A consumer law study committee was formed by the Law Revision Commission to study a list of issues set out by the Commission in a scope of study dated March 19, 2001 and attached hereto. A list of committee members and advisors is also attached. The Commission has adopted, and hereby forwards to the Judiciary Committee, the following study committee report concerning enactment of possible legislation:

The scope for this study noted that "existing consumer protections under the Retail Installment Sales Financing Act (RISFA) fail to cover a variety of consumer goods transactions that, for policy purposes, appear to be indistinguishable from transactions actually covered by that act." In particular, the study disclosed that a substantial gap in protections exists with respect to consumer goods that are secured by nonpurchase money loans. RISFA, which covers the initial purchase of goods, inherently does not apply to nonpurchase money loans - loans that are secured with those goods after the initial purchase.

Under RISFA, a consumer is entitled to important statutory protections if the consumer defaults on the debt and the consumer’s goods are repossessed under the security agreement provisions. In particular, section 36a-785, subsection (c), gives the consumer under RISFA the right to cure the default and regain possession of the repossessed goods by tender of "the unaccelerated amount due" and payment of "the actual and reasonable expenses of any retaking and storing". (That right to cure can be cut off by an optional section 36a-785(b) "pre-repossession notice".) In contrast, under a nonpurchase money consumer loan that is governed by UCC Article 9, the debtor will usually be required to pay the accelerated amount due – that is to say the whole loan rather than just current payments due – to redeem the collateral.

RISFA also provides the consumer with important protections as to the amount of any deficiency that may be found due after sale of the collateral. Under the RISFA resale provisions, before assessment of a deficiency, the consumer must be credited with "either the amount paid for such goods at such sale or the fair cash retail market value of such goods at the time of repossession, whichever is greater". Subsection (g) includes specific trade publication references for determining the fair market value of motor vehicles and boats, and, if such trade publications are not available, requires determination of fair market value by the court. Under UCC Article 9, the amount of the deficiency is determined by the resale price as long as the rules concerning a commercially reasonable disposition are adhered to and related Article 9 requirements are met.

Finally, the RISFA foreclosure provision requires that the foreclosing party make an election of remedies – either foreclosing against the collateral or suing on the debt. In contrast, remedies under the Connecticut version of Article 9 are cumulative unless prohibited by some other law in a consumer transaction (a reference that acknowledges RISFA but does not provide express protection with respect to nonpurchase money loans).

As a matter of public policy, laws such as RISFA that implement consumer protections are designed to redress abuses that can arise from a consumer’s lack of legal sophistication and bargaining power. The consumer protections provided with respect to foreclosure of a security interest that arises from the purchase of consumer goods therefore could also apply where the consumer subjected those goods to a security interest after the purchase.

Possible legislation to add such consumer protection could include enactment of foreclosure and repossession protections based on the analogous RISFA section 36a-785, to apply with respect to foreclosure of nonpurchase money loans under the amount of $50,000 secured by consumer goods. A draft of such a provision, with commentary addressing a variety of nuances, is attached.

The committee also noted that existing law already invokes the RISFA foreclosure protections for certain small loans, up to $15,000, when they are regulated under the "Small Loan Lender" statutes. See section 36a-568. However, while those existing small loan statutes cover a subset of the consumer loans that would otherwise be addressed by the attached draft, they do not comprehensively cover all consumer purpose small loans. No protection is provided, for example, if the small loan is issued by a traditional banking or lending entity that is not regulated under the "Small Loan Lender" statutes (possibly because the General Assembly felt that specific regulation of traditional banking entities in the small loan area was unnecessary). Please also note that because nonbank entities licensed under the small loan statutes are highly regulated and an amendment changing those statutes may unnecessarily raise issues of construction, the attached draft is crafted so as not to apply to any loan already subject to section 36a-785 through the small loan lender statutes.

Section 51-345(d) provides that "In all actions involving consumer transactions, civil process shall be made returnable to the judicial district where the consumer resides or where the transaction occurred. For the purposes of this subsection, consumer transaction means a transaction in which a natural person obligates himself to pay for goods sold or leased, services rendered or moneys loaned for personal, family or household purposes." That provision protects consumers from the burden of being required to litigate against an institutional seller or lender in an inconvenient forum. The study scope provision asked that the committee review whether "increased use of arbitration provisions in consumer contracts may bypass the consumer protection offered by that statute."

The committee agreed that current law fails to address the possible misuse of dispute resolution provisions like arbitration clauses to impose an inconvenient forum on a Connecticut consumer. However, the committee also noted that federal preemption under the Federal Arbitration Act, 9 U.S C. Section 2, has been held to preclude a variety of state acts that have attempted to ameliorate or restrict the impact of arbitration clauses. See, for example, American Financial Services Association v. John P. Burke, 2001 WL 1268604, 2001 U.S. Dist. LEXIS 17339 (Oct. 5, 2001) (Droney, J.) and the cases cited therein. In that case the District Court, on an application for a preliminary injunction, finds it probable that the Connecticut Abusive Home Loan Lending Practices Act, P.A. 01-34, which prohibits mandatory arbitration clauses in contracts for "high cost home loans", is preempted by the Federal Arbitration Act. Cited case law notes the invalidity of any similar provision that undercuts the enforceability of arbitration agreements.

However, this current law of federal preemption does not necessarily preclude state legislation that imposes reasonable conditions on contracts generally if the legislation is not directly intended to undercut the right by agreement to mandate arbitration. In that light, a provision that would allow any arbitration or other dispute resolution agreement to be enforced, but that would require that the proceeding be held in a convenient forum – as is already required for similar judicial proceedings - may pass muster as a reasonable exercise of state authority. The preemptive reach of the Federal Arbitration Act cannot be conclusively determined under the current state of the law.

Therefore, it may be desirable for Connecticut to adopt a broadly drafted ameliorative venue provision applicable to consumer disputes that would parallel section 51-345(d). The committee could not provide assurance that the provision would survive federal preemption. A proposed draft is attached. Note that the geographical restriction for that proposal is based on Connecticut law concerning depositions – see Practice Book section 13-29 – rather than on judicial districts because dispute resolution matters may be privately based rather than handled within the judicial department. In that context, a standard based on judicial districts may be overly restrictive.

cc: Vice Chairs, Judiciary Committee

Ranking Members, Judiciary Committee

Possible legislation based on RISFA        Recommendation for Consumer Venue