the property in the event of a default.
Instead, the laws are meant to prohibit smaller lenders such as those in the furniture, appliance, auto dealership, or department store business from attaching a lien against the debtor's home. Any borrower who signed a waiver of exemption made such exempt property available to a creditor who obtained a judgment to satisfy a debt.
FTC Regulates Wavier of Exemption Practices
The FTC offers the following example of a typical waiver clause:
“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 FTC deemed such waivers of exemption unfair to consumers, as well as poorly understood. The 1985 prohibition did not specifically ban any forms of collateral but only mandated that creditors may not contravene, or go against the order of state law which governs property exemptions.
Further, the Credit Practices Rule of 1985 separately prohibited creditors from attaching liens to household goods considered necessary, including appliances, clothing and linens, and items deemed of more personal than a monetary value such as family photos and wedding rings. The rule does not include household goods purchased explicitly with a loan, in which case the creditor who made the loan has the right to repossess after a default.
As an example, imagine you bought a new bedroom suite of furniture from a local furniture store using the store financing option. The store may repossess the furniture purchased with the loan. However, the store may not come after your car or clothing if you should stop paying the loan.