ICFM Magazine, October 2004
Part 2 of 2. Click here for part 1. Can all those rules and regulations designed to protect buyers and allow them to cancel contracts your counselors spent hours to sell actually be good for business?
Yes they can, with properly drawn contracts and well-trained counselors.
Truth in Lending
If the buyer is permitted by the terms of the contract to pay the obligation in more than four installments, regardless of whether interest is charged or not, there are Federal Reserve rules that apply. The rules are based on the Federal Truth-In-Lending Act as amended and Regulation Z (12 CFR 226, et. seq.).
For purposes of this article, we have focused on the traditional method of financing, which the rule characterizes as "Closed End Credit." This kind of credit provides for an amortization of the purchase price over a fixed period of time at a specified interest rate, such as: five years, with monthly installments, at 8 percent interest. The Truth-In-Lending Act and Regulation Z require the seller to disclose the following information to the buyer:
the amount financed.
the right to receive an itemization of the amount financed or a reference in the contract to where the amount financed is itemized.
the amount of the finance charge.
the finance charge expressed as an annual percentage rate.
the total of payments.
the number and due dates, along with the amount of those payments necessary to pay the full obligation.
the total sales price.
descriptive explanation of the annual percentage rate, the finance charge, amount financed, the total of payments, and the total sales price.
the amount and how delinquency charges are calculated and charged.
the creditor's polices on finance charge rebates or prepayment penalties.
whether or not a security interest is retained by the creditor until the obligation is paid in full.
a statement that the consumer should refer to the contract documents for any additional information about nonpayment, default, right to accelerate, prepayment or abatement penalty provisions, and so forth.
Regulation Z requires that these disclosures be "clear and conspicuous" and that they be grouped together and segregated in the contract from the rest of its provisions.
There is no question that installment sale cemetery and funeral prearranged contracts are covered by the Truth-In-Lending Act and Regulation Z. There is a provision for state exemption—where the state law may be the same as or more restrictive than the federal law, but I am not aware of any state exemption application or a circumstance where a state exemption was granted by the Federal Reserve. The federal law preempts state law.
The Federal Reserve has provided a form for sellers to use in disclosing the required information. The form is referred to as the "Federal Box," and in theory, using it should ensure sellers that they are in compliance. The Federal Box looks like H-l: Credit Sale Model Form (see below).
Going back to my previous point on the importance of consistency in language, you should make sure that your consumer contracts are consistent with the language used in the Federal Box. In your contracts, where the purchase price is calculated, the references should be to "total sale price," "cash down payment," and "unpaid balance (amount financed)" in order to be consistent with the terms used in the Federal Box.
Finally, the Federal Box must be outlined in bold so that it sticks out and the buyer's attention is drawn to it, and the interior boxes that disclose the "annual percentage rate" and the "finance charge" also must be highlighted or made bold in comparison to the three boxes next to them.
A buyer can void or collect ascertainable damages as a result of consumer contracts which do not comply with FTC or Federal Reserve requirements. In either instance, the buyer may also collect attorney's fees and expenses. All the buyer has to do is show that the contract (or contracts—the law permits class action claims) is incomplete or inaccurate as to one or more material elements of the mandatory disclosures or that the contract does not use the terms defined and required to be used.
Since contracts that do not comply with federal requirements can be voidable, those contracts not only are not an asset to the company using them, they are contingent liabilities that may actually reduce the value of those companies. That is why sophisticated potential buyers of a cemetery or mortuary business examine the form, content and extent of use of consumer contracts as a significant element in their due diligence.
The Funeral Industry Practices Rule
There are other mandatory federal disclosures arising out of the FTC’s Funeral Industry Practices Rule. If a seller is contracting to deliver funeral and burial merchandise and services, the seller must comply with the funeral practices rule.
Those disclosures are numerous and comprehensive and could be the subject of another article. Interested readers are directed to the rule at 16 CFR 453, or more generally to the FTC Web site, www.ftc.gov, where there are lengthy explanations on complying with the rule. There is also an FTC sample form of contract that provides some insight into the FTC's perspective, a consumer guide for funerals and other information.
Buyer's Protection Is Seller's Protection
Over the three decades that I practiced law, I heard a steady din of complaints about these rules and others adopted by federal and state regulators to protect consumers from themselves. Yet, as I suggested earlier, these contract disclosure requirements provide your company the opportunity to strengthen its position in a contract dispute and can even help your counselors make a sale that otherwise would not be made.
Let us first consider the case of the sales counselor making a home presentation. Because the buyer has the right to cancel, the "I can't make a decision today; I need to think about it" objection evaporates. All the counselor needs to do is point out that if the prospect changes his or her mind, the contract can be canceled simply by delivering the attached cancellation notice to the seller.
If the price being offered is a program price only good that day, the potential buyer has even more incentive to buy today, not tomorrow. The buyer has nothing to lose and everything to gain.
Experience suggests that most prospects know and understand why they purchased funeral or cemetery arrangements preneed—the risk of cancellation is not great, particularly if the counselor has done a good job of explaining the advantages of prearrangement, which are sizeable. Therefore, you should encourage counselors to point out and explain the right of cancellation and other buyers' protection clauses in the contract, and use them as additional reasons to justify closure then and there.
Once the cooling-off period has expired, there can be no question as to whether the contract is binding on the customer. After all, the notice of right to cancel is required to be in "immediate proximity to the space reserved in the contract for the signature of the buyer." Since the right of cancellation was right there near the signature space, surely the customer read it. Even if the customer did sign an agreement without reading it, by doing so he or she assumed the risk of loss.
Parenthetically, most states require another disclosure that arises from the Uniform Commercial Credit Code that requires, among other things, a statement (also in close proximity to the space where the buyer's signature goes) that the buyer not sign the agreement before reading it or if it contains any blank spaces, and that the buyer is entitled to a copy of the agreement.
What about a customer who dishonorably asserts that he or she did not receive the notice of cancellation form? To prevent that from happening, in our funeral homes we make the notice, in duplicate, an actual printed portion of the contract. Further, we require the customer, as part of the "buyer's acknowledgment," to concede in writing that he or she received the notice of cancellation attached. Finally, we also have gone the extra mile by noting on the contract whether the sale was a "home" or "office" sale, so that the applicability of the cooling-off provision can be determined from the face of the contract.
Our policy is that our counselors and funeral directors must discuss these provisions with the prospect. In fact, Illinois state law requires that in prearrangements the customer acknowledge that the cemetery or funeral home representative explained the material terms of the contract before the contract was signed.
In summary, an educated customer is in a better position to appreciate and understand the contract if the counselor takes the time to explain why and what the terms mean. Once explained and disclosed, these buyer's protections make it virtually impossible to get out of the contract (and improbable, as well, as the customer will understand and appreciate the significance of the transaction).
These disclosures become, then, additional tools for the counselor to use to reaffirm the importance and fairness of the deal, to emphasize that the customer is protected and to give him or her confidence in the principle that there is more value there than just a couple of spaces or a casket. What the customer is really acquiring is a long-term relationship. When that is understood, there is truly great power in legitimacy.
What does your cemetery or funeral home have to fear? I submit that there is nothing to fear. If the counselor did his or her job right, the customer will not want to cancel. If the counselor didn't convince the customer, then it wasn't a deal anyway and all of the signed agreements in the world won't change that. In the end, contracts are only as strong as the people who stand behind them.
Reprinted with the permission of Wakarusa River Management Co., Copyright 2004. All rights reserved. Neither the author nor the publisher is providing legal advice through publication of this article. If such advice is needed, the services of a qualified attorney should be sought.