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For release on deliver y 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.
