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For release on delivery




Statement of J. L, Robertson, Vice Chairman
Board of Governors of the Federal Reserve System
before the
Subcommittee on Consumer Affairs
of the
Committee on Banking and Currency
House of Representatives

March 6, 1969

I appreciate this opportunity to review with the Subcommittee
on Consumer Affairs the steps that have been taken to get ready for
Z-Day.

Since the reference to Z-Day may possibly be puzzling to some

of those in this hearing room, let me explain that I am talking about
this coming July 1st, the effective date of Regulation Z, prescribed
by the Board of Governors of the Federal Reserve System to implement
the Truth in Lending Act.

And in case these remarks should reach

people who have never heard of the Truth in Lending Act, it may be
useful to summarize what the Act and the regulation do.

Together

they spell out the disclosures— chiefly the finance charge and the
annual percentage rate— that those who extend consumer credit must
make to their customers; they set standards for advertising credit
terms; and they permit a customer to cancel some types of credit
arrangements within three business days if his residence is used as
collateral.

This hearing should prove useful in calling public

attention to the fact that Z-Day is coming.
At the Board, preparation for this event began before the
Consumer Credit Protection Act was signed into law.

In Pebruary,

1968, we established a task force on Truth in Lending, drawn from
the staffs of the Board and the Reserve Banks, aided by outside
consultants with experience in various aspects of consumer credit.
We wanted to get a head start, since we realized time would be
needed not only to study the legislation and then draft and redraft
the regulation, but also to issue it far enough in advance of the




2July 1st effective date to give creditors time to get ready.
Obviously they need time to prepare and "debug" necessary forms,
computer programs, and other compliance procedures and to train
personnel.

And we were determined to do our best to develop a

practical, workable regulation--one that would carry out the
objectives of the Act without imposing unnecessary burdens on
business that could result in higher costs being passed on to the
consumer.
In this effort we were most fortunate to have the
assistance of the Advisory Committee on Truth in Lending, established
under section 110 of the Act.

This twenty-member group was appointed

by the Board in August; their names and affiliations are given in the
attached list.

Dr. Richard H. Holton, Dean of the School of Business

Administration at the University of California, Berkeley, is chairman
of the Committee.. Its members were carefully selected to provide a
broad representation of retailer, lender, and consumer groups in
all sections of the country.
The Advisory Committee has acted as liaison between the
Board and the public, including industry as well as consumer interests,
with regard to the purpose, scope and implementation of Regulation Z.
The Committee has served as an important vehicle for channeling to us
advice on problems and issues involved in the preparation of the
regulation.

The members of the Committee, although selected from

the various industry and consumer groups interested in and affected




3
by the Act, have represented the public in a broad sense, rather
than merely their own special interest groups.

In short, this has

been an effective working committee which has contributed greatly
to the development of Regulation Z and will contribute in the future
to our informational program and to appraising the effectiveness of
Truth in Lending.
The first meeting of the Advisory Committee was held on
September 12 and 13, 1968, to review a preliminary working draft
of the regulation, which, after redrafting, was released for comment
in mid-October.
This draft generated more than 1200 comments and suggestions
by industry, consumer groups and others.

We also received comments

from the other Federal agencies involved in the enforcement of the
Truth in Lending Act and were contacted by several State authorities
regarding their own consumer credit disclosure statutes.

We met

again with the Advisory Committee on December 12 and 13 to discuss
the major issues presented.

All of the comments and suggestions were

carefully reviewed and considered in the preparation of the final
version of Regulation Z which was made public by the Board o1
.
'
February 10 and printed in the Federal Register on February 11, 1969.
The final version of Regulation Z has benefited substantially
from the widespread review that was given to the preliminary version,
although there were no changes in the basic disclosure requirements
which are, indeed, largely dictated by the law itself.




-4

One troublesome question we faced in this process relates
to conflicts between the Federal statute and State laws.

Very few

States have a truth in lending act, but many States have statutes
that require that some types of consumer credit contracts disclose
information in a manner that is inconsistent with the Federal statute,
either in form of presentation or in method of determining the infor­
mation.

Section 111 of the Federal statute provides that it shall

not exempt any creditor from complying with any State l x relating
a«
to disclosure of information in connection with credit transactions,
except to the extent the State law is inconsistent with the Federal
law.
Accordingly, section 226.6(b) of the Regulation provides
that State law is inconsistent with the Federal law and regulation
to the extent that it




(1)

requires a creditor to make disclosures different
from the requirements of Regulation Z xvith respect
to form, content, terminology, or time of delivery;

(2)

requires disclosure of the amount of the finance
charge determined in any manner other than that
prescribed in Regulation Z; or

(3)

requires disclosure of the annual percentage rate
determined in any manner other than that prescribed
in Regulation Z.

-

5-

Many of these State laws are not purely "disclosure"
statutes; that is, they establish certain requirements that must be
met it the credit contract is to be enforceable.

For example, some

State laws prescribe that an installment sales contract on an
automobile, to be valid, must state the cash price and the "time
price differential."

The "time price differential" must include

part— but not necessarily all— of the amounts that must be included
in the "finance charge" to be disclosed under the Federal statute.
This requirement is inconsistent with the Federal regulations.
Nevertheless, we recognize that there will be cases in
which the question of whether a requirement of State law is invalidated
by the Federal law will not be entirely free from doubt.
this score could confront creditors with a hard choice.

Doubts on
If they

elect to ignore a requirement of the State law, in the belief that
it is no longer in force, they run some risk that courts might later
determine that the State requirement is still in effect.

In such a

situation, the creditor might have no valid contract, and could be
left without any security to protect his interest, since the failure
to comply with the State law might also invalidate the underlying
contract and the means of enforcing it.
Creditors as well as consumers urged the Board to
minimize the need for dual disclosure, and we have tried to do
so in the Regulation.




6

Since virtually everyone agrees that conflicting disclosures
are undesirable, we have good reason to hope that the problem is a
temporary one that will disappear as uncertainties regarding the
areas of conflict are eliminated.
In the meantime, however, the regulation permits a creditor
to make a disclosure specified in State law that is inconsistent with
the regulation, if he does so separately and apart from the disclosures
required by the regulation, so as not to confuse the borrower by
mixing the two.

The disclosure may be made on a separate piece of

paper, or (if it is clearly marked as being inconsistent with the
Federal requirements) on the same piece of paper but below the
Federal disclosures.

I hope that in time it will be possible to

eliminate these provisions for conflicting disclosures, as the
problem disappears.
Another (less troublesome) problem involves credit extended
"without charge." The Act defines creditors as persons who "regularly
extend or arrange for the extension of credit for which the payment of
a finance charge is required."

In many cases creditors claim to make

no finance charge, although in every other respect they regularly
extend consumer credit.

Take, for example, the merchant who advertises

watches for a.dollar down, and a dollar a week, with no indication of
how many dollars are required to pay for the watch.

There is little

doubt that he is in fact, collecting a finance charge, included but
not identifiable in the cash price.

And it seems clear that Congress

intended to reach advertising of this kind.




-7

Accordingly, the regulation defines "consumer credit" to
include credit payable in more than four instalments even though no
finance charge is expressly imposed.

Thus, the advertising and

disclosure provisions apply to this type of credit except for those
provisions that cannot be complied with because the finance charge
cannot be identified.

In the example given above, the merchant would

have to state the price of the watch and give particulars as to the
payment schedule, even though he could not give the amount of the
finance charge expressed as an annual percentage rate.
Then there was the question of whether we should have more
than one regulation.

A few creditor groups argued that their problems

were so different from those of other creditors that separate
regulations should be issued exclusively covering their particular
activities.

We decided instead to follow in the regulation the

approach taken in the Act, namely, to have a single set of rules
applicable generally, but with special provisions to cover particular
situations that require special treatment.

For example, both the Act

and Regulation Z exempt purchase-money real estate first mortgage
credits from the requirement that the total dollar amount of the
finance charge, as contrasted with its rate, be disclosed.

We hope

to prepare explanatory materiel relating the regulation specifically
to the activities of particular industries.

However, we felt that to

issue separate regulations would either result in undesirable impe-.rment of the basic principle of treating equivalent situations equally
or would require useless repetition of many basic regulatory provisions
in the regulations applicable to particular groups.




-8
Now a word or two about what we did not put in the
regulation.

First, we omitted the formulas involved in computing

the annual percentage rate, sine« most creditors will have no need
for them.

They are available, however, without charge upon written

request to the Board.

The Board has prepared annual percentage rate

tables, consisting of two volumes, which will be available at the
Board and at the Reserve Banks at a charge of $1 per volume.
Volume 1 contains standard tables that may be used to compute the
APR for most types of transactions.

Volume II can be used in

conjunction with Volume I for transactions with irregular payments
or those involving multiple advances.

For orders of 10 or more,

the charge is reduced to 85 cents.
We also omitted standards for granting exemptions under
section 123 of the statute.

You will recall that under this section

and section 226.12 of the regulation any State may apply to the Board
for exemption of any class of transactions within the State that are
subject to requirements substantially similar to the Federal require­
ments, if there is adequate provision for enforcement of the State
requirements.

The Board will soon publish a proposed set of guidelines

to be used in ruling on State applications for such exemptions.

Until

these have been formulated, I hope you will understand that I am not
in a position to comment on what steps should be taken by State
officials to secure such exemptions.




Uncertainties remain as to

-9

how transactions should be classified for this purpose, how closely
the requirements of the State law and regulations should conform to
those of the Federal law and regulations, and what provisions fot
enforcement should be regarded as adequate.
Let me add a few words about the informational aspects
involved in Regulation Z and what the Board is doing in this field.
The Board decided even before the final regulation was
published that a major effort would be needed to acquaint the nation's
creditors with the requirements of the regulation. Although no exact
figures are available, estimates of the number of creditors covered
range from 500,000 to 1 million.

The nine enforcement agencies,

including the Federal Reserve, are working together to make sure that
all known creditors receive a copy of the regulation and explanatory
material well before the July 1st deadline.
As part of our overall information program, the Board has
arranged for the production of a pamphlet containing not only
Regulation Z and the statute but also an explanatory series of
questions and answers and some illustrative forms which a creditor
may use or modify to suit his own circumstances.

This pamphlet will

be distributed through the nine enforcement agencies so that creditors
will receive the material directly from the agency to which they
should address any questions about it.

Included in the pamphlet

will be a listing of addresses where creditors can obtain any
additional information they might need from the appropriate enforce*
ment agency.




-10-

Distribution of this pamphlet will begin in the next
two weeks.

Each enforcement agency has placed its order for

copies with the Board and approximately 950,000 copies of the
pamphlet will be run off at this stage.
In the meantime, other aspects of the informational
program have been under development.

For example, the Board has

arranged for the preparation of a film strip on Truth in Lending
which will be made available to interested groups through the
Federal Reserve Banks and other enforcement agencies.

This film

strip is designed to make creditors aware quickly just how Truth
in Lending applies to them and what they will need to do before
July 1st, such as preparing forms and educating their personnel.
And tomorrow the Board's staff will initiate a series of meetings
to share with staff members of the enforcing agencies informational
materials we have developed.

The first meeting will be held at the

Board's headquarters in Washington.

Subsequent meetings are scheduled

this month at each of the 12 Federal Reserve Banks, with field
representatives of the enforcement agencies as well as creditor
groups invited to attend.

This presentation will consist of an

explanatory talk illustrated by slide projections of the illustrative
forms which will appear in the Truth in Lending pamphlet.

Copies

of the talk and the slides will be distributed to the enforcement
agencies and the Reserve Banks for use by them before various public
groups*

These phases of the information program were reviewed last

week at a meeting of the Advisory Committee.




-11The information program has been underway since publication
in mid-October of the proposed Truth in Lending regulation.

Trade

and consumer groups were contacted at that time to enlist their
aid in distributing data as widely as possible.

Special mailing

lists with the names of any group or person wanting Truth in Lending
material were prepared by the Board's staff during this period.
These lists include business and consumer groups and individuals
throughout the country.

Meetings were also held with the other

enforcement agencies not only to facilitate uniform enforcement
of the law but also to coordinate the informational efforts.

The

result was a much wider distribution of the regulation when it was
published in final form in early February than we could otherwise
have achieved.
One week following publication of Regulation Z, the
Board released a question and answer series, which has been widely
published in the press and trade journals, explaining in relatively
simple terms how the law and regulation will work.

These questions

and answers served as the basis for a similar series which will
appear in the pamphlet to be distributed soon to all known creditors.
The Board is also considering further informational
efforts including the preparation of booklets for specific types
of credit such as mortgage credit or department store credit.
If this statement gives the impression that I take some
pride in the job that has been done, it is because I do.

The

assignment was particularly challenging, since the Federal Reserve




-12System has no special qualifications as a consumer protection agency»
Indeed, I hope you will reflect on the need to vest consumer protection
functions in some agency better suited to the job than is the central
bank, in view of the likelihood that consumer legislation will cover
ever broader areas.
But to return to Truth in Lending, I am happy to review
with you our efforts to implement the legislation that your Sub­
committee worked so hard to enact, and to report to you that this
experience has convinced me that the great bulk of businessmen can
be counted on to cooperate in making credit cost disclosure effective.
As your committee report on this legislation pointed out, the present
confusing and conflicting methods of quoting credit costs arose in
part out of difficulties with usury laws and then became imbedded in
industry practice, so that no one segment of the industry has felt it
could disclose an annual percentage rate without incurring a competitive
disadvantage.

Your efforts have made it possible for all creditors to

adopt this reform simultaneously, and you have also made it crystal
clear that this can be done without affecting the application of State
usury laws. What remains to be done now is to make sure that this
message gets to the people who will in the end make it work.

This

informational job is obviously much too broad for the Board to handle
alone.

We are preparing educational materials, but we must rely on

banks, trade associations, consumer groups, educational institutions,




- 13-

and others to use these materials.

We have had encouraging

indications of their desire to cooperate in this effort.

The

favorable response we have had since the regulation was released
leads me to expect that Z-Day will dawn bright and fair.

Attachment




ADVISORY COMMITTEE
ON TRUTH IN LENDING
Chairman

Dr. Richard H. Holton
Dean, School of Business Administration
University of California, Berkeley

Mr. James M. Barry
Managing Director
Texas Credit Union League
Dallas, Texas
Mr. Clark W. Blackburn
General Director, Family Service
Association of America
New York, New York
Mr. W. H. Bowman *
Credit Sales Manager
Davison-Paxon Co.
Atlanta, Georgia
Mr. 0. C. Carmichael, Jr.
Chairman of the Board
Associates Investment Company
South Bend, Indiana

Mr. William F. James, President
Bill James Chevrolet Co.
St. Louis, Missouri
Mr. Robert J. Klein
Economics Editor
Consumers Union of the U.S., Inc.
Mt. Vernon, New York
Mr. William F. Melville, Jr.
Vice President
Maryland National Bank
Baltimore, Maryland
Mr. Irving S. Michelman
Executive Vice President
Budget Finance Plan
Los Angeles, California

Mr. Dick Christman
Dick Christman, Inc.
Oklahoma City, Oklahoma

Mrs. Doris E. Saunders
Director of Community Relations
Chicago State College
Chicago, Illinois

Dr. Jean A. Crockett
Department of Finance
University of Pennsylvania
Philadelphia, Pennsylvania

Mr. Miles C. Stanley, President
West Virginia Labor Federation,
AFL-CIO
Charleston, West Virginia

Mr. George H. Dixon, President
First National Bank of Minneapolis
Minneapolis, Minnesota

Mr. T. G. While, Consultant
The Goodyear Tire and Rubber Company
Akron, Ohio

Mr. John E. Eidatn, President
Omaha Bank for Cooperatives
Omaha, Nebraska

Professor William F. Willier
Department of Law
Boston College Law School
Brighton, Massachusetts

Professor David I. Fand,
Department of Economics
Wayne State University
Detroit, Michigan
Mr. Richard G. Gilbert, President
Citizens Savings Association
Canton, Ohio




Miss Barbara A. Zintmelman
Executive Director
Central Houston Association
Houston, Texas
* Now on Board's staff