Truth in Lending Simplification
| Jurisdiction | United States,Federal |
| Citation | Vol. 9 No. 11 Pg. 2297 |
| Pages | 2297 |
| Publication year | 1980 |
1980, November, Pg. 2297. Truth in Lending Simplification
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Consumers have a dazzling variety of credit available to them. However, do they always shop for the best credit bargain?
Feeling that credit disclosures would assist this shopping process, Congress enacted the Consumer Credit Protection Act on May 29, 1968.(fn1) The avowed legislative purpose was ". . . to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit. . . ."(fn2) This article considers past and present legislative efforts to accomplish this goal.
Following the mandate of the original Truth in Lending Act,(fn3) the Federal Reserve Board (Board) promulgated Regulation Z.(fn4) This important regulation became effective on July 1, 1969, and unwittingly gave birth to a decade of misunderstanding and frustration. During this decade, more than 14,000 cases were filed involving major Regulation Z issues.(fn5) In addition, countless Regulation Z controversies were litigated in the form of counterclaims filed by consumers in creditor-debtor cases.
Not to be outdone by private litigants, the Board has issued sixty-five official interpretations and approximately 1,500 published staff letters under Regulation Z since 1969.(fn6) Truth in Lending law has become a recognized field of specialty, and thousands of lawyers labor daily to keep their creditor clients in compliance with this prolific body of law.
The judiciary has added to the mounting confusion over the years with decisions inventing new disclosure requirements(fn7) or relying on overly technical interpretations of the Regulation.(fn8) Moreover, some court decisions actually overrule or conflict with the Board's official interpretations under the Regulation.(fn9)
While not every Regulation Z violation turns into a civil action, agencies regulating the various financial institutions fill the gap by enforcing compliance with the Act and the Regulation. When the Board reported a compliance failure rate to Congress in 1978 of more than 80 percent of the financial institutions which were examined,(fn10) it was generally concluded that something had to be done. The most immediate answer came in the form of uniform enforcement guidelines adopted by the agencies.(fn11) These guidelines became effective on January 4, 1979, and required financial institutions to make refunds to consumers who were overcharged as a result of various disclosure violations.
When the agencies began issuing enforcement
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orders as required by the guidelines for overcharge violations in transactions going back to October 28, 1974, the American Bankers Association leaped to the rescue and filed suit challenging the authority of the agencies under the guidelines.(fn12) The extent of the Association's "victory" in that litigation has been hotly debated. Nevertheless, the agencies suspended the guidelines and ultimately proposed revised guidelines containing increased tolerance levels and greater flexibility.(fn13)
Litigation continued to flourish, and creditors subject to Truth in Lending were becoming keenly aware of the significant civil penalties provided for by the Act.(fn14) Moreover, examiner training programs were resulting in more penetrating and sophisticated consumer compliance examinations. It is no wonder that bankers and their lawyers began experiencing "the Truth in Lending blues."
As the mood for reform continued to build in banking circles, Congress and the Board were moving to bring about some sort of simplification effort. In 1976, hearings were conducted before Senator Proxmire's Subcommittee on Consumer Affairs. Jonathan Landers, a professor of law at the University of Illinois, testified at those hearings. Professor Landers had analyzed the Truth in Lending Act as a fellow with the American Bar Association and his published findings had sparked considerable interest.(fn15) Essentially, he had catalogued the abuses of the Act and the frivolous litigation it had spawned.
Heeding this summons to act, Senator Proxmire and others introduced a reform bill in the closing days of the 94th Congress. The 95th Congress was better able to deal with the questions and Senator Proxmire's Truth in Lending Simplification bill(fn16) along with other reform bills were introduced. Hearings on all of the bills were held in July of 1977, and Dr. Steven Permut of Yale University fascinated the Banking Committee with his notable "information overload" theory.(fn17)
The Proxmire bill was amended by representatives of various interest groups, and it appeared that compromise would be impossible. The bill finally reached the Senate floor and was later added to the Financial Institutions Regulatory and Interest Rate Control Act (FIRA) in October of 1978. However, it was subsequently dropped as a compromise to assure passage of FIRA.
The following year proved to be a success. An identical bill (S.108) was introduced and passed by the Senate on May 10, 1979. This bill contained express authority for the agencies to order reimbursement in cases where an overcharge had occurred as a result of certain misdisclosures. The enforcement provisions required redrafting, however, because the language was similar to that contained in the original reimbursement guidelines promulgated by the agencies on January 4, 1979.(fn18) These guidelines had proved unworkable and had been suspended later that year.
The agencies proposed revised guidelines on October 19, 1979.(fn19) S. 108 was amended essentially to codify these revised guidelines, and an additional amendment was added to assure that this portion of the bill would become effective upon the President's signature.
After subsequent skirmishes, certain other amendments were obtained, requiring additional disclosures along with the right to receive optional disclosure itemizations.(fn20) The conference report was ultimately accepted, and the bill cleared both houses of Congress. It was signed into law on March 31, 1980.
The Board is empowered to issue regulations and interpretations under the Act and is specifically required to issue a revised
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Regulation Z no later than March 31, 1981. Creditors will have the option of complying with the new regulation as soon as it is issued in final form. However, it is important to note that compliance will not be mandatory until March 31, 1982.(fn21)
Creditors will now have at least six months under the Act to comply with any new or amended Board regulation or interpretation.(fn22) This should certainly be a welcome change for creditors who have previously experienced situations in which thousands of printed forms are rendered instantly obsolete by a Board interpretation.
The Board must issue model disclosure forms and clauses for use by creditors, and "readily understandable language" must be employed by the Board. A creditor using the appropriate model disclosures will be deemed in compliance with the non-numerical provisions of the Act.(fn23)
On May 5, 1980, the Board published for comment a proposed revision of Regulation Z.(fn24) The response from the credit community was enormous, and staff members doubt that a second draft version will soon be available.
The weight of Board pronouncements was recently given a substantial boost by the Supreme Court in Ford Motor Credit Co. v. Milhollin.(fn25) Although the Milhollin decision was decided approximately five weeks before the Simplification Act was signed into law, it will undoubtedly be used to buttress a less than clear Congressional intent to give the Board near plenary authority in Regulation Z matters. The Milhollin decision, while laying to rest the troublesome question of whether an acceleration clause must be disclosed as a default charge, more importantly announces a new standard for the consideration of Board regulations. The
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court states that Board regulations should be controlling unless "demonstrably irrational," and that:
It will be interesting to observe the Board's reaction to this new grant of power.. . . (D)eference to the Federal Reserve is compelled by necessity; a court that tries to chart a true course to the Act's purpose embarks upon a voyage without a compass when it disregards the agency's views.(fn26)
Precise disclosure of the annual perecentage rate (APR) is not required. The old Act provided that the APR could be rounded to the nearest quarter of one percent.(fn27) Unfortunately, the agencies interpreted this to require disclosure of an amount which is the nearest quarter of one percent to the correct disclosure amount (e.g., 12.3 percent must be rounded off to 12.25 percent instead of 12.05 percent or 12.55 percent). The new APR tolerance is one-eighth of one percent more or less than the actual rate. Alternatively, rounding to the nearest one-quarter of one percent will suffice,(fn28)
The Act also injects needed flexibility by permitting the Board to allow greater tolerance levels for transactions...
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