STATEMENT OF LEWIS H. GOLDFARB, ACTING ASSISTANT DIRECTOR FOR SPECIAL STATUTES, FEDERAL TRADE COMMISSION, ACCOMPANIED BY LEE PEELER

Senator RIEGLE. And now we will call Mr. Lewis Goldfarb, Acting Assistant Director for Special Statutes, Federal Trade Commission, if he will come forward.

Mr. Goldfarb, we have your statement before us here. It is a lengthy one. We appreciate having it and appreciate the care that has gone into putting it together. I would like to ask you if in the interest of time you might be of a mind to do as our last witness did and submit your statement in its entirety for the record and perhaps give us a narrative summary of the critical points that you want to emphasize.

Mr. GOLDFARB. Mr. Chairman, I have an abbreviated version of the statement which the Commission has authorized.

Senator RIEGLE. Fine. Why don't you proceed then.

Mr. GOLDFARB. My name is Lewis Goldfarb, Acting Assistant Director for Special Statutes of the Federal Trade Commission's Bureau of Consumer Protection. With me is Mr. Lee Peeler, an attorney in our division, who is primarily responsible for truth-in-lending enforce

ment.

I am pleased to appear here this morning to testify on the pending proposal to simplify the Truth-in-Lending Act both because the FTC has jurisdiction over the vast majority of creditors and because of the significant consumer benefits that have been and are being achieved by this important statute.

The act, which has been in effect for 8 years, is one of the most ambitious and far-reaching Federal consumer protection statutes ever passed. It has established a national standard of affirmative disclosure of the terms and conditions of credit contracts which, with one sweep, has banished many of the fraudulent and deceptive credit practices which have plagued consumers for years. It has transferred from the consumer to the creditor responsibility for translating the technical jargon of standard form credit contract clauses and shifted the burden of inaccuracies and omissions from the consumer to the creditor.

It is this second aspect of act, the lack of disclosure of contract terms. which is being most strongly attacked by some of the simplification proposals which you are considering today and which the Commission believes is worthy of your continued support.

As your previous hearings concerning the act have shown, the Truthin-Lending Act has not been perfectly implemented by those agencies, including the Federal Trade Commission, which are charged with doing so. In reassessing the importance of this statute, however, you must bear in mind that given the task which its original proponents sought to achieve there can be little doubt that any statutory scheme. would fall short.

Most of the major shortcomings were in fact clearly foreseeable at the time it was passed. These included the problem of determining whether State disclosure statutes would be preempted by the Federal act and the problems which would be caused by attempting to have a single disclosure regulation apply to the innumerable forms credit transactions assume under the many State statutes which regulate their content.

Even the problems created by private litigation over so-called technical violations were foreseeable and I submit, were vastly preferable to the alternative which would have left aggrieved consumers without meaningful right to redress. Though there have been attempts to circumscribe private causes of action, private litigation has been the single most effective enforcement tool under the act and has established significant protections for consumers.

Federal regulatory efforts, no matter how highly motivated, simply cannot assure the same level of compliance as the threat of civil liability.

As Governor Jackson stated earlier, truth-in-lending simplification means something different to each individual depending on his own viewpoint. For creditors, it means fewer disclosure obligations and less exposure to civil liability. For consumers, it means more meaningful and usable information, even if that requires a more complicated regulation. For the FTC, it means simplification of our present truthin-lending enforcement proceedings.

In the past, the Commission's enforcement of truth in lending has been largely accomplished through the use of traditional cease and desist orders. Under this mechanism, litigation may proceed for at least 1 to 3 years before a final order is entered in a contested case. The effect of such an order is generally to require the respondent to stop vioalting the Truth-in-Lending Act in the future. While this procedure may make sense when the Commission is establishing a new concept of unfairness or deception under the broad statutory standard of section 5 of the FTC Act, it makes little sense if we are enforcing a statute which is as specific in its demands as the Truth-in-Lending Act. Indeed, Congress has provided in the Magnuson-Moss Act that if the Commission spells out specific unfair or deceptive acts or practices in a trade regulation rule, it may file a complaint in Federal district. court seeking consumer redress or civil penalties without engaging in lengthy administrative sparring rounds. Without an amendment similar to that contained in section 3 of S. 1653, which I should note Congress saw fit to include in the Equal Credit Opportunity Act, the Commission will continue to have less power to enforce this congressional statute than it has to enforce its own trade regulation rules.

S. 1653 contains three other sections which are directly responsive to past enforcement problems which the Commission has experienced, particularly with cases involving failure to give or the backdating of the right of rescission. Section 4 clarifies an assignee's liability for a violation which he can determine from the face of the instrument or other documents assigned and clarifies the assignees' liability in situations in which no disclosures were made or where they were clearly backdated. Finally, this section clarifies the assignee is not free from liability for recission.

The majority of the present simplification proposals presently address only the problems of making disclosure in other than open end credits. However, at the same time this reexamination of closed end credit has taken place, many creditors within our jurisdiction are circumventing the disclosure requirements for closed end credit by using what has become known as spurious open end credit plans.

There is a continuing significant trend toward the use of open end credit disclosures in large ticket transactions which involve essentially

one-time extensions of credit. For example, door-to-door encyclopedia. sellers are peddling $400 and $500 sets and giving only open ended disclosures. Sellers of hospital beds are using open ended disclosures. The Commission has entered a consent order with a piano and organ dealer giving only open ended disclosures.

In these transactions, the consumer receives disclosures of only the annual percentage rate and monthly payment and is deprived of information such as the finance charge, total of payments and number of payments, information deemed necessary by even the most conservative simplification proposals that are before you.

Rather than review the problem consumers are experiencing with credit life today, I woud like to dramatize the point by referring to a loan company supervisor's instructions to his branch managers. This memorandum instructs loan officers to include insurance coverage automatically in every loan and to remove it only if the customer insists on having it removed. The instructions go on to state that a sale of credit life insurance for less than 98 percent of the office's customers will be unacceptable as will the sale of accident and health insurance of less than 90 percent.

To remedy this situation, the Commission has repeatedly supported inclusion of credit life insurance charges in the finance charges of the transaction since this would provide the consumer with an adequate reflection of the cost of the loan and induce price competition in the sale of credit life insurance.

The core issue which we see in the present simplication movement is that of civil liability for technical violations of the act. As indicated earlier, we believe the high level of compliance with the act is primarily due to the threat of civil liability. There appears to be no reason to continue this for violations of form rather than substance. The separation of material from technical violations is no easy task, however. This is perhaps the most important reason why the original drafters of the statute did not do so.

The point to be made here is that before a section limiting civil liability is passed, a thorough review of all case law and administered enforcement actions should be undertaken and those actions which deal with material violations should be listed in the legislative history of the new section as examples of material violations.

In the interest of time, I will dispense with the remainder of the testimony and simply state that the Commission strongly supports the posting requirements contained in Senator Proxmire's bill and opposes the elimination of the present requirements for disclosure of default charges and security interests.

Senator RIEGLE. Thank you very much for your testimony. As I said earlier, we will make your full presentation part of the record. [Complete statement of Lewis Goldfarb follows:]

STATEMENT OF FEDERAL TRADE COMMISSION BY LEWIS H. GOLDFARB, ACTING ASSISTANT DIRECTOR FOR SPECIAL STATUTES

Good morning, my name is Lewis H. Goldfarb and I am the Acting Assistant Director for Special Statutes of the Federal Trade Commission's Bureau of Consumer Protection. I am happy to appear before you to testify on the pending proposals to simplify the provisions of the Truth in Lending Act both because the Federal Trade Commission has jurisdiction of the vast majority of creditors who must comply with this statute and because of the significant consumer benefits

that have been and are being achieved by this important consumer protection statute.

The act, which has been in effect for 8 years, is one of the most ambitious and far reaching Federal consumer protection statutes ever passed. An idea that was more than 10 years in the making, the act sought to harness the forces of competition to insure that they worked to the benefit of consumers. It created a uniform method of making disclosures so that consumers could compare the costs and terms of credit from disparate sources. Equally important it established a national standard of affirmative disclosure of the terms and conditions of credit contracts which, with one sweep, banished many of the fraudulent and deceptive credit practices which had plagued consumers for years.' The act created on the part of the American consumer a legal right to full and accurate disclosure of the terms of their credit transactions. It transferred from the consumer to the creditor the responsibility for translating the technical jargon of standard form credit contract clauses and shifted the burden for inaccuracies and omissions from the consumer to the creditor. It is this second aspect of the act, the disclosure of terms as well as cost, which is being most strongly attacked by some simplification proposals which you are considering today and which be believe is worthy of your continued support.

As your previous hearings and studies concerning the act have shown, the Truth in Lending Act has not been perfectly implemented by those agencies, including the Federal Trade Commission, which were charged with doing so. In reassessing the importance of this statute, however, you must bear in mind that given the tasks which its original proponents set out to achieve, there could be little doubt that any statutory scheme would fall short. Most of the major shortcomings of the act were in fact clearly foreseeable at the time it was passed. These included the problem of determining whether State disclosures statutes would be preempted by the Federal act and the problems which have been caused by attempting to have a single disclosure regulation apply to the almost innumerable forms that credit transactions assume under the many State statutes which regulate their content. Even the problems which have been created by private litigation over so-called "technical" violations of the act were foreseeable and, I submit, were vastly preferable to the alternative which would have left aggrieved consumers without a meaningful right to redress. Although there have still been attempts to circumscribe private causes of action,2 private litigation has been the single most effective enforcement tool under the act and has established significant principles under the act. Federal regulatory efforts, no matter how highly motivated, simply cannot ensure the same level of compliance as the threat of civil liability. For example, prior commission surveys have found that substantial compliance with the act's point of sale disclosure requirements is fairly high. However, our enforcement experience is that compliance with the less complex credit advertising provisions is much lower, a result which can be attributed to the lack of any private right of action under those provisions. This is not to say that a reevaluation of the last 8 years experience under the present act is not necessary or that it will not be helpful. It would be remarkable if this accumulated experience could not be used to improve the act both by reducing compliance problems experienced by creditors and increasing the amount

1 See, e.g., Ford Motor Co. v. Federal Trade Commission, 120 F. 2d 175 (6th Cir. 1941), cert. denied, 314 U.S. 668 (1941); General Motors Co. v. Federal Trade Commission 114 F. 2d 33 (2d Cir. 1940) cert. denied, 312 U.S. 682 (1941) (advertising of "add on" interest rates). Compare § 226.101 of Regulation Z. See also Tashof v. Federal Trade Commission 437 F. 2d 707, 711-12 (D.C. Cir. 1970) (failure to disclose an annual or monthly rate of interest, the dollar amount of the finance charge or the amount of the total obligation). In the Matter of Hollywood Credit Clothing, 77 F.T.C. 1594, 1605 (D. 8796, 1970) (failure to provide customers copies of Consolidated Mortgage Company, 73 F.T.C. 376 (D. 8723, 1968) (advertising of credit terms which are unavailable).

See e.g. Allen v. Beneficial Finance, 531 F. 2d 797 (7th Cir. 1976) cert. denied (failure to make required disclosures in meaningful sequence); Ives v. W. T. Grant, 522 F. 2d 749, 759-60 (2d Cir. 1975) (failure to refund unearned insurance premiums upon refinancing creates a finance charge which must be disclosed under the Act).

2 See e.g. Sosa v. Fite, 465 F. 2d 1227, 1228 (5th Cir., 1972) (Reversing district court's ruling that the consumer's transaction was exempt from Truth in Lending because the State of Texas has disclosure requirements similar to the Act's and provides adequate enforcement for them.

F.T.C. Report on Surveys of Creditor Compliance With The Truth in Lending Act (1971). This survey addressed only the question of whether the disclosure statements were in the correct format. It did not determine whether, for example, disclosures were actually being made prior to consummation, whether they were being backdated or whether credit insurance was properly submitted.

of usable information which is provided to consumers. Similarly it must be realized that we are now working with a mature statute that does not face the same massive implementation problems that the act originally did. Many provisions which were initially needed to ensure compliance could now be deleted or modified.

As stated earlier, I believe that the act has worked well although there are clearly areas in which it could be improved. Studies by the National Commission on Consumer Finance have validated the act's effectiveness in stimulating price competition among most creditors.5 Later studies have indicated that in those markets in which the National Commission researchers failed to find significant impact, the results may have been reversed if other tests were used. Still other studies have confirmed that truth in lending did not have the disasterous effect predicted for it by some members of the consumer credit industry' and that creditors have generally come to perceive the Truth in Lending Act to be the Federal statute most necessary to protect interests of all concerned with consumer credit. Finally, when all is said and done, we believe that one of the major impacts of the act has been to establish a legal "right to know" on the part of credit customers, which they have come to rely on.

It is with this background that you are now considering three separate bills to take changes in the Truth in Lending Act. Rather than comment in detail on the provisions of each bill we will focus our remarks on only a few of the issues which are most important from our viewpoint.

FTC ENFORCEMENT POWERS

As one staff member of the Federal Reserve Board perceptively told the FRB's Consumer Advisory Council, truth in lending simplification means something different to each individual depending on his own viewpoint. For creditors, it means fewer disclosure obligations and less exposure to civil liability. For consumers it means more meaningful and usable information even if that requires a more complicated regulation. For the Federal Trade Commission it means simplification of our present truth in lending enforcement proceedings. In the past, the Commission's enforcement of truth in lending has been largely accomplished through the use of traditional cease and desist orders. Under this mechanism, litigation may proceed for as many as three years, but almost never for less than a year before a final order is entered in a contested case. The effect of such an order is generally to require the respondent to stop violating the Truth in Lending Act in the future. While this procedure may make sense when the Commission is establishing a new concept of unfairness or deception under the board statutory standard of section 5 of the Federal Trade Commission Act, it makes little sense when we are enforcing a statute which is as specific in its demands as the Truth in Lending Act.

Indeed, Congress has provided that if the commission spells out specific unfair or deceptive acts or practices in a trade regulation rule, it may file a complaint in federal district court seeking consumer redress or civil penalties without engaging in a lengthy administrative sparring match. Without an amendment similar to that contained in section 3 of S. 1653, which, I should note, Congress saw fit to include in the equal credit opportunity act, the commission will continue to have less power to enforce this congressional statute than it has to enforce its own trade regulation rules. Moreover, I would emphasize that the enforcement mechanism which would be created by section 3 of S. 1653 will not raise the possibility of undue sanctions for technical violations which has troubled the courts in truth in lending class action cases. The amended federal trade commission act specifically instructs the courts, in imposing civil penalties, to consider: (a) the degree of the respondent's culpability for the violation;

5 Report of the National Commission on Consumer Finance, Consumer Credit in the United States 175-183 (1972).

For example, a more recent analysis concludes that lower income consumers are more concerned with the amount of the monthly payment and the dollar amount of the finance charge than the Annual Percentage Rate and that such borrowers can use this information to shop for the most favorable credit transaction. Durkin Consumer Awareness of Credit Terms Review and New Evidence, 48 J. of Bus. 253, 258-63 (1975). See also, Brandt, Day and Deutsher, Information Disclosure and Consumer Credit Knowledge: A Longitudinal Analysis. J. of Cons. Affairs 15. 23 (197 ).

Starkweather. Effect of Truth in Lending Legislation on Finance Companies, J. of Consumer Credit Management 82 (Winter 1977).

Yankelovich. A Qualitative Evaluation of the Impact of the Holder in Due Course Rule on Lending Institutions 50-52 (Prepared for the Federal Trade Commission, August 1976).