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For Release Upon Delivery




Statement by Philip E. Coldwell
Member
Board of Governors
of the Federal Reserve System

Before the Subcommittee on Consumer Affairs
of the House Committee on Banking,
Finance and Urban Affairs

Washington, D.C.

September 6, 1978

I am pleased to appear before this Subcommittee
to present the Board's views on the need for simplification
of the Truth in Lending Act, which we strongly support.
The b a s i c p u r p o s e o f T r u t h i n L e n d i n g
vide

t h e c ons ume r w i t h

a particular
benefits

credit

information

that

transaction w ill

by knowi ng t h e a d d i t i o n a l

indicates

cost.

co st of

rather

t h a n c a s h and i s

able

costs,

thus m aintaining

a competitive

is

to pro­
how much

The c o n s u me r
using

credit

t o c o mpa r e and s h o p c r e d i t
discipline

in c r e d i t

pricing.

We believe that Truth in Lending has made great
progress toward accomplishing its purpose.

The Board

commissioned a survey of approximately 2500 households in
July 1977 to determine whether consumers have benefited
from Truth in Lending.

Partial results of the survey were

presented in the Board's 1977 Annual Report to Congress on
the Truth in Lending Act.

Those results demonstrate that

there has been a significant increase since the act was
passed in consumers' awareness of the annual percentage
rates charged in consumer credit transactions.

Many more

consumers are now aware of the costs involved in borrowing
money and purchasing goods and services on credit.
The Board believes, however, that a simplified
version of the Truth in Lending Act would operate even more
effectively, would result in even greater awareness of cred
costs, and would reduce the costs incurred by creditors in




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achieving compliance with the act's requirements.

Thus,

the Board believes that simplified Truth in Lending
requirements would better serve the consumer.
Simplification, as recommended by the Board,
should result in the improved delivery of information to
the consumer.

One of the principal improvements would be

achieved by reducing the number of items on which the
consumer is asked to focus in reviewing a Truth in Lending
statement.
The complexity of the many disclosures required
under present law is hampering full accomplishment of the
purpose of the statute to inform consumers about credit
costs. The July 1977 survey indicates that consumers do
not read their disclosure statements very carefully.

They

apparently are neither concerned with many of the items
presently disclosed nor are many of the items regarded as
particularly useful.

But they do rank highly information

such as the annual percentage rate, the finance charge,
and the size of monthly payments.

Survey results indicate,

however, less consumer interest in charges imposed for late
payment, rebate methods used in the event of prepayment,
and descriptions of required security interests.
In the Board's view, improved delivery of disclo­
sures also requires that Truth in Lending information be
segregated from other contractual provisions and that it
be presented in simple terms.




At the present time, the

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consumer often receives lengthy and complex Truth in Lending
disclosures interspersed among contractual provisions and
State law disclosures.

We believe that Truth in Lending

cannot be truly effective when the consumer is presented
with discouragingly detailed and complicated disclosures.
Overwhelming the consumer cannot result in a better informed,
credit conscious consumer; rather, it will result in a con­
sumer who will often ignore all disclosures and not attempt
to digest the information provided.
The information provided in accordance with a
simplified Truth in Lending statute would focus on those
items necessary for consumers to know the cost of credit.
Simplification would not deny needed information.

If Truth

in Lending continues to be regarded as a vehicle for furnish­
ing the consumer with all information relevant to a credit
transaction,

it will do no more than repeat large portions of

the credit contract, rather than extract and highlight those
terms considered most useful in shopping for credit and com­
paring its cost.
There are terms other than credit cost terms that
consumers need to know when entering into credit transactions.
However, most of those terms are included in the underlying
contract.

Efforts are being made in several States -- for

example, California and New York -- to require that consumer
contracts be written in simplified, understandable language
to ensure that those terms not considered relevant to the




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cost of credit are presented to the consumer in a coherent
manner.
The present lengthy and complex disclosures that
overwhelm and confuse the consumer are not the only reason
for simplification of the act.

Since Truth in Lending's

passage approximately ten years ago, a great deal has been
learned.

The practical application of its requirements to

individual credit programs has often proven to be a diffi­
cult task.

These difficulties have arisen in two basic

contexts.
First, several of the statutory directives,
although they appear to be simple and straightforward,
have proven to be vague and imprecise in their application.
For example, both the Board's staff and the courts
have had difficulty in interpreting the broad statutory
requirement that default, delinquency, or similar charges
payable in the event of late payment be disclosed.

The

staff and the courts are comfortable in applying this statu­
tory provision to a flat $3 charge imposed when a consumer
is ten days late in making a scheduled payment.

However,

they have not been as sure about requiring disclosure that
interest will continue to accrue in the event of late pay­
ment in a simple interest loan, where accrual of interest
is an inherent term of the loan.
examples.




This is only one of many

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Second, the Truth in Lending Act also has proven
to be difficult to apply to the wide variety of new credit
programs developed over the past ten years.
The Board and its staff, in trying to be respon­
sive to questions about the day-to-day application of the
act's requirements, have published approximately 1300
informal staff interpretations, 150 official staff inter­
pretations, and 55 Board interpretations.

Nor have we been

alone in our efforts to provide guidance with regard to Truth
in Lending; the courts, too, have issued numerous opinions.
A large amount of Truth in Lending litigation con­
tinues to burden the courts.

Unfortunately, compliance with

a specific Truth in Lending requirement often means different
things to different courts.

Courts in one district may inter­

pret a statutory requirement differently from those in another.
Many creditors operating outside local areas have had to design
different disclosure statements for different judicial districts
or circuits.

Court opinions also occasionally differ from

Board or staff opinions on the same issue.

The consistent,

uniform interpretation of the act has become almost an impossi­
bility.

Even though creditors may make every effort to comply

with the statute's requirements, multitudinous interpretations
of broad statutory language make it impossible for them to know
that their disclosure statements comply fully with the act's
provisions.




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Simplification, aside from its desirable focus
on the most important aspects of credit costs, also should
result in a savings to consumers.

Creditors' costs in

complying with Truth in Lending appear to be substantial
and must necessarily be borne in large measure by the con­
sumer. Significant costs are incurred in the constant review
and redesigning of disclosure forms in order to incorporate
statutory amendments, Board and staff interpretations, judi­
cial activity, and State law considerations.

The fact that

civil liability attaches to violations that are highly
technical in nature compels creditors to engage in frequent
and costly review procedures.

Simplification,

in clarifying

disclosure responsibilities, should reduce the possibility
of inadvertent violations and aid in reducing creditors'
compliance costs, thus serving to keep consumers' credit
costs down.
The Federal Paperwork Commission indicated in
its July 29, 1977, report on Consumer Credit Protection
that creditors would save approximately $600 million if
the Board approved creditors' forms for one-year periods.
The Commission believed that the use of a form that would
not need revision for a year "would save creditors the
formidable costs of printing and reprinting forms and,
further, would serve to provide some measure of protection
to creditors from lawsuits resulting from differences in
interpretation rather than intent."




Although approval

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of individual creditors' forms .-¡ay not be feasible, the Board
could, under a simplified statute, prepare model forms that
would provide clear guidance to creditors.
The Board believes that the simplification of Truth
in Lending not only will result in a savings to creditors and,
thus, in a savings to consumers, but also will improve the
focus on credit cost terms and facilitate earlier disclosure.
These latter improvements will better ensure that consumers
have the opportunity to review and evaluate the information
provided.

This, in turn, will facilitate comparison credit

shopping.
We urge the Congress to enact promptly a simplified
Truth in Lending statute that is clear and concise in its
requirements.