The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
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
House Banking and Currency Committee
on
the Truth in Lending Act and
Federal Reserve Regulation Z
March 22, 1972
Madam Chairman, It Is a pleasure to appear before the
Subcommittee on Consumer Affairs.
1 have with me Frederic Solomon,
Director of our Division of Supervision and Regulation, Griffith L.
Garwood, Chief of the Truth In Lending Section, and Jerauld C. Kluckman,
Accountant* Analyst with that section.
Today 1 Intend to discuss four major topics relating to
Truth In Lending.
These can be identified as the Board's administrative
experience, creditor compliance, recommendations for legislative changes,
and areas for further study.
AEMINISTRATIVE EXPERIENCE
While the Act delegates rule-making authority to implement its
provisions solely to the Board of Governors of the Federal Reserve System,
actual enforcement of these rules (Regulation Z) is delegated to nine
separate Federal agencies, including the Board.
For the most part,
Federal agencies with general supervisory authority over a particular
group of creditors were also given Truth in Lending enforcement responsi
bility over those creditors.
Enforcement for all remaining creditors,
except in those States which have an exemption from the Act, Is the
responsibility of the Federal Trade Commission.
While some doubt was expressed before the Act was passed
whether this multiple agency structure would be workable, our experience
to date has been favorable.
We believe Truth in Lending is being enforced
evenhandedly and vigorously by all of the enforcement agencies in con
formance with Regulation Z and the Board's interpretations of It.
The
predicted interagency conflicts in Interpreting the law, with corresponding
confusion and inequitable enforcement, have simply not materialized.
-2This has been due In large part to the cooperative attitude of the various
agencies involved.
We are anxious to acknowledge the considerable
contribution of these agencies to the general success of the administration
of Regulation Z, which has extended beyond their enforcement efforts
with respect to their particular class of creditors.
This is particularly
true of the Federal Trade Commission which has had the task of carrying
the bulk of the enforcement responsibility under a Regulation drafted and
administered by another agency.
With this as background I would like to summarize what the Board
has done to administer its functions under the Act since I appeared before
this Subcommittee on March 6, 1969.
At that time, you may recall» the final
version of Regulation Z had been approved by the Board and published» but
the effective date» July 1» 1969» still lay ahead.
Since that time» there
have been necessary adjustments, interpretations and explanations of the
Regulation to maintain it as a workable and useful tool in implementing the
Truth in Lending Act.
The Board has found it necessary to amend Regulation Z 11 times.
In addition, the Board has issued 49 formal interpretations of Regulation Z
which are intended to clarify or further explain certain provisions of the
Regulation.
These amendments and interpretations (which are listed in
Appendix A) have been required from time to time to solve specific prob
lems which arose as we attempted to apply the concept of Truth in' Lending
to the complex and changing pattern of consumer credit.
-3
Amendments to Regulation 2
At an early date, the Board became aware that, without some
adjustments in the regulatory requirements, the application of Truth in
Lending to agricultural credit was overly burdensome to creditors and of
little or no real benefit to agricultural consumers.
Consequently, it
rewrote the section of Regulation Z (8 226.8(o)) dealing with discounts
for prompt payment, modified the rescission requirements as they applied to
agricultural credit (8 226.9(c) and (g)) and added a section (S 226.8(p))
to cover credit with indefinite advances and payments, common in agricul
tural credit transactions.
These amendments were accompanied by Board
interpretations (I 226.301 and 8 226.812 of Title 12, Code of Federal
Regulations) which also sought to clarify and improve the application of
Truth in Lending to the unique characteristics of agricultural credit.
While these adjustments have gone a long way toward solving the agricul
tural credit problem, the Board believes that additional relief is needed
as 1 will discuss later.
It also became evident that the Regulation's prior disclosure
retirements in open-end credit (8 226.7(e)) could impede changes by
creditors in their open-end crédit plans which were beneficial to custom
ers.
In response to this problem, the Board adopted relaxing amendments.
Likewise, it became evident that the requirements regarding
advertising mortgage credit, as they applied to so-called "Section 235
FHA programs" (designed to provide home ownership for lower income families)
were actually inhibiting the informative advertising of properties to which
this financial assistance relates.
The Board added « section (f 226.10(e))
to the Regulation to resolve this problem.
Similar adjustments were made
4
with respect to the application of the right of rescission to the sale
of vacant lots expected to be used as the customer's principal residence
(S 226.9(b)), the effect of the new Federal holiday schedule on the
rescission period (8 226.9(a)), the effect of leap year on preprinted
disclosures (8 226.6(1)), and the continued applicability of the Federal
civil liability provisions after the issuance of a State exemption
(8 226.12).
Interpretations
A number of Board interpretations of Regulation Z have been
necessitated by the existence of specialised credit practices to which
the Regulation had to be matched - for example, certain layvway plans,
vendor's single interest insurance, seller's points, assumptions of
existing loans, variable rate obligations, renewals of notea, multiple
advance loans, and demand loans.
The point I want to make is that the Regulation, to a certain
extent, is a fluid document which the Board has found necessary to adjust
from time to time In thfe light of specialized creditor practices
of which we became aware and in response to new developments in the methods
of extending credit.
Where requirements have been overly burdenaome or
where disclosures have proven misleading or confusing to customers, the
Board has attempted to adjust the Regulation's requirements to make them
as workable as poaslble.
We have been assisted in this task by the fine
help of our public-spirited Advisory Committee on Truth in Lending^ composed
of 20 individuals whom we consider to be knowledgable, nationwide repre
sentatives of the public - both creditors and consumers.
We have relied
heavily on the members of the Committee in coping with difficult problems
5
and their advice has been sound and helpful.
Attached as Appendix B is
a list of the Committee members, both former and current.
Staff Letters
In addition to preparing amendments and interpretations of the
Regulation for the Board, our staff has responded to an enormous volume of
written and telephone inquiries.
He have not kept count of all of the
correspondence we have written relating to Truth in Lending, but to give
you some idea of the volume, we responded to approximately 1,000 letter
inquiries during 1971.
Many of the staff's letters have been given wide
distribution by commercial publishers.
In an effort to maintain uniformity of view among the various
enforcement agencies, Indexed copies of our staff letters treating new or
unusual subjects have been provided to the 12 Federal Reserve Banks, the
eight other Federal enforcement agencies, and the four States that have
received an exemption from the Federal Act on the basis of substantially
similar State law.
Education
He have devoted considerable effort to educational programs
for both consumers and creditors.
Our first creditor-oriented educational tool was the pamphlet,
What You Ought to Know About Truth In Lending. This pamphlet contains the
text of the Act and the Regulation, questions and answers about Truth in
Lending, and sample disclosure forms.
Nearly one and one-half million
of these pamphlets have been distributed to creditors and other interested
persons.
A filmstrip designed to explain Truth in Lending from a
creditor's point of view was prepared and distributed.
These filmstrips
-6-
(there are 650 of them) can be purchased
or borrowed free of charge.
The staff of the Board, the Federal Reserve Banks and the other
enforcement agencies have participated in numerous meetings and
seminars regarding Truth in Lending.
Much of the creditor education
program took place during the initial implementation of the Regulation,
when the thirst for information on how to comply was almost insatiable.
The demand for creditor education subsided as time passed and creditors
gained more experience under the Regulation.
I should not conclude my discussion of the creditor educational
program without mentioning the admirable work of many trade associations
in providing information to their members.
At the outset, the Board emphasized information for creditors,
since the success of Truth in Lending depends upon their understanding
the requirements.
However, if the purposes of the Act are to be fully
achieved, the consumer must be able to utilize effectively the information
provided to him.
Consequently, the Board has developed several consumer-
oriented educational tools.
The first is a filmstrip that explains Truth in Lending from the
consumer point of view.
Over 1,200 filmstrips have been distributed.
may be purchased or borrowed.
They
We are pleased to note that many of the
users have been school systems.
The second major consumer tool is a leaflet entitled, What Truth
in Lending Means to You. This leaflet explains in simple terms the basic
facts about Truth in Lending*
Many methods and sources have been used to
distribute, free, more than two and one~!ialf million copies of this
leaflet.
-7 The Board' 3 most recent consumer-oriented educational release
also looks as If it will be a best-seller.
This is a Spanish translation
of the leaflet» What Truth in Lending Means to You.
State Exemptions
Pursuant to the provisions of the Statute (8 123), the Board
has granted exemptions from the disclosure and rescission provisions of
the Federal Act to the States of Connecticut» Maine» Massachusetts and
Oklahoma.
The exemptions granted generally pertain to all consumer credit
transactions within the exempt State» except for those transactions in
which a Federally chartered institution is a creditor.
An exemption can
be granted to any State that has law substantially similar to the Federal
Truth in Lending Act (including Implementing regulations) and adequate
provision for enforcement.
The Board maintains close liaison with each exempt State.
He
believe that each of them is conscientiously Implementing ita own Truth in
Lending law In a manner consistent with the Federal Act.
Preliminary applications for exemption have also been received
from the States bf Kansas and Wyoming.
These are currently being reviewed
to assure their completeness prior to publishing official notice of their
receipt in the Federal Register.
Litigation
In its annual report on Truth In Lending for 1971» the Board
indicated that it was aware of 71 civil actions which have been brought
under 8 130 of the Act.
instituted.
It is likely that additional suits have been
I will not discuss these suits» except to mention that they
cover the waterfront - disclosures under open-end credit as well as other
credit plans, the right of rescission, and even advertising.
COMPLIANCE
With respect to creditor compliance with the Truth In Lending
Act, let me say that the Federal agencies with general supervisory authority
over their credltor-groups, such as the Board, the Comptroller of the
Currency, the Federal Home Loan Bank Board and the National Credit Union
Administration, seem to have experienced no significant problems in the
enforcement of Regulation Z.
These agencies inform us that the level of
compliance is high, and that the errors that are found usually result
from misunderstanding or clerical error, rather than an attempt to evade
the Act.
For the most part, compliance is determined by these agencies
during the regular periodic examinations of the institutions.
The Federal Trade Commission has conducted two surveys In an
attempt to determine the extent of compliance by creditors under its
jurisdiction, such as finance companies, automobile dealers, and jewelry
stores - creditors which are not regularly supervised by a Federal agency.
The results of these two surveys were reported by the Commission in an
April 1971 release entitled Federal Trade Commission Report on Surveys of
Creditor Compliance with the Truth in Lending Act. The release revealed that
86 percent of all creditors surveyed were using contracts which were in
either total or substantial compliance.
Also, a vast majority of the
larger creditors - those whose sales volumes are $1 million or more - were
in total or substantial compliance.
The results indicate that not only are
most creditors under the Commission's jurisdiction in total or substantial
compliance, but also most disclosures made to consumers were in total or
stantial compliance.
These surveys Identified for the Commission the
^s of creditors and the geographic areas to which its enforcement efforts
Ld be principally directed. The results were of assistance to the
Smmlssion in planning its enforcement program.
-9-
It also appears that substantial compliance by creditors under
their jurisdiction is being achieved by each of the four exempt States.
Based upon the reports of all enforcement agencies, Including
the exempt States, it is the Board's belief that substantial compliance
with Truth in Lending is being achieved.
RECOMMENDATIONS FOR LEGISLATIVE CHANGES
The Board's most recent recommendations for legislative changes
have been presented as part of its Annual Report on Truth in Lending for 1971.
Since then the Chairman of the Subcommittee on Financial Institutions of the
Senate Committee on Banking, Housing and Urban Affairs has asked the Board to
provide drafts of legislation to implement the recommendations, and the Board
has done so by letter dated February 28, 1972, a copy of which is attached as
Appendix C.
Civil Liability
One area in which legislative changes are needed relates to
civil liability under the Act.
Many creditors have been extremely concerned
over their possible exposure to class action suits and the possible ruinous
liability which might result.
Their concern was prompted largely by Ratner
v. Chemical Bank New York Trust Company, a case in which a U.S. District Court
held the bank in violation of the Act for failure to disclose the nominal
annual percentage rate on open-end credit billing statements that showed an
outstanding balance but no finance charge yet Incurred.
The reported $13
million potential liability of the bank in the Ratner case led many creditors
to fear that similar suits filed against them could seriously threaten their
-10solvency.
The court ultimately held in Ratner that a class action was not
sustainable, but other class action cases relating to alleged Truth in
Lending violations are pending.
I believe that this almost unlimited class action exposure may be
detrimental to consumer interests and, in fact, may be an impediment to
effective private enforcement of Truth In Lending through class actions.
By this I mean that the courts, which are given a good deal of discretion
in determining whether or not to allow class actions, may be inclined to
disallow than simply because of the seemingly unreasonable magnitude of the
class action recovery.
Consequently I believe it is important to suitably
limit this exposure while at the same time maintaining class actions as a
viable remedy for violations of the Act and Regulation Z.
Others more
qualified than I may suggest specific solutions to the problem, but I would
hope class actions would not be prohibited or unduly limited because they
provide the most effective sanction by which compliance is achieved.
At least one step in solving this problem may be the insertion of a
"good faith" provision in the statute.
The Act's civil liability section
does not necessarily preclude liability even when a creditor has acted in
"good faith" reliance on Regulation Z or the Board's Interpretations thereof.
The Board has recommended inserting in the Act a "good faith" provision, such
as that In the Securities Exchange Act of 1934, which would apply to both
the Board's Regulation Z and its interpretations of it.
The following
wording was furnished to the Senate Subcommittee for insertion in the civil
liability provisions:
"No provision of this section impooing any
liability shall apply to any act done or omitted in
good faith in conformity with any rule, regulation
or Interpretation thereof by the Board, notwithstanding
that such rule, regulation or interpretation may, after
such act or omission, be amended or rescinded or be
determined by judicial or other authority to be invalid
for any reason."
-11
Another problem relates to the minimum recovery provision of
the statute.
Section 130 of the Act makes a creditor lisble for a
minimum of $100 for failure to make proper disclosute "in connection with
any consumer credit transaction."
There is some uncertainty as to the
meaning of the word "transaction" when applying 8 130 to multiple errors for example, to an error on a periodic statement, which is sent repeatedly
in connection with an open end account.
It might be contended that each
separate purchase for which a credit card is used constitutes a separate
"transaction" for purposes of 8 130,tor that each,periodic statement is a
separate transaction.
In our view, the opening and use of the account
should be considered as a single transaction.
We believe that Congress
should clarify the meaning of the very important term "transaction" and
have suggested the following wording:
"The multiple failure to disclose to any person any
information required under this chapter to be disclosed
In connection with a single account under an open end
consumer credit plan, other single consumer credit sale,
consumer loan or other extension of consumer credit,
shall entitle the person to a.single recovery under this
section."
The new provision is designed to make certain that although there
may have been multiple failures to disclose required Information on an
account or in connection'with a single credit transaction, for example, where
an omission occurs in a series of periodic hilling statements, the mini
mum recovery to a consumer would be a single $100, not a multiple of that
amount.
Rescission
The right of rescission is another area which the Board believes
merits legislative changes.
-12Section 125 of the Act, implemented by Régulation Z (8 226.9)
provides that in certain credit transactions in which a security interest
in the customer's residence is involved, the customer has three business
days in which to rescind the transaction.
The creditor must notify the
customer of this right and provide a form which may be used to exercise
that right.
The law does not limit the period for which the right continues
where the creditor has failed to notify the customer of his right - the
three-day period never begins to run.
Also, even though the required notice
is given, there is a question as to whether the rescission period also con
tinues indefinitely if other required disclosures have not been made.
The
titles to many residential properties might become clouded by uncertainty
arising from these rights of rescission.
The Board recommends that Congress
amend the Act to provide a three year limit on the time the right of rescis
sion may run, where the creditor has failed to give proper disclosures.
An additional recommendation results from two legal actions that
have been brought against the Board by home improvement contractors alleging
that the Board exceeded its authority by providing in Regulation Z
(8 226.2(z) and 8 226.9(a)) that the right of rescission applies to consumer
credit contracts secured by a mechanic's or materialman's lien on the
customer's home, even though no mortgage or deed of trust Is executed by the
customer.
In one case, summary judgment was granted-in'favor of the Board.
In the other, the court held that the provision (8 226.9(a)) was null and
void as it relates to liens which may come into existence by opération of
law.
Appeals have been filed in both cases.
The right of rescission was designed to allow homeowners a
"cooling-off" period before being irrevocably bound by credit transactions
involving security interests in their homes, and to reduce the danger of
-13homeowners being overreached by unscrupulous home improvement contractors.
The Board believes that accomplishment of this goal necessitates the
coverage under the right of rescission of all consumer credit transactions
in which a customer's home may be lost through foreclosure, whether by
mortgage, deed of trust, or other lien rights.
The Board recommended that
Congress amend the Act to remove any doubt as the coverage of these trans
actions under section 125 by adding wording that specifically includes
security interests that arise by operation of law under that section.
More-than-four-instalments rule
Our Annual Report also recommends that Congress expressly declare
that the Act covers transactions involving more than four Instalments with
out an identifiable finance charge.
By providing in Regulation Z that
Truth in Lending encompasses transactions payable in more than four instal
ments, the Board gave notice to vendors who may have considered concealing
finance charges in the price of goods to evade the Act's requirements (as
well as the so-called "no-charge-for-credit" sellers already operating In
low income markets) that the Board considered them subject to the Act's
requirements.
The Board did this to insure that they would make certain
important disclosures required by Truth in Lending, even when no finance
charge or annual percentage rate was disclosed.
The Board's more-than-four-instalments rule was based on the
economic fact that instalment contracts of more than four instalments
typically include some component to compensate the creditor for the cost
involved in allowing deferred payment, even though that cost may not be
separately identified as a finance charge.
The Board believes the rule is
both within the scope of Its authority and necessary to prevent evasion
of the Act.
However, In Mourning v. Family Publications Service. Inc., the
court declared the rule Invalid, although the rule has been upheld In other
courts.
Should the adverse decision be allowed to stand, many creditors
would not only escape the requirement of making important Truth in Lending
disclosures prior to consummation of their contracts, such as the number,
amount, and due dates of payments and the total amount of the consumer's
obligation, but would also be free of the Act's prohibitions against "bait"
credit advertising*
Since they would not be subject to the advertising
requirements, they would be able to advertise "no down payment" or the
amount of the payments without further information, which is prohibited for
creditors subject to the Act.
In addition, home Improvement contractors might svold giving
customers the right of rescission, even where they obtained a second mort
gage on the customer's home, simply by "burying" the finance charges in the
price.
In short, the Board Is convinced that Invalidation of Its
"more-than-four-instalments" regulation could seriously impsir the effective
ness of the legislation.
He believe that Congress should amend the Act to
remove any possible doubt about its coverage of transactions payable in
more than four Instalments and has suggested language for such legislation.
Agricultural Credit
The inclusion of agricultural credit under the coverage of the
Act has stirred a great deal of controversy, and has created numerous
problems, as I mentioned earlier.
Some creditors have argued that the very nature of many agricul
tural credit transactions (which frequently involve advances and payments
-15
for which both time and amount are unknown at the time of consummation of
the transaction) makes them unsulted for meaningful disclosure.
Furthermore, It has frequently been argued that since agriculture Is a
business, it should be exempt from coverage of the Act, just as other
business credit is exempt.
In spite of the amendments to Regulation Z
designed to make disclosures easier for agricultural creditors and more
meaningful for farmers,the problems have not been completely solved.
Knowing the general view of creditors that credit for agricul
tural purposes should be exempt, the Board's staff contacted a number of
agricultural associations in an effort to determine the views of the persons
who actually use agricultural credit.
While the majority of the associations
that responded indicated that agriculture should be exempt, two of the
largest representing general agricultural interests (the Farmers Union
and the National Grange) supported continued coverage.
In addition, a poll
of a number of agricultural economists Indicated a 3 to 1 response in
favor of continuing coverage.
In a poll of directors of farmer cooperatives,
which has been reported to the Board, 55 percent said that Truth in Lending
disclosures assisted them in determining credit costs, while 42 percent
indicated that the disclosures were of no assistance.
Furthermore, 45 per
cent Indicated that Truth in Lending matte little change in their credit
buying habits.
All of this suggests that a strong case cannot be made for
either complete coverage or complete exemption of agricultural credit
under Truth In Lending.
However, it tends to reinforce the reasons for the
Board'8 continuing to recommend that credit primarily for agricultural
purposes In excess of an appropriate amount (we have suggested $25,000) be
exempted from the provisions of the Act, whether nr not secured by real
-16
property.
This action by Congress would remove from coverage the larger
credits which are generally extended to more sophisticated borrowers who are
less in need of the disclosures, while still providing the benefits of
disclosure to the smaller borrowers.
Such an amendment would benefit
creditors by eliminating the need for disclosures in some large and complex
credit situations.
Administrative Enforcement
Finally, the Board has recommended that the enforcement responsi
bility relating to Federal land banks, Federal land bank associations,
Federal intermediate credit banks and production credit associations be
transferred from the Federal Trade Commission to the Farm Credit Administra
tion, the agency with general supervisory authority over those creditors.
Both agencies concur in this suggestion.
AREAS FOR FURTHER STUDY
There are some remaining areas for further study in Truth in
Lending which concern the Board.
We are studying these areas to determine
whether there is a need for further action either by the Board or by
the Congress.
Discounts
One area of study relates to discounts.
The initial disclosure
requirements relating to discouuts for prompt payment posed serious com
pliance problems.
The apparent effect of treating the offering of discounts
17-
as Involving finance charges has caused sone discontinuance of
the discount practice, to the detriment to those consumers who pay early.
An August 1969 amendment to Regulation Z alleviated, but did not entirely
solve the problem.
We are giving the problem further study.
Disclosures in Foreign Language
Another area of inquiry involves the desirability of requiring
disclosures in foreign languages.
In order to provide uniformity in dis
closure of credit terms, Regulation Z requires certain English terminology
to be used.
However, such disclosures may be of little value to consumers
who do not understand English.
Although disclosures must be given before
consummation of a credit transaction and, theoretically, a consumer can
obtain an explanation or a translation of the disclosures before committing
himself, this is not likely to happen in actual practice.
A number of
possible solutions to this problem have been considered, but none that we
have explored appear feasible.
As I have mentioned, the Board has taken
a step toward alleviation of the problem by publlshlqg a Spanish
version of the consumer
leaflet, What Truth in Lending Means to You. The
initial demand for this leaflet has been encouraging.
Advertising
A third area of study relates to the lack of advertising of
specific credit terms.
The inclusion of specific credit terms in credit
-18advertising appears to be continuing at a level substantially lower than
desirable to enable consumers to use advertising effectively as a means
to shop for the best credit terms available.
However, there are indica
tions of increased use of more specific advertising.
Creditor complaints
against the advertising restrictions have diminished.
We are reviewing
this area to determine whether changes can be made in the Regulation or
the Act to encourage greater Inclusion of specific credit terms in credit
advertising.
Complexity
Regulation Z is complex.
complex.
Truth in Lending disclosures are
A goal to which we are continually working is simplification of
both the Regulation and the disclosures.
Unfortunately, given the
complexity of credit transactions, much of it the product of complex
State legislation, there seems to be little hope of significantly reducing
the intricacy of Truth in Lending.
Nevertheless, that is our goal and we
will continue to adjust the requirements of Regulation Z as best we can
to meet this goal.
By mentioning these problem areas, I do not suggest that no
other provisions of the Act and Regulation Z raise difficult questions.
Such questions seems to arise every day.
to resolve most of them.
Fortunately, we have been able
We believe, despite all the problems, Truth in
Lending is serving the public well.
CONCLUSION
The real test of the worth of this law is whether it is
achieving its purpose which as stated in the Act is "to assure a
meaningful disclosure of credit- terms so that the.consumer will be able
Co compare more readily the various credit terms available to him and
thereby avoid the uninformed use of credit."
To obtain some indications,
the Board has conducted two Surveys of Consumer Awareness of Finance
Charges and Interest Rates.
The first survey was conducted in June 1969, and was designed
to serve as a benchmark of consumer awareness prior to the advent of
Federal Truth in Lending.
October 1970.
The second took place during September and
The results were compared to the first survey's results
to determine changes in consumer knowledge since Federal Truth in Lending
became operative.
The surveys yielded these three major findings:
1.
The proportion of consumer-borrowers with no knowledge of
the annual percentage rates they were paying has declined substantially*
2.
A greater proportion of those borrowers who believe they
know the annual percentage rates they are paying reported rates in line
with prevailing rates for the types of credit involved.
3.
In spite of the general improvement in consumer awareness,
there remains a large proportion of consumer-borrowers who are not aware
of the annual percentage rate they are paying.
The results, then, are mixed but encouraging.
The problems have
not been .insoluble, as claimed by some of Truth In Lending's early
opponents, but neither has the public's confusion over credit costs been
completely eradicated, as hoped for by some supporters of the Act.
In
summary, the public is better informed than before enactment of Truth in
Lending, the major problems in implementation have been solved, and with
-20continued education the benefits to the public vill increase.
I appreciate having had the opportunity to appear before this
Subcommittee.
APPENDIX A
AMENDMENTS
GENEPAL DISCLOSURE REQUIREMENTS—
Leap Tear (11/26/71)
f 226.6(1)
S 226.7(e)
OPEN END CREDIT ACCOUNTS--SPECIFIC DISCLOSURES—
Change In terms
(10/23/70, reamended 4/5/71)
§ 226.8(o)
CREDIT OTHER THAN OPEN END— SPECIFIC
DISCLOSURES—
Discount for Prompt
Payment of Sales
Transactions (8/11/69)
S 226.8(p)
CREDIT OTHER THAN OPEN END— SPECIFIC
DISCLOSURES
Agricultural Credit-Information Not Determinable (11/6/69)
S 226.9(a)
RIGHT TO RESCIND CERTAIN TRANSACTIONS—
Footnote 14— Specification of business days
(10/1/71)
§ 226.9(b)
RIGHT TO RESCIND CERTAIN TRANSACTIONS—
Notice of Opportunity to Rescind (4/5/71)
5 226.9(c)
RIGHT TO RESCIND CERTAIN TRANSACTIONS—
Delay of Performance (4/5/71)
% 226.9(g)(4)
S 226.10(e)
I 226.12
RIGHT TO RESCIND CERTAIN TRANSACTIONS—
Exceptions to General Rule (11/6/69)
ADVERTISING CREDIT TERMS—
Advertising of ÏHA Section 235 Financing
(4/5/71)
EXEMPTION OF CERTAIN STATE REGULATED TRANSACTIONS
(3/12/70)
CREDIT CARD AMENDMENTS (1/25/71)
f 226.1 AUTHORITY, SCOPE AND PURPOSE
§ 226.12
EXEMPTION OF CERTAIN STATE REGULATED TRANSACTIONS
I 226.13
CREDIT CARDS— ISSUANCE AND LIABILITY
-2INTERPRETATIONS
I.
Section 226.2— Definition» and Rules of Construction
9 226.201 Layaway Plans as extensions of credit (5/5/69)
II.
III.
S 226.202
Security interest— confession of judgment— cognovit
notes (5/26/69)
t 226,203
Open end credit distinguished from other credit
(5/26/69)
Section 226.3— Exempted Transactions
S 226.301
Agricultural purposes— when exempt from the
Regulation (5/26/69)
§ 226.302
Credit for business or consnercial purposes— more
than 4 family units (1/28/70)
Section 226.A— Determination of Finance Charge
S 226.401
Service charges on accotots not paid within a
given period of time (4/22/69)
S 226.402
Term of Insurance coverage (5/5/69)
$ 226.403
Disclosure of cost of property insurance when not
obtainable from or through the creditor (5/26/69)
i 226.404 Premiums for vendor's single interest insurance
required by creditor (amended 1/28/70)
$ 226.405
Property insurance written in connection with a
transaction— obtained from or through the creditor
(amended 9/11/69)
S 226.406
Sellers points and discounts under Regulation Z
(10/23/70)
I 226.407
Charges for mesfcership in open end credit plan
(8/12/71)
-3 IV*
Section 226.5— Determination of Annual Percentage Rate
S 226.501 Use of ranges or brackets to determine periodic
rate of finance charge on open end accounts (4/2/69)
$ 226.502
Annual percentage rate on single add-on rate
transactions (5/26/69)
$ 226.503 Minor Irregularities— Maximum Irregular period
limits (6/10/69)
S 226.504 Treatment of "Pick-Up Payment" In an Instalment
contract (9/11/69)
S 226.505
V.
Application of the minor irregularities provisions
in determining the amount of the finance charge
(9/11/69)
Section 226.6— General Disclosure Requirements
f 226.601
Overstatement of annual percentage rate (4/2/69)
S 226.602 Transition Period— Using existing forms, suitably
altered or supplemented (4/2/69)
VI.
$ 226.603
Disclosures in transaction involving multiple
customers (4/2/69)
f 226.604
Inconsistent State requirements (4/22/69)
S 226.605
P.ate charts and tables unavailable (6/20/69)
Section 226.7— Open End Credit Accounts— Specific Disclosures
S 226.701 Periodic Statements— Finance charge resulting from
more than one periodic rate (4/2/69)
S 226.702
Location of statement of how the balance was determined
(4/22/69)
§ 226.703
Finance charge based on average daily balance in open
end credit accounts (5/5/69)
| 226.704
Annual percentage rate computation where transaction
charges are imposed on open end credit accounts
(5/5/69)
S 226.705 Open end credit— change in the method of determining
the balance on which finance charges are computed
(7/29/71)
-4-
VII.
Sectlon 226.8— Credit Other Than Open End— ■Specific Disclosures
S 226.801
Location of disclosures when contract, security
agreement, and evidence of transaction are combined
in a 8ingle document (4/22/69)
S 226.802
Disclosures on mail or telephone orders (5/5/69)
§ 226.803
Disclosures when discounts apply for prompt payment
(5/5/69)
§ 226.804
Series of sales— content of agreement (5/5/69)
9 226.805
Series of sales as distinguished from refinancing,
consolidating or increasing (5/26/69)
9 226.806
Deposit balances applied toward satisfaction of
customer's obligation (5/26/69)
9 226.807 Assumption of an obligation— disclosures (6/10/69)
9 226.808 Disclosure of amount of scheduled payments (6/10/69)
I 226.809 Disclosures for certain student loans (6/10/69)
S 226.810 Disclosures— variable interest rotes (6/20/69)
S 226.811 Renewals of notes by mall (amended 1/28/70)
5 226.812
Advances under open end real estate mortgages for
agricultural purposes (11/6/69)
5 226.813
Disclosures on multiple advance loans (1/28/70)
f 226.814
Premiums for insurance added to an existing balance
(1/28/70)
S 226.815
Disclosure for demand loans (1/28/70)
9 226.816
Mortgages with demand features (1/28/70)
9 226.817
Reduction in annual percentage rate (3/31/70)
5VIII.
Section 226.9—"Right to Rescind Certain Transactions
$ 226.901 Waiver of security interests— effect on the right
of rescission (5/26/69)
IX.
S 226.902
"Customers" and joint owners of property under
the right of rescission (5/26/69)
S 226.903
Refinancing and Increasing— disclosures and effects
on the right of rescission (amended 1/28/70)
Section 226.10---Advertising Credit Terms
S 226.1001
Advertising of credit terms in other than open
end credit (4/22/69)
S 226.1002
Catalogs— Tables or schedules of credit tens
(4/22/69)
“ 1 APPENDIX B
ADVISORY COMMITTEE
ON TRUTH IN LENDING
Chairman
Dr. Richard H. Holton, Dean
School of Business Administration
University of California
Berkeley, California
Mr. Harry D. Allen
Assistant Credit Sales Manager
Rich*8 Department Store
Atlanta, Georgia
Mr. John E. Eidam
Attorney and Consultant
to Cooperatives
Omaha, Nebraska
Mr. James M. Barry
Managing Director
Texas Credit Union League
Dallas, Texas
Mr. IJil11am F. James
President
James Cadillac Company
Woodbridge, Connecticut
Mr. Edwin B. Brooks, Jr.
President
Security Federal Savings
and Loan Association
Richmond, Virginia
Mr. Robert J. Klein
Economics Editor
Consumers Union
Mount Vernon, New York
Mr. O.C. Carmichael, Jr.
Chairman of the Board
Associates Corporation of
North America
South Bend, Indiana
Mr. Robert R. Masterton
President
Maine Savings Bank
Portland, Maine
Miss Barbara A. Curran
Senior Research Attorney
American Bar Foundation
Chicago, Illinois
Mr. William F. Melville, Jr.
Senior Vice President
Maryland National Bank
Baltimore, Maryland
Dr. Louis F. Del Duca
Professor of Law and
Director of Admissions
The Dickinson School of Law
Carlisle, Pennsylvania
Mrs. Faith Prior
Extension Family Economist
University of Vermont
Burlington, Vermont
-2Mr. Robert W. Pullen
Chairman
Department of Economics
Colby College
Waterville, Maine
Mrs. Lynnette Taylor
Executive Director
Delta Sigma Theta Sorority
Washington, D. C.
Mrs. Doris E. Saunders
Staff Associate
Office of the Chancellor
University of Illinois
Chicago, Illinois
Mr. Peter R. Thompson
President
Mid-Continent Properties, Inc.
Piqua, Ohio
Mr. Miles C. Stanley
President
West Virginia Labor
Federation, AFL-CIO
Charleston, West Virginia
Mr. Harry R. Valas
Vice President
Valas Corporation
Denver, Colorado
Miss Barbara A. Zimmelman
Consultant, Urban and Economic
Development
Houston, Texas
3
FORMER MEMBERS OF THE ADVISORY COMMITTEE
Mr. Clark W. Blackburn
General Director
Family Service Association
of America
New York, New York
Mr. David I. Fand
Professor of Economics
Wayne State University
Detroit, Michigan
Mr. Winston H. Bowman
Bullocks
Los Angeles, California
Mr. Richard G. Gilbert, President
Citizens Savings Association
Canton, Ohio
Mr. Dick Christman
Dick Christman, Inc.
Oklahoma City, Oklahoma
Mr. Irving S. Michelman
Executive Vice President
Budget Finance Plan
Los Angeles, California
Professor Jean A. Crockett
Department of Finance
University of Pennsylvania
Philadelphia, Pennsylvania
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. William F. Willier
Professor of Law
Boston College Law School
Brighton, Massachusetts
- 1 -
APPENDIX C
February 28, 1972
The Honorable William Proxmire, Chairman
Subcommittee on Financial Institutions
Committee on Banking, Housing and
Urban Affairs
United States Senate
Washington, D. C. 20510
Dear Mr. Chairman:
In response to your request of January 12, 1972, that the
Board supply specific language to implement its recommendations to
Congress for amendments to the Truth in Lending Act contained in its
1971 Annual Report on Truth in Lending, ve are pleased to submit the
following suggestions for your consideration.
Where language has been
added to existing provisions It has been underlined, and deletions are
shown.
Civil Liability
The Board recommended that the Act's civil liability provisions
in § 130 be amended to provide for a "good faith" defense similar to one
contained in $ 23(a) of the Securities Exchange Act of 1934 (15 U.S.C.
78w(a)).
The Board suggests that the present f 130(d) be redesignated
$ 130(e) and a new { 130(d) be inserted as follows:
$ 130(d) No provision of this section imposing any
liability shall apply to any act done or omitted in good
faith in conformity with any rule, regulation or inter
pretation thereof by the Board, notwithstanding that
such rule, regulation or interpretation may, after such
act or omission, be amended or rescinded or be deter
mined by judicial or other authority to be invalid for
any reason.
The Honorable William Proxmlre
-2-
To deal with the problem of uncertainty about the scope
of the definition of "transaction" under ( 130(a), to which the
$100 minimum recovery of that section applies, the present § 130(e)
should be redesignated § 130(g) and a new S 130(f) added.
The new
provision is designed to Insure that although there may have been
multiple failures to disclose required information on an account
or In connection with a single credit transaction, for example,
where an omission occurs in a series of periodic billing statements,
the minimum recovery to a consumer would be a single $100.
S 130(f) The multiple failure to disclose to any
person any information required under this chapter
to be disclosed In connection with a single account
under an open end consumer credit plan, other single
consumer credit sale, consumer loan or other extension
of consumer credit, shall entitle the person to a
single recovery under this section.
Right of Rescission
The following addition to f 125 is suggested to set an
outside limit on the time the right of rescission may run.
The recom
mendation is made to avoid clouds on the title to residential real
estate, since under the present language of the Statute, the rescission
right might run indefinitely under certain circumstances.
The follow
ing addition is recommended:
§ 125(f) A customer's right of rescission shall expire
three years after the date of consummation of the trans
action, notwithstanding the fact that the disclosures
required under this section or any other material dis
closures required under this chapter have not been
delivered to the customer.
The Honorable William Proxmire
-3-
To clarify the fact that the rescission right under S 125
is applicable to cases in which customers may lose their homes through
foreclosure under lien rights as well as under mortgages or deeds of
trust, the following indicated additions to the first sentences of
S 125(a) and (b) are suggested:
S 125(a) Except as otherwise provided in this section,
in the case of any consumer credit transaction in which
a security Interest, including any arising by operation
of law, is or will be retained or acquired. .
etc.
(b) When an obligor exercises his right to rescind
under subsection (a), he is not liable for any finance
or other charge, and any security interest given by the
obligor, including any arising by operation of law,
becomes void upon such a rescission.
These changes are suggested in response to the opinion of
the court in N. C. Freed Company. Inc. v. Board of Governors. U.S.D.C.,
W.D.H.Y.
Sept. 29, 1971, 4 CCH Consumer Credit Guide 1 99,356, which
held that S 226.9(a) of Regulation Z, which Implements § 125 of the
Act, is "invalid and null and void, and in excess of the power of the
Board granted to it by Congress, and not within the scope of Section 125(a)
.insofar as it relates to liens which may come into existence by
operation of law after midnight of the third business day following the
date of consummation of the credit transaction."
The Board previously
obtained a summary judgment in its favor in a similar suit in the United
States District Court for the District of Columbia.
Gardner and North
Roofing and Sidlne Corp. v. Board of Governors. .Tan. 6, 1971, 4 CCH
Consumer Credit Guide 199,621.
The Honorable William Proxmire
*4-
More-than-four-ins taiment rule
To clarify the Act's application to transactions involving
more than four instalments where no separately Identifiable finance
charges are shown, the following indicated amendments to $ 103(f) and
9 121(a) are suggested:
S 103(f) The term "creditor" refers only to creditors
who regularly extend, or arrange for the extension of,
credit which is payable by agreement in more than
four instalments or for which the payment of a finance
charge is required, whether in connection with loans,
sales of property or services, or otherwise. The pro
visions of this title apply to any such creditor, ir
respective of his or its status as a natural person or
any type of organization.
$ 121(a) Each creditor shall disclose clearly and
conspicuously, in accordance with the regulations of
the Board, to each person to whom consumer credit is
extended^ and-upen-whem-a-fiaanee-eharge-is-ev-flMy-be
imposed the information required under this chapter,
where
(1) a finance charge is or may be imposed, or
(2) the extension of credit is payable by agree
ment in more than four instalments.
These suggestions are in response to the opinion of the
United States Court of Appeals for the Fifth Circuit in Mourning v .
Family Publications Service, Inc.. Sept. 27, 1971, 4 CCH Consumer
Credit Guide 999,337 which held that the Board exceeded its authority
in specifically defining "consumer credit" to include transactions
payable by agreement in more than four instalments.
This opinion was
contrary to the court's holding in Strompolos v. Premium Readers Service,
U.S.D.C., N.D.I11., May 18, 1971, 4 CCH Consumer Credit Guide 1 99,471.
In that case the court concluded that "the four instalment rule falls
squarely within the scope of the Act's provision authorizing the Board
to promulgate regulations that are proper or necessary to prevent cir
cumvention or evasion of the Act."
The Honorable William Proxmire
-5-
Agricultural Credit
The Board recommended that agricultural credit above an
appropriate amount be excluded from the Act's coverage.
The report
details the lack of uniformity of view among the users of agricultural
credit as to whether it should be covered at all, or what limit might
properly be placed on its coverage.
Nevertheless the Board believes
that the responses received reinforce its view that some agricultural
credit should be exempt from coverage.
While the Board is happy to
suggest language for the exclusion, and believes an exclusion of trans
actions above $25,000 would alleviate the problem, it is aware that
opinions legitimately may vary about the appropriate amount.
S 104(5) Credit transactions primarily for agricultural
purposes in which the total amount to be financed exceeds
$25,000.
Administrative Enforcement
To implement its recommendation for the transfer of certain
enforcement jurisdiction from the Federal Trade Commission to the Farm
Credit Administration, the Board suggests the following addition to
S 108:
$ 108(a)(7) the Farm Credit Act of 1971, by the Farm
Credit Administration with respect to any Federal
land bank, Federal land bank association, Federal
intermediate credit bank, or production credit associa
tion.
The Honorable William Proxmire
-6-
We hope these suggestions will assist you in implementing
the Board's recommendations.
Sincerely,
J. L. Robertson
@FedFRASER