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rum N E W S RELEASE F E D E R A L D E P O S IT I N S U R A N C E C O R P O R A T IO N FOR RELEASE ON DELIVERY PR-72-73 (10-29-73) Statement by Frank W ille Chairman, Federal Deposit Insurance Corporation before the Subcommittee on Consumer A ffa ir s of the Committee on Banking and Currency House o f Representatives October 29, 1973 RAL DEPOSIT INSURANCE CORPORATION, 550 Seventeenth St. N.W., Washington, D. C. 20429 • 202-389-4221 I am pleased to appear today b efore this Subcommittee to t e s t ify regarding the Federal Deposit Insurance Corporation’ s enforcement of the Truth in Lending Act. I sh a ll also discuss b r ie fly the recommendations o f the National Commission on Consumer Finance and the proposed amendments to the Truth in Lending Act (S . 2101) passed by the Senate on July 23, including a provision therein which would proh ibit discrimination on the basis o f sex or m arital status in the granting o f c red it. F in a lly, I sh all discuss certain ways in which we b e lie v e the Fair Credit Reporting Act might be improved. F i r m 's TRUTH IN LENDING ENFORCEMENT A C T IV IT IE S The FDIC has enforcement resp o n sib ility under the Truth in Lending Act with respect to insured banks which are not members o f the Federal Reserve System. Primary re sp o n sib ility fo r enforcing compliance with Truth in Lending requirements has been assigned to the Regional Directors in charge o f our 14 regional o ffic e s , as part of th eir o v e ra ll examination and supervisory re s p o n s ib ilitie s . In addition, we have established in our Washington O ffic e a Consumer A ffa irs Unit in the D ivision of Bank - 2- Supervision to coordinate our regional enforcement e ffo r ts and to process in q u iries, requests, and complaints directed or referred to our Washington headquarters. The le g a l s t a f f in our Washington O ffic e and our seven Regional Counsel also rou tinely a ssist in handling Truth in Lending matters and are a va ila b le as needed fo r sp ecia l enforcement problems. Our f i e l d examiners check fo r compliance with Truth in Lending requirements as a part o f a l l regular examinations o f State nonmember banks. Since we try to examine each such bank once each year, this means that v ir t u a lly a l l State nonmember banks are checked annually fo r compliance with Truth in Lending requirements. In order to f a c i l i t a t e checking fo r compliance in an organized and e f f ic ie n t manner, we have furnished each examiner with a checklist to be used as a reference and guide. This checklist contains some 46 questions covering a wide range o f areas in which Truth in Lending v io la tio n s may e x is t. During the course o f an examination, our examiners review a s u ffic ie n t number o f c red it transactions in various categories to give a f a i r in dica tion o f whether the bank is complying with applicable statutory requirements, including those o f the Truth in Lending Act. When vio la tio n s o f Truth in Lending requirements are discovered, they are handled in one o f two ways. In many cases, our examiners w i l l simply point out the vio la tio n s found and the bank’ s management w i l l make the -3necessary corrections before the examination is concluded. On the other hand, i f the v io la tio n s found are not resolved inform ally during the examination or appear more extensive, the examiner in charge w i l l prepare a le t t e r report, addressed to the bank’ s board o f d irectors, lis t in g the various vio la tio n s found and requesting correction and requ iring advice as to steps to be taken to avoid sim ilar violation s in the future. This le t t e r report is forwarded with the completed report o f examination to our Regional O ffice fo r review. I t is then sent by our Regional D irector to the bank involved and routinely followed-up as a part o f his ongoing supervisory e ffo r t to secure recommended improvements and correction in the bank’ s p o lic ie s and practices. As a resu lt o f such le t t e r s , corrections are normally obtained. In point o f fa c t, we recently surveyed our Regional O ffices by telephone requesting the name and location of any banks in which viola tion s of Truth in Lending regulations have been reported by le tte r-r e p o rt to the bank’ s board of directors through September 15, 1973, and where the Regional D irector has not been s a tis fie d that compliance has been e ffe c te d . The survey indicated that 36 banks were receivin g follow-up action because the Regional Director was not s a tis fie d with the bank’ s compliance with the Truth in Lending law. Of the 36 banks, two are in an exempted State and are also the subject o f follow-up action by that S ta te ’ s banking department. Follow-up action being taken by the -4- Regional O ffices includes continuing correspondence and scheduling o f sp ecia l reviews o f Truth in Lending compliance at upcoming examinations o f the banks. Depending upon the results o f this follow-up a c t iv it y , the Regional Directors may take other action to obtain compliance. In a l l cases such as these, we make every e ff o r t to obtain corrections v o lu n ta rily . Nevertheless, i f i t becomes apparent that corrections cannot be obtained vo lu n ta rily , we may i n i t i a t e adm inistrative proceedings to issue a cease-and-desist order against any further v io la tio n s . Such an instance occurred recently when the examination o f a bank revealed that the bank had fa ile d , a fte r repeated e ffo r ts by the Corporation to obtain voluntary compliance, to co rrectly disclose the annual percentage rate to it s borrowers, to d isclose finance charges, to disclose the number, amount, due dates, and/or periods o f payments scheduled to repay the indebtedness, and to accurately disclose the amount financed — a l l in v io la tio n o f Truth in Lending requirements. An order to cease and desist such v io la tio n s was issued by the Corporation and the bank consented without admitting or denying the charges. The order requires the bank to make a l l necessary Truth in Lending disclosures at the time and in the manner and form required by the law and regulations issued thereunder. In addition, the bank must review a l l outstanding extensions o f cred it and d e liv e r to each -5- customer a notice containing the required disclosures. We are working clo sely with the bank involved and we b elie v e that they are making every reasonable e ff o r t to comply with the substance o f the order. V io la tio n o f such an order is enforceable in the United States D is tr ic t Court in the d is t r ic t in which the bank is located. In addition to administrative enforcement proceedings, we routinely re fe r possible criminal viola tion s o f Federal laws to the Department o f Ju stice. This is normally done through le t t e r reports to the appropriate United States Attorney outlin ing the basic facts as we know them and in d icatin g the individuals and the statutory provisions believed to be involved. As you know, under the Truth in Lending Act, the Board o f Governors o f the Federal Reserve System may exempt from the requirements of disclosure any class o f cred it transactions within any State i f i t determines that under the laws of that State that class o f transactions is subject to requirements su bstantially sim ilar to those imposed under the Federal law, and that there is adequate provision fo r enforcement. Under this authority, the Board has exempted various classes o f credit transactions in the States o f Connecticut, Maine, Massachusetts, Oklahoma, and Wyoming. As a re s u lt, State nonmember banks in such States have become subject to disclosure requirements under State law substantially sim ilar to the - 6 - dis closure requirements under the Federal Truth in Lending law. Consequently! enforcing compliance with Truth in Lending in these States is now a matter o f enforcing applicable State law. Primary enforcement re sp o n sib ility in this regard rests with those State au th orities s p e c ific a lly charged with i t under State law. Nevertheless, we continue our e ffo r ts to assist in the enforcement o f Truth in Lending requirements in those States which have received exemptions from the Federal law. We r e fe r Truth in Lending complaints and v io la tio n s to other Federal and State enforcement agencies in accordance with established procedures. On a State le v e l, our Regional Directors cooperate clo sely on enforcement matters with the various banking au th orities o f the States located in th eir regions. As a re s u lt, a l l our Regional Directors furnish to the appropriate State banking authority copies o f a l l l e t t e r reports prepared by our examiners lis t in g Truth in Lending v io la tio n s discovered in State nonmember banks located in th eir States. Truth in Lending v io la tio n s discovered by our examiners which in volve creditors committed to the enforcement ju ris d ic tio n o f some other Federal agency are reported by le t t e r to that enforcement agency. This may occur, fo r example, where during the course o f checking automobile dealer paper purchased, our examiners note apparent v io la tio n s o f -7- Truth in Lending. In such case, the matter would be reported by le t t e r to the Federal Trade Commission. Truth in Lending involves a rather complex law and even more complex regu lations. This complexity makes the law d i f f ic u lt to understand, and i t is th erefore d i f f ic u lt fo r bank o ffic e r s and employees to gain a fa m ilia r working knowledge o f it s numerous, rather s p e c ific requirements. However, through our repeated examination checks, criticism o f violation s found, and the advice and guidance we furnish, we b e lie v e we are making r e a lis t ic progress towards the goal o f substantially complete o v e ra ll compliance, in sofar as State nonmember banks are concerned. REPORT OF THE NATIONAL COMMISSION ON CONSUMER FINANCE Because o f the breadth of the report of the National Commission on Consumer Finance, we sh a ll confine our comments thereon prim arily to issues o f sp ecia l importance to the FDIC in Chapter 4 rela tin g to supervisory mechanisms and Chapter 7 rela tin g to the rates and a v a ila b ilit y o f cred it. We note that many of the recommendations in Chapter 3 of the Commission’ s Report dealing with contract provisions and cred ito rs’ remedies are sim ila r to comparable recommendations in the November 1972 - 8- Report o f the Sub-Council on Credit and Related Terms o f Sale o f the National Business Council fo r Consumer A f f a i r s • We generally support the objectives o f these recommendations. S p e c ific a lly , we might add that, with respect to the proposal in currently pending f a i r cred it b i l l i n g le g is la tio n lim itin g the a p p lic a b ility o f the holder-in-due-course (w aiver—o f—defense) doctrine in c red it card transactions, the Corporation favors elim inating this doctrine as applied to bank cred it card transactions above a reasonable d o lla r minimum, so long as the merchants involved are w ithin the market area o f the card issuing bank in lin e with the concept underlying § 170 of S. 2101. Perhaps the most s ig n ific a n t feature o f Chapter 4 o f the Report is the recommendation that Congress establish a new governmental agency, the Bureau o f Consumer C redit, with authority to issue substantive rules and regulations and to supervise a l l examination and enforcement functions under the Consumer Credit Protection Act, including the Truth in Lending Act. Among other powers, the new BCC could (1) require State and Federal agencies that supervise in stitu tio n s which grant consumer c red it to submit w ritten reports, (2) require by subpoena the attendance and testimony o f witnesses and the production o f a l l documentary evidence relevant to the execution of it s duties, and (3) intervene in corporate mergers and acquisitions which might lessen competition in - 9 - consumer cred it markets, as w e ll as in proceedings fo r the granting o f new charters and the approval of new o ffic e s and branches. We b e lie v e that before creating ye t another Federal agency with functions sim ila r to and overlapping those o f a nunfoer o f existin g agencies, such as the Federal agencies regulating fin a n cia l in stitu tion s and the Federal Trade Commission and the Department o f Justice, every e ffo r t should be made to accomplish the Commission's objectives within the ex istin g regulatory structure. We b e lie v e the Commission’ s goals could be re a liz e d by (1) mandating a sin gle fin a n cia l regulatory agency (such as the Federal Reserve, the FDIC or the Federal Home Loan Bank Board) to issue substantive regulations in the consumer protection area, and (2) conferring ju ris d ic tio n to enforce such regulations upon a l l agencies regulating fin a n cia l In stitu tio n s. This approach would achieve uniformity of substantive consumer protection rules applicable to fin an cial in s titu tio n s , w hile at the same time taking advantage o f the existin g supervisory structure to obtain optimum enforcement resu lts. We b e lie v e that, with a clear mandate from the Congress, the existin g fin a n cia l regulatory agencies are w illin g and able to undertake a vigorous and sustained e ff o r t to promulgate and enforce regulations designed to protect consumers transacting business with fin an cial in stitu tio n s. In our opinion such a consumer protection program is consistent with the - 10 - need to maintain a sound fin a n cia l system, and we b e lie v e the goal of protectin g customers, depositors and shareholders o f fin a n cia l institutions and the public in general can be achieved most e ffe c t iv e ly by the fin a n cia l regulatory agencies under appropriate congressional d ire c tiv e s . We would p refer to avoid further p r o life r a tio n o f regulatory agencies at the Federal le v e l u n til the ex is tin g fin a n cia l regulatory agencies have been given a broad consumer protection mandate by Congress and have then been shown to have fa ile d e ff e c t iv e ly to implement such mandate. With particu la r reference to the BCG’ s proposed rig h t to intervene in e x is tin g procedures fo r approving bank mergers, we would note that these procedures are already quite d eta iled , in that the Department of Justice and other fin a n cia l regulatory agencies are required to furnish advisory opinions on the com petitive factors involved in each such merger to the regulatory agency with decision-making authority. Also, i t may b pointed out that the com petitive impact on relevan t consumer cred it markets is required to be taken in to account in connection with a l l bank mergers under ex is tin g law. We concur in the Commission’ s recommendation in Chapter 7 that the regulatory agencies disallow mergers or stock acquisitions among fin a n cia l in stitu tio n s where the re su lt would be a substantial increase in concentration in State as w e ll as lo c a l markets. The proposition that - 11- statewide concentration data are relevant in analyzing mergers represents an emerging antitru st concept endorsed by the Corporation. We also generally favor the Commission's recommendations on steps to be taken to assure easier entry than at present into the consumer c red it market. Permitting banks to make small loans by establishing de novo o ffic e s through subsidiaries or a ffilia t e d e n titie s operating under the rate structure permitted fo r finance companies seems generally preferab le from the competitive standpoint to the acquisition by banks of ex istin g finance companies. Such acquisitions could foreclose p oten tial d irect competition w hile the gains achieved by the merger o f creditor in s titu tio n s , such as scale economies and risk d iv e rs ific a tio n , would seem to be equally ava ila b le through de novo entry by banks in to the small loan business. The Commission also recommends in Chapter 7 that " r e s tr ic t iv e arrangements" in the cred it industry should be vigorously pursued and elim inated. Practices such as " t i e - i n " arrangements, t e r r it o r ia l a llo c a tio n s , discriminatory p ricin g , and p r ic e -fix in g often have serious anticom petitive e ffe c t s . We agree with the Com ission’ s conclusion that these practices should be vigorously pursued and eliminated wherever they e x ist in the cred it industry. - 12- TRUTH IN LENDING ACT AMENDMENTS OF 1973 S. 2101 contains provisions designed to help consumers resolve c re d it b i l l i n g disputes in a f a i r and timely manner and to proh ibit certain other practices arisin g out o f consumer cred it transactions. The b i l l also incorporates a series o f needed technical amendments to the Truth in Lending Act. Although we generally support these portions o f the b i l l , I w i l l not take the time to discuss them in d e ta il here today. Rather, I would lik e to focus upon three important and perhaps con troversial issues involved in this proposed le g is la tio n . F irs t is the question o f lim ita tion s on class action l i a b i l i t y fo r vio la tio n s o f the Truth in Lending Act. The b i l l as passed by the Senate would impose a lim ita tio n o f the less er o f $100,000 or one percent o f the c r e d ito r ’ s net worth. The Federal Reserve, on the other hand, recommends that the lim ita tio n be the greater o f $50,000 or one percent o f net worth. In his testimony b efore this Subcommittee la s t July, Mr. Frederic Solomon, D irector o f the Federal Reserve’ s D ivision o f Supervision and Regulation, stated that i t might very w e ll be b e tte r to s a c r ific e the b i l l than to accept the Senate-passed lim it on class action l i a b i l i t y . Perhaps the s in g le most important fa cto r encouraging creditors to comply with Truth in Lending requirements is th e ir concern about potential class action l i a b i l i t y fo r vio la to rs o f the Act. In our opinion, a maximum l i a b i l i t y o f $100,000 In a class action su it against the largest insured banks would be an In e ffe c tiv e deterrent to vio la tio n s o f the Truth in Lending Act. We would therefore concur with the Federal Reserve on this point and would stron gly recommend that the b i l l set the class action l i a b i l i t y lim it at the greater o f $50,000 or one percent o f net worth. Our second major point in connection with this proposed le g is la tio n involves the omission from S. 2101 o f any provision dealing with the method fo r computing finance charges on openend cred it accounts. S. 914, 93d Congress, another version o f this proposed le g is la tio n , contains a provision (§ 167) which would prohibit the re tro a ctive assessment o f a finance charge against any balance outstanding in the card holder s p rio r to the time by which payment must be made in order to avoid im position o f a finance charge. In e ffe c t , § 167 would abolish the use o f the previous balance and the average daily balance methods o f assessing finance char ges. Although we b e lie v e the previous balance method o f computing finance charges u n fa irly imposes a finance charge on that portion o f the cred it balance which is paid during the current period, we b e lie v e there is merit in retain in g the option o f using the average daily balance method, with one q u a lific a tio n - namely, that purchases made during the current b illin g -14- cycle be excluded from the computation o f the average d a ily balance, thus providing a "fr e e period" fo r current purchases. This is the approach recommended in FTC Chairman Engman’ s May 22, 1973 statement b efore the Subcommittee on Consumer A ffa irs o f the Senate Committee on Banking, Housing and Urban A f f a i r s . The third major point we wish to s p e c ia lly note is the question of discrim ination on the basis o f sex or m arital status in connection with consumer cred it transactions. T i t l e I I I o f S. 2101 would p roh ib it discrim ination on eith er o f these bases in connection with "the approval or denial o f any extension o f consumer c red it or with respect to the terms thereof or with respect to the approval, denial, renewal, continuation, or revocation o f any open end consumer cred it act or with respect to the terms th e re o f." We strongly support including a p roh ibition o f this type in the b i l l , but we would recommend that i t be expanded to also proh ibit discrim ination in consumer cred it transactions on the basis o f race, color, r e lig io n , or national o rig in . A d d itio n a lly, we would recommend that a s in g le Federal supervisory agency such as the Board o f Governors o f the Federal Reserve System, the FDIC or the Federal Home Loan Bank Board, be expressly granted general substantive rulemaking authority to implement these prohibitions in a manner consistent with the property laws o f the various States, such substantive rules then to be enforced by each appropriate Federal agency with respect to fin a n cia l in stitu tion s under th e ir supervisory ju ris d ic tio n . -15- With amendments as suggested in these three areas, we would favor enactment o f a b i l l along the lin es o f S. 2101. FAIR CREDIT REPORTING ACT Our experience with the Fair Credit Reporting Act as i t relates to State nonmember banks leads us to recommend the follow in g changes in the A c t: 1. Consigner Reporting Agency Disclosures At present, section 609 o f the FCRA merely requires that upon request, a consumer reporting agency must "d isclo se" to the consumer "the nature and substance of a l l information (except medical information) in it s f i l e s on the consumer . . . " This does not e n t it le the consumer to actually see his f i l e and determine fo r him self what i t contains. Instead, the contents o f the f i l e are read by an employee o f the reporting agency to the consumer who must take notes on what is said to him. We recommend that the FCRA be changed to permit the consumer to personally inspect his f i l e , take notes regarding it s contents or, fo r a nominal fe e , make copies o f the material in his f i l e . This would permit the consumer who has a personal in terest in the -16- matter to see and judge fo r him self the accuracy and completeness o f the information contained in his f i l e and give him access to the d eta ils o f that information, which may be s ig n ific a n t, rather than merely the "nature and substance" of the information. 2. In v e s tig a tiv e reporting authorizations and disclosures At present, section 606 o f the FCRA merely requires that a person who orders an in v e s tig a tiv e report on a consumer inform him that such a report "may be made" and further inform him o f his right to make a w ritten request as to the "nature and scope" of the in vestiga tio n requested. I f the consumer is in terested , he may th erea fter inquire as to the "nature and scope" of the in vestiga tio n (but not the information develop ed). We recommend that no in v e s tig a tiv e consumer report be prepared without a s p e c ific authorization from the consumer. This approach would protect the consumer’ s rig h t of privacy and give him the righ t to decide whether he wants the related b e n e fit enough to allow a p riva te agency to delve in to his personal a ffa ir s . 17- 3. User Disclosure At present, users o f cred it information are required to disclose only the name and address of the cred it bureau whenever adverse action is prompted by a consumer report. The user is not required to furnish the consumer with a copy o f the report prompting that action. Nor is the user required to explain why the adverse action was taken or id e n tify the information responsible. We recommend that the user be required to furnish the telephone number o f the cred it reporting agency in addition to it s name and address. The Federal Trade Commission has recommended that the user be also required to furnish the consumer with a copy o f the consumer report, explain the reason fo r the adverse action taken and id e n tify fo r the consumer the information in the report responsible fo r the adverse action. We question the propriety o f placing upon the user the burden o f furnishing a copy o f the report, requiring the user to explain his reason fo r taking adverse action and compelling him to id e n tify the information responsible. I f a consumer wishes to correct inaccurate or incomplete information in his cred it f i l e , he may do so by reviewing his f i l e at the credit reporting agency. Requiring the user to furnish the name, address, and telephone number of -18- the cred it reporting agency seems s u ffic ie n t to permit the consumer to make whatever corrections are necessary and to s a tis fy the basic purpose o f the FCRA. To require the user to explain why the adverse action was taken and to id e n tify the information responsible seems to go beyond the purpose o f the PCM and to be unnecessarily burdensome to the user. I f the user is a bank, fo r example, which has ordered a c red it report fo r the purpose o f evaluating a consumer’ s loan application, to require the bank to explain to the consumer why his loan was turned down w i l l lik e ly simply generate c o n flic t over the merits o f the cred it judgment. 4. C iv il Enforcement o f FCM At present, section 617 o f the FCM lim its l i a b i l i t y fo r n egligen t noncompliance to the actual damages sustained by the consumer, plus costs and reasonable attorn ey’ s fees. I t i s , o f course, very d i f f i c u l t to prove actual damages given the nature o f the in ju ry. Moreover, the fa c t that not one d o lla r o f damages has ever been o f f i c i a l l y awarded to a p l a i n t i f f in a c i v i l su it brought under the FCM is cogent evidence o f the inadequacy o f ex istin g provisions. We b e lie v e that allowance fo r the recovery o f some type o f penalty is essen tia l both as an incentive to private enforcement action and to encourage care in complying with the FCRA on the part o f those subject to i t . We therefore recommend a $100 minimum penalty fo r negligent noncompliance recoverable in individu al action, with maximum l i a b i l i t y in a class action lim ited to the greater o f $50,000 or one percent o f the defendant's net worth, as recommended e a r lie r with respect to Truth in Lending v io la tio n s .