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Statement on
Truth in Lending Simplification Bills
(S. 1312, S. 1501, S. 1653 and Federal Reserve Board Staff Proposal),

^Presented to the
Subcommittee on Consumer Affairs,
Committee on Banking, Housing and Urban Affairs
United^ States Senate


Miles A. Cobb, General Counsel
Federal Deposit Insurance Corporation

July 11, 1977,


d e p o s it in s u r a n c e

CORPO RATIO N, 5 5 0 Seventeenth St. N.W., Washington, D.C. 20429


Mr. Chairman, we greatly appreciate this opportunity to appear this morning
before your Subcommittee to testify in support of Truth in Lending simplifica­

The four proposals before us are Senator Proxmire1s S . 1312, Senator

Garn's S. 1501, your S. 1653 and a Federal Reserve Board staff proposal.
As you know, the FDIC has enforcement responsibility under the Truth in
Lending Act with respect to insured banks which are not members of the Federal
Reserve System.

Since the law became effective in 1969, FDIC field examiners

have checked for compliance with the Act as part of our routine bank examina­
tions for safety and soundness.

As an outgrowth of an experimental program

involving the reliance on State examinations for safety and soundness in three
states, the Corporation developed and in 1974 began using on a nationwide scale
separate compliance examination reports designed to focus more attention on
consumer matters.

Furthermore, on June 3 of this year, we announced a new

program of separate compliance examinations to assess compliance with various
consumer protection laws and regulations including Truth in Lending.


separate compliance examinations will be conducted at least once every 15 months
by examiners having special expertise in consumer protection matters, who will
also, as appropriate, provide advice and guidance to bank managements on con­
sumer protection laws and regulations.
While we believe that this new program of separate compliance examination
by examiners specially trained in consumer protection matters will help bank
managements establish effective procedures to assure compliance with consumer
protection requirements, it is nevertheless imperative in our judgment that
the basic framework of consumer legislation be structured to make it both com­
prehensible to consumers and enforceable at a reasonable cost to the public
and to regulated institutions.

Truth in Lending is a prime example of the need

to simplify consumer legislation.

The need for Truth in Lending simplification has been abundantly documented

I will not, therefore, belabor the point with you here today.


simple glance at the length and complexity of the Act itself and of its imple­
menting Regulation Z, at the more than 1,200 interpretations and staff opinion
letters published by the Federal Reserve, and at the many thousands of law suits
this legislation has spawned should suffice to make the case for simplification.
Clearly, it is unduly burdensome for creditors, especially smaller lending
institutions, to have to comply with this enormous volume of regulatory require­

In fact, the sheer volume and complexity of required disclosures renders

full compliance very difficult.

In our opinion, the amount of detailed, complex

information that must be disclosed has increased the cost of credit to the con­

At the same time, some believe that there has been no corresponding

increase in benefit to the consumer because of a so-called "information overload"
which taxes his ability to assimilate and utilize the information made available
to him.

Therefore, simplification legislation would substantially benefit both

consumers and creditors.

Similarly, there would undoubtedly be cost savings

to the regulatory agencies as well.
Of course, simplification can mean different things to different people.
To some it means eliminating unnecessary disclosures.
creditor liability.

To others it means limiting

To still others it means providing borrowers and creditors

with model forms in simple layman's language.

Finally, there are those who advo­

cate strengthening the administrative enforcement machinery for Truth in Lending

We believe that all of these are legitimate objectives of Truth in

Lending simplification and that they all should be pursued simultaneously.

- 3 -

S. 1312
As you indicated when you introduced your bill, Mr. Chairman, Senator
Proxmire's S. 1312 provides a basic framework for comprehensive revision of
the Truth in Lending Act.

In addition to a number of largely technical changes

recommended by the Federal Reserve Board, the bill would —


exclude agricultural credit from Truth in Lending coverage;


permit State officials to enforce State Truth in Lending
laws as to federally chartered institutions in those
States which are exempted by the Federal Reserve from
Federal Truth in Lending requirements;


require the enforcement agencies to order creditors to
reimburse borrowers for any charges in excess of the
stated finance charge or annual percentage rate unless the
enforcing agency finds such restitution to be unreasonably
burdensome; S. 1312 would also require such agencies to
notify borrowers of any failure to reimburse them as ordered
and of their consequent rights under the Act and would autho­
rize the enforcement agencies to publicize the name and other
details regarding a creditor who has engaged in repeated
and substantial Truth in Lending violations;


permit borrowers who are notified of a violation by an en­
forcement agency to file a civil action for damages within
90 days of such notification, but not more than 3 years
after the transaction date;

- 4 -


require the Federal Reserve Board to issue model disclosure
forms for common credit transactions phrased in understandable
language which, if properly used, would relieve creditors
from civil liability for alleged inadequate disclosures;


limit civil liability in closed-end transactions to the
following seven types of disclosure violations!

(1) amount

financed, (2) finance charge, (3) annual percentage rate,
(4) repayment schedule, (5) late payment charges, (6)
security interest, and (7) the right of rescission; and

require the Federal Reserve Board to publish semiannually
the annual percentage rates charged by creditors for
various types of closed-end credit in urban areas
exceeding 500,000 population.

We generally support the provisions in S. 1312, particularly the exemption
for agricultural credit, requirements as to model disclosure forms and publica­
tion of annual percentage rates in large urban areas and the limitation of civil
liability in closed-end credit transactions to certain specified disclosure vio­

Including agricultural credit in the Act has resulted in numerous com­

plexities and has been of little value to consumers.

The FDIC has recommended

on several occassions in the past that agricultural credit be excluded from the
As to preparing model disclosure forms, the Federal Reserve Board is
already doing this in the consumer leasing area and for credit application
forms under the Equal Credit Opportunity Act.

If the Board could draft simple,

easy to read, and understandable disclosure forms, we believe this would be one


of tne more significant steps forward in consumer credit transactions that has
ever been taken.

Coupled with readily available information on rates being

charged by various creditors in the locality, a consumer would be in a much
better position to understand the terms of consumer credit transactions and to
shop for tne best rate available to him.

While we strongly endorse this concept

of publishing consumer loan rates in large urban localities, some have ques­
tioned the practicability of such an effort.

Because of tne obvious benefits

to consumers, we would favor making every effort to provide such rate informa­
tion to the public.
In the area of civil liability for disclosure violations, present law re­
quires as many as twenty or more Truth in Lending disclosures in connection
with a closed-end transaction.

Civil liability ma_y currently be imposed upon a

creditor for very technical violations of Truth in Lending requirements.


amendment in S. 1312 would eliminate technical disclosures and require disclo­
sure of information which is material to the borrower's credit decision.


the creditor's viewpoint, we believe that this could be one of the more important
sections of the bill and should significantly reduce the amount of litigation.
We also favor some form of restitution to borrowers in cases involving an
erroneously stated finance charge or annual percentage rate.

While in our

opinion the financial institution regulatory agencies presently have authority
to order affirmative remedial action generally in enforcing the Truth in Lend­
ing Act, and to publish the results of examinations, we believe there is merit
in the S. 1312 proposal to specifically provide for restitution, for notifica­
tion to borrowers, and for public reporting of repeated and substantial viola­

We would recommend amending these provisions in two respects, however.

First, we believe that the bill should provide that, in the first instance, a
violating bank should be required to notify individual borrowers of violations
on standard forms prescribed by the enforcement agencies and that the agencies
have this responsibility only if the bank refuses to do so.

Secondly, we recom­

mend that in the case of substantial and repeated violations, the agencies
should be mandated either to publish the details of such violations as the
bill presently provides or to proceed administratively against the bank by
cease-and-desist action.
We favor extending the statute of limitations for civil damage actions.
The present limitations period of one year from the transaction date effectively
deprives many borrowers of legal redress.

The one year period is inadvisable

because examinations often uncover errors after one year from the transaction

The new statute of limitations proposal in S, 1312 would solve this problem

and would mesh with the disclosure procedures contemplated in the bill.
We have no comment on the S. 1312 provision which would permit State offi­
cials to examine federally chartered financial institutions for compliance with
State Truth in Lending requirements except to note that it has been our experience
that State authorities are capable of effectively enforcing State consumer pro­
tection laws as to State banks regularly examined by FDIC.

Accordingly, there

seems to us to be considerable merit in considering Federal withdrawal from en­
forcement of these laws where State enforcement methods meet necessary minimum

we assume that Congress will also want to resolve this problem

without imposing duplicative and costly enforcement procedures on federally
chartered institutions.


S. 1653
In introducing S. 1653, Mr. Chairman, you stated that it was not intended
to be a comprehensive revision of the Truth in Lending Act like Senator Proxmire's S. 1312.

Instead, you indicated that S. 1653 was designed to address

certain specific problems whicn have arisen in implementing the Act.


tially, S. 1653 would authorize the Federal Trade Commission, which enforces
the Act with respect to about 90 percent of the Nation's creditors, to obtain
restraining orders in U.S, district courts and seek civil penalties and resti­
tution to enforce compliance with Truth in Lending requirements.

S. 1653 would

also make several other amendments to the Act recommended by the FTC.


amendments would, for example, provide (1) that assignees are liable for viola­
tions on the face of disclosure statements and that an obligor's exercise of
the right of rescission is effective as to any assignee, (2) that a consumer's
right to rescind is not cut off by a creditor's foreclosure sale of the con­
sumer's home, (3) that the notice of billing rights mailed to consumers under
the Fair Credit Billing Act should list the types of errors to which the Act
applies, and (4) that creditors should credit to the accounts of customers
any balances over $1.00 resulting from excess payments or rebates.
We have no objection to any of the provisions in S. 1653.

As noted above,

the financial institution regulatory agencies already have administrative
cease-and-desist authority to enforce Truth in Lending requirements (including
power to order affirmative remedial action by creditors).

Therefore, the

authority sought by the FTC to seek immediate judicial enforcement would seem
unnecessary in the case of the financial agencies.




S, 1501
S. 1501 contains some of the same provisions as S. 1312 but it goes much
further in many respects.

Generally speaking, we have no problems with those

provisions of S. 1501 which implement Federal Reserve Board recommendations.
Your Subcommittee may want to consider whether other provisions of the bill
would enhance the consumer protection goals of the Truth in Lending Act.
For example, S. 1501 provides that a creditor would not be civilly liable
if the failure to disclose was not material to the consumer's awareness of the
cost of credit.

The bill would relieve creditors of the duty to make disclo­

sures with respect to late payment penalties, the existence of a security in­
terest and identification of the property subject thereto, and the borrower's
right of rescission.

We believe these matters should properly be disclosed as

required under present law and S. 1312.
S. 1501 would also establish a general principle of preempting all similar
State laws except those that are identical to the federal law or those that are
both more protective of consumers and necessary because of special local circum­

While we agree the preemption area needs clarification, we question

whether State authority in this area should be so severely curtailed as S. 1501
would do.

We would prefer the provision in the Federal Reserve Staff proposal

wnich permits the Federal Reserve Board to exempt credit transactions in any
State which imposes substantially similar requirements as under Federal law and
where there is adequate provision for enforcing such State requirements.
In order to limit form changes to once a year and give lead time for neces­
sary printing and programming, another provision in S. 1501 would provide gen­
erally that the effective date of any statutory, regulatory, or interpretive


change requiring a change in a disclosure form would be October 1 of the fol­
lowing year, unless the Federal Reserve Board determines that an earlier effec­
tive date is necessary to prevent unfair or deceptive practices.

Although such

a provision would certainly be helpful to creditors in adjusting to new require­
ments, we do not believe the Federal Reserve has been unreasonable about pro­
viding lead time and would therefore defer to them as to the workability of
such a deferred effected date in achieving the purposes of the Act.

Federal Reserve Proposal
The Federal Reserve draft bill contains several provisions quite similar
to comparable provisions in S. 1312.

It provides, for example, for issuance

by the Federal Reserve of model disclosure forms in everyday language, for the
exemption of agricultural credit from Truth in Lending coverage, and for a sub­
stantial reduction in the number of items which need to be disclosed in a Truth
in Lending statement.

Also, as alluded to above, the Federal Reserve draft bill

would substantially revise the definition of finance charge in Section 106 of
the Act to include a number of items previously excluded, such as fees for
credit reports and appraisals, for the preparation of deeds and other documents
(except in residential mortgage transactions), and for perfecting security in­

All these changes are intended to reinforce the notion that the

finance charge should contain all those charges which are unique to a credit
In residential mortgage transactions, the creditor would be permitted to
exclude from the finance charge fees for title examination, surveys and mort­
gagor's title insurance.

With the exception of mortgagor's title insurance,


such fees should not be excluded from the finance charge if required by the
lender as a condition of the credit.

Other changes are also recommended in

the Federal Reserve proposal to conform disclosure requirements in residential
mortgage transactions to those contained in the Real Estate Settlement Proce­
dures Act.
Under present law credit life, health and accident insurance premiums need
not be included in the finance charge if its purchase is at the borrower's

The Federal Reserve draft bill presents two alternatives on this con­

troversial issue.

One alternative would include such premiums in the finance

charge on the rationale that in some localities such insurance is traditional
despite its ostensible voluntariness.

The other would require inclusion unless

the consumer has an absolute right to cancel the insurance in a reasonable time

We favor inclusion of such premiums in the finance charge in all cases

This we believe is the simpler approach.

Moreover, it should be noted that

credit life, accident or health insurance is unique to a credit transaction
and is not present in a cash transaction.

Therefore, where insurance is to be

purchased, whether or not voluntarily, its cost should be included as a cost
of credit.

In our view, this change would reflect the reality that, in many

cases, borrowers are lead to believe credit insurance is mandatory despite
representations or written disclosures to the contrary.

In these cases, it

is difficult, if not impossible, to prove that the required representations
or disclosures of voluntariness were overridden by by other statements of the

Consequently, the issue of including or excluding the cost should

not be made to turn upon the supposed "voluntariness" of the insurance.
We fully support the simplification provisions contained in the Federal


Reserve draft proposal and would urge that its elements be combined with those
of S. 1312 and S. 1653, and perhaps certain portions of S. 1501, to produce a
composite simplification bill.

This would be a major step in the direction

of making the consumer protection provisions of the Truth in Lending Act more

We believe that in these pending proposals your Subcommittee has

before it all the elements necessary to make a very significant contribution
to better implementation of Truth in Lending objectives and we would be happy
to work with your Subcommittee in any effort to combine the best elements of
these bills to achieve this objective.