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Statement by

P h ilip C. Jackson, Jr.

Member, Board o f Governors o f the Federal Reserve System

before the

Subcommittee on Commerce, Consumer, and Monetary A f f a ir s
o f the

Committee on Government Operations

U.S. House o f Representatives

September 16, 1976

I welcome the opportunity to t e s t i f y today before the
Subcommittee on Commerce, Consumer, and Monetary A ff a ir s regarding
the issue o f enforcement o f the Truth in Lending Act.

The Board

appreciates your in t e r e s t in our enforcement e f f o r t s .

As you are

aware, the Board’ s s t a f f and members o f the Subcommittee s t a f f have
met on a number o f occasions during the la s t few weeks in preparation
for these hearings.

I would lik e to begin by presenting an overview

o f the Federal Reserve System's previous enforcement e f f o r t o f Truth
in Lending and i t s new plan fo r enforcement o f a l l consumer laws
and regu la tion s in the future.
The Federal Reserve System has a dual r e s p o n s i b i lit y under the
Truth in Lending Act.

F i r s t , the Board o f Governors has the r e s p o n s i b i lit y

to issue regulations to implement the A ct.
issued Regulation Z in 1969.

To th is end, the Board

These regulations apply to a l l persons

and e n t i t i e s who reg u la rly extend consumer c r e d i t .

This task a lso

includes the issuance o f numerous amendments and in terp re ta tion s
designed to resolve u n certain ties as to the impact o f the l e g i s l a t i o n .
The s t a f f has a lso issued more than 1,100 p u b lic p o s it io n le t t e r s
regarding the Regulation.
While the Board's emphasis has been on ru lew ritin g , the
Federal Reserve System a lso has r e s p o n s i b i lit y to enforce the Regulation
among some 1,050 State chartered banks that are members o f the System.
This enforcement r e s p o n s i b i lit y i s ca rried out in the f i r s t instance
by the 12 Federal Reserve Banks, which maintain a fo rce o f examining
personnel who perform annual examinations o f the State member banks.




-2-

Compliance by State member banks is monitored through a
review o f each bank's formal p o l i c i e s and procedures, as well as an
examination o f the actual p ra ctices follow ed.

To i l l u s t r a t e , com­

pliance with Truth in Lending requirements is v e r i f i e d through
review o f the bank's p o l i c i e s and procedures in granting d ir e c t
and in d ire c t consumer loans, the d isclo su re forms used in connection
with those loans, and cop ies o f i t s a d v ertisin g .

V io la tio n s are

c a lle d to the a tte n tio n o f management with a view toward informing
the bank o f the law's requirements, obtaining c o r r e c t io n , and g ettin g
the bank to adopt measures to prevent future occu rrences.

V io la tion s

and the bank management's plan for c o r r e c t io n are a lso noted on
a separate page in the Examination Report (page 5 ( 1 ) ) , a sample
copy o f which is attached. Depending upon the nature and seriousness
o f the v i o l a t i o n , the Federal Reserve Bank, in transm itting a
copy o f the Examination Report to the bank, may h ig h lig h t the
v io la t io n and ask fo r management's response by a given date as
to the a ction taken to prevent recurrences o f the v i o l a t i o n .

Of

course, during any subsequent examination, a determination is
made as to whether v io la t io n s previously c it e d have been c o r r e c t e d .
Enforcement o f the Truth in Lending Act is a lso ca rried out
through the in v e s t ig a t io n o f consumer complaints concerning the State
member banks.

During the f i r s t h a lf o f 1976, the 12 Federal Reserve

Banks handled 1,131 complaints.

Two-thirds o f these complaints were

investigated by the Reserve Banks, as they rela te d to State member banks.







-3-

The remaining one-third involved c r e d it o r s not under the System's
d ir e c t supervision and were forwarded to the appropriate enforcement
agency.

Where v io la t io n s o f the Act have been found, the banks

are to ld to co r r e c t them.

The Board is made aware o f compliance

d e f i c i e n c i e s at State member banks by the Reserve Banks which
prepare a quarterly report fo r the Board summarizing the consumer
complaint a c t i v i t y .
The Board and the Federal Reserve Banks have taken a number
o f steps to provide examiners with the training and in v estig a to ry t o o ls
needed to perform e f f e c t i v e Truth in Lending compliance reviews.
Before Regulation Z became e f f e c t i v e (July 1, 1969), members o f
the Board's s t a f f conducted seminars for examiners at the Federal
Reserve Banks explaining the requirements o f the Regulation.
program was repeated in 1973.

This

In a d d ition , the Board prepared

an extensive examination manual and c h e c k lis t on Truth in Lending
designed to be used by examiners fo r enforcing Regulation Z.

In

connection with the Fair Credit B illin g Act, the Board conducted
intensive reviews o f the new requirements fo r both the key examination
personnel o f the Reserve Banks and fo r persons from the other
Federal enforcement agencies.

In a d d ition , the Federal Reserve

Banks have held numerous trainin g sessions fo r examiners, p a r tic u la r ly
newly appointed examiners.
Each System examiner attends our A ssistant Examiner and
Examiner Schools which devote time to explaining Regulation Z
and to trainin g examiners to determine whether State member banks

-4-

are m

compliance with the law.

It should be noted that some examiners

from State banking departments also attend the System's schools.

Since enactment o f the Truth in Lending Act in 1968, the
Board has conducted an extensive consumer and c r e d it o r educational
program r e la t in g to the Act and Regulation Z.

Education to a s s is t

the consumer in understanding the information and other b e n e fit s that
the l e g i s l a t i o n i s intended to provide i s regarded as very important.
Newspaper a r t i c l e s , interview s, and radio appearances continue to be
used in our e f f o r t s to acquaint the general p ublic with the Truth in
Lending Act.

Consumer a f f a i r s li a i s o n o f f i c e r s and s t a f f at the

Federal Reserve Banks a lso conduct frequent meetings and seminars for
c r e d it o r and consumer groups.
Hie Board b elie v e s that education o f c r e d it o r s is an important
device in preventing noncompliance problems.

As an example o f this

educational program, follow ing the passage o f the recent Fair Credit
B illin g Amendments to the Act and the Board1s issuance o f implementing
amendments to Regulation Z, the Board's s t a f f p a r tic ip a te d in
numerous meetings and seminars fo r the purpose o f explaining to
cr e d ito r s the new prov ision s and requirements.

Approximately 6,200

c r e d it o r s attended these meetings which were held throughout the
United States during 1975.
The System has also d istrib u te d more than two m illio n copies
o f a pamphlet that contains both the Act and Regulation Z, as w ell as
questions and answers concerning compliance matters.

In a d d itio n ,

more than three and one h a lf m illio n cop ies o f a l e a f l e t explain ing the
basics o f Truth in Lending to consumers have been d is t r ib u t e d , including







-5 -

more than a h a l f - m i l l i o n cop ies o f a Spanish language v ersion .
Our s t a f f is developing sim ilar pamphlets on the p rovision s o f the
Fair Credit B illin g and Equal Credit Opportunity Acts.
U to th is p o in t, the System has been able to u t i l i z e
p
the standard bank examination process to determine State-member bank
compliance with Truth in Lending.

However, with the growth o f

consumer c r e d it l e g i s l a t i o n , we recognize the need fo r expanding
our enforcement e f f o r t s .

These new consumer-oriented laws, a l l

o f which have been enacted during the past two years, include
the Fair Credit B illin g Act, Equal Credit Opportunity Act, Consumer
Leasing Act, Home Mortgage Disclosure Act, Real Estate Settlement
Procedures Act, and the p rov ision s o f the Federal Trade Commission
Improvement Act r e la t in g to un fair and deceptive acts and p ra ctice s
by banks.

In re co g n itio n o f th is expansion, the Board has r e ce n tly

approved the follow in g program:
1.

The establishment o f a s p e cia l consumer compliance

examination school to be held in Washington, D.C.

This school w i l l

acquaint examiners more f u l l y with the requirements o f the many
consumer c r e d it regulations and the methods f o r enforcing them.
The f i r s t school is scheduled to begin September 27, 1976 and
a d d itio n a l schools w i l l be scheduled t h e r e a fte r .

I have attached a

copy o f the agenda to my written statement.
2.

I n s t it u t io n o f an intensive educational and advisory

s e rv ic e in each Federal Reserve Bank to a s s is t State member banks

-6 -

in their efforts toward compliance. Each Reserve Bank is establishing
a team of specialists to assist State member banks in complying
with the Board's consumer regulations.

3.

Special examination o f State member banks w i l l sh o r tly

be i n i t i a t e d by bank examiners who have received s p e c ia l tra in in g
in the consumer c r e d i t re g u la tion s .

These examinations o r d in a r ily

would be conducted and scheduledi to c o in c id e with the regular com­
m ercial examinations, but they may, at tim es, be scheduled se p a ra tely .
A fte r the f i r s t 24 months o f the program (December 31, 1978),
a thorough evaluation o f the program would be conducted.
4.

The immediate formation o f a sp e c ia l Task Force,

comprised o f rep resen ta tiv es from the Board and the examining
departments o f the Federal Reserve Banks, to study and promptly report
to the Board on the follo w in g iss u e s:




a.

The implementation o f s p e c i f i c examination procedures

to ca rry out consumer reg u la tion compliance.
b.

The appropriate sample s iz e needed to measure a

bank's compliance with the re g u la tio n s , e . g . , the quantity
o f d is c lo s u r e forms, finance charge computations, and
annual percentage rate c a lc u la tio n s to be reviewed.
c.

The determination o f what steps should be taken

when v i o l a t i o n s are d iscovered.
d.

The expansion o f the System's Public Education Program

to inform c r e d it o r s and consumers about the new consumer
le g isla tio n .

-7-

5.

The System plans to involve the new Consumer

Advisory Council to the f u l l e s t extent p o ssib le in bringing to
it s atten tion Truth in Lending abuses.
The e f f o r t s outlined above should re s u lt in an even
more e f f e c t i v e enforcement program.

In th is con n ection, the Comptroller

o f the Currency and the Federal Deposit Insurance. Corporation have
a lso been evaluating e x is t in g procedures. During the last, three
months, Board s t a f f has been working with the s t a f f s o f these two
agencies toward developing a uniform approach to examinations o f commer­
c i a l banks.

To d ate, the product o f th is e f f o r t includes development

o f examination manuals, report pages, trainin g manuals, and interagency
instructor & for the a gencies' consumer regulations trainin g sch o ols.
The Subcommittee a lso requested that the Board present i t s
p o s itio n on the merits o f three issues r e la tin g to noncompliance
d is c lo s u r e .
1.

These issues a re:
N o t ific a t io n to individual borrowers that th e ir loan

transaction may contain a v i o l a t i o n o f some s e c t io n o f Truth in
Lending re g u la tio n s;
2.

Disclosure through the media o f the degree o f

individual bank noncompliance with Truth in Lending reg u la tion s; and
3.

The re la tio n sh ip o f d isclosu re to the s e lf - e n f o r c in g

nature o f the Truth in Lending Act.
The Board b e lie v es i t would be premature to take p o sitio n s
on these issues p r io r to re c e ip t o f the Task Force report mentioned
ea rlier.

These issues involve numerous and d i f f i c u l t consideration s

which the Board b e lie v e s need further analysis and experience before




-

being decided.

8-

I can assure you, however,

that the Board will give

these matters their deserved attention, and I would be happy to report
to you when the Board finally adopts its positions.

However,

in order

to be as helpful to this Subcommittee as possible, I would like to
now raise some of our primary concerns with the points you mention.
As the Board has repeatedly indicated both in testimony
and reports to the Congress, the majority of violations of the Truth
in Lending Act are purely technical in nature.

Given the highly

complex nature of the Regulation, technical violations will occur
due to unintentional and inevitable human error.

An example

of such an error would be the failure to denote a prepaid finance
charge as such (although it is disclosed as a finance charge).
most violations,

In

the customer is neither overcharged nor misled.

It may

be unwarranted to notify borrowers and/or the media that a bank has




committed such technical violati ons .

Such a procedure m a y unduly

encourage a proliferation of civil actions to be brought against the
offending bank even when only technical violations have occurred.
Much of the present complexity of the Act and Regulation Z
reflects the impact of the civil liability considerations.

The threat

of severe penalties for relatively minor technical violations has
led many creditors to seek greater certainty by requesting official
Board amendments and interpretations, which further complicate the
Regulation.

Although private causes of action provide an important

enforcement tool for the Ac

¿bélieves that Congress should

carefully review the presen

ity provisions to determine

whether m odifica tion o f them might reduce needless l i t i g a t i o n
and the re su ltin g regulatory com plications.
The Board has taken one a ctio n and i s considering another
that may a s s is t in reducing unnecessary l i t i g a t i o n .

The Board has

adopted procedures implementing the provisions o f Public Laws 94-222
and 94-239, which provide a defense fo r c r e d it o r s rely in g upon l e t t e r s
issued by duly authorized o f f i c i a l s o f the Board in connection with
Regulations B and Z.

In a d d itio n , the Board i s considering the

development o f standardized Truth in Lending d is c lo s u r e forms, or
portions o f forms, on which c r e d it o r s could r e ly in complying with
the Act.

I t is hoped that these forms w i l l prove e s p e c ia lly b e n e f ic ia l

to those c r e d it o r s , such as small r e t a i l e r s , who do not have access t o ,
or cannot a ff o r d , s p e c ia liz e d le g a l counsel to design th e ir own forms.
While these measures should reduce the present volume o f
l i t i g a t i o n and help a l le v ia t e confusion re s u ltin g from the complexity o f
the Act and the Regulation, the Board has asked that Congress a lso
study the p o s s i b i l i t y o f lim itin g the penalty p rov ision s o f the statute
to v io la t io n s that a ctu a lly in t e r fe r e with the consumer's a b i l i t y
to make meaningful comparisons o f c r e d it terms.

Only a limited

number o f terms seem to be genuinely h elp fu l in th is regard.

These

probably include the annual percentage ra te , the finance charge, the
amount financed, and the repayment schedule.

Perhaps only material

misstatements o f these terms should be brought to the attention
o f consumers and c i v i l l i a b i l i t y only attach where such misstatements
have occu rred.




This would leave technical v i o la t io n s to be dealt




-

10 - -

with by administrative remedies.

Under present law. a c r e d ito r may

be penalized for purely technical v iola tion s o f which the consumer
may have been unaware at the time and which in no way entered
into the d ecision to accept or r e je c t the cre d it terms o ffe r e d .
This situation lends i t s e l f to abuse and has overburdened some
courts with Truth in Lending li t i g a t i o n .
From 1972 through September, 1975, approximately 6,100 suits
have been f i l e d in Federal D is trict courts a lleging v io la t io n s o f the
Truth in Lending Act

This indicates to some degree that the s e l f -

enforcement mechanism within the Act is being exercised. Many o f these
su its , however, were the result o f technical v io la tio n s bein*> committed
and were nor. in itia te d s o le ly on the basis o f a v io la t io n o f the Act,
Sut as s part o f a bankruptcy or other c o ll e c t i o n proceeding; thus,
i t would appear that the thrust o f c i v i l actions brought under the Act
has not been d irected to improving those pertinent disclosu re items
vhich a s s is t consumers in shopping for c r e d it .

The Board shares the

concern o f Congress that these issues concerning compliance with the
Truth in Lending Act and other consumer-oriented regulations must be
resolved.
The Board sin cerely appreciates the opportunity to come
before this Committee and to be o f assistance to the Committee in it s
oversight r e s p o n s i b i lit ie s .
questions you may have.

I would be more than glad to answer any

Thank you Mr. Chairman.

OSCA
School for Examiners
First Session
Curriculum

Week of September 27, 1976
p
e
i
o
d

Monday
September 27

Time

Tuesday
September 28

Wednesday
September 29

Thursday
September 30

Introductory comments Fair Credit Billing
1

2

9:00
9:55

Gov. Jackson
Janet Hart

10:10
11:00

Reg. B
(present rules)
N. Butler

3

11:05
12:00

Reg. B (cont.)
and Fair Credit
Reporting
A. Geary

Municipal Securities
Dealer Bank Activities
*
alenn Loney
N. Shupeck
MSD (cont.)
*
Fair Credit Practices
Examination Procedures s Examination Proc.
E. Schmelzer and
B. Silver
M. Schoenfeld
Reg. B. (proposed)
and Title VIII

Truth in' Lending
4

1:00
1:55

E. Schmelzer

TIL (cont.)
5

6

7

2:00
2:55

3:10
4:00

4:05
5:00




M. Stewart
Consumer Education
_ C. Aldrixh _
Consumer Complaint
Procedures-K. Casey
Fair Credit Reporting 5
M.

English

C

R. Plows

RESPA and
Fair Credit Practices
Unfair and Deceptive
Case Study
Practices
Committee Report
M. Medvin

Panel - EC0A staff
Examination
techniques for
dis co very.of“
*
discrimination

ECOA Case Study
(cont.^ include
class discussion

11:05 - 11:35
Reg. 2 - A. Raiken
11:36 - 12:00
Flood Ins. - R. Insley

*

R. Lacoste

N. Butler
Reg.

Reg. U

ECOA Case Study
Committee Report

FCP Case Study
(cont.) include
class discussion
Reg* G

Compliance
Reporting
including:
Uniform
Compliance
Report;

**

M. Schoenfeld
Consumer Leasing
L. Barr

Regs. T and X
R. Lacoste

**

Reporting
Standards;
Commonly
Found
Violations

Fri Aay
October 1
Examiners 1
Res pons ibilities;
FRBank Authority;
Enforcement Actions
Critique

Summary
Future Prospects
Presentation of
Certificates
J. Kluckman
* FCP Case Study
Group consisting
of students not
involved in SCR
programs will
meet in separate
classroom.
ECOA Case Study
Group consisting
of students not
involved in SCR
programs will
meet in separate
classroom.

FR 410—Page 5(1)—Rev. 5-63
Examination as oi the close of business .....................

District Number

...........................................

Total Deposits $ .................................. ................

(Name oi bank)

(C ity)

(County)

(S tate )

REGULATION Z—TRUTH IN LENDING
1. Were test checks made of the bank's forms and procedures for disclosure?
in detail and indicate management's plans for correction.

If any irregularities were disclosed, discuss

2. Has bank established effective procedures to detect defects in disclosures on dealer paper which it proposes to acquire?
U not or if there are defects, discuss in detail and indicate management plans to correct existing procedures or establish new ones.

3. Were test checks made of the bank's advertising?
posed plans to prevent future occurrences.

If any irregularities were disclosed, discuss in detail and indicate pro­

4 If it appears tht?- rescission rights are not being properly observed on both direct and indirect paper, discuss in detail.