CONSUMERS UNION, Washington, D.C., July 18, 1977. Hon. DONALD RIEGLE, DEAR MR. CHAIRMAN: I am authorized to state that Consumer Federation of America joins in my prepared staement submitted to the Subcommittee on July 12, 1977, on Truth In Lending Simplification and Reform. If possible, would you please enter this letter into the record so that CFA's position on this matter will be included. Sincerely, MARK SILBERGELD, Director, Washington Office. Senator RIEGLE. Mr. Boyle, are you prepared to go next? STATEMENT OF JAMES BOYLE, EXECUTIVE DIRECTOR, Mr. BOYLE. Mr. Chairman, I'm James Boyle. I'm the executive director of the Texas Consumer Association which is an association which represents hundreds of individual consumers across the State of Texas. I do want to begin my remarks by congratulating the committee on its work in attempting to protect the consumers. Both the United States and our Texas consumers are most appreciative. The comments that we make here that might be somewhat critical are made with great respect for members of this committee. Basically, we are against any simplification or we are for simplification if it means clarification in putting terms into readily understood English. We are against disclosure elimination and feel that it would have a disastrous effect on individual consumers and would wreck the current truth in lending law and would permit great fraud and deception to occur, and I will go into greater detail later. We have heard some language in kind of "1984" terminology and you remember "1984" where war is peace and slavery is freedom and ignorance is strength. Now we are told more is less and less is more. Let's make no mistake about it. With the elimination of many of the disclosure items here, less is definitely less. When you take away the cash price or the fees charged for registration or documentary fees or for the fees for security insurance alone or for insurance premiums, less is definitely less and to the disadvantage of the individual consumer. The committee should begin-and I'm sure it has-to carefully examine the validity for disclosure elimination. Several reasons are given for eliminating disclosure. First, it is said that because of all the disclosures we have had great length in our contracts and they have become extremely difficult to read. I suggest that much of this length is due to archaic boilerplate language that creditors have continued to use since the days of the law merchant. One boilerplate clause after another is continued. You see the old Citibank of New York form over there and I'm sure it's filled with all kind of boilerplate language that's been continued. Our experience has been, Senator, that the creditors who have screamed the loudest about having to make disclosures and the fact. that the disclosures have lengthened their form have been the same creditors who have continued to this archaic and useless boilerplate. Now even with the present disclosure requirements Citibank—as you can see on the right-the contract is a tremendous improvement over the one on the left. There they have attempted to comply with all the truth in lending disclosure requirements in simple English. I have seen other contracts that are even simpler than that. I believe that even with the current disclosure requirements the contracts can be made readable and understandable to the ordinary consumer. Let's talk about the second reason. The first reason is all this gobbledygook which is lengthening contracts. Again, I think you will find the creditors that complain about it are the same creditors that continue to use this useless boilerplate. They just can't have it both ways. Are they really interested in simplification and, if so, why don't they get rid of the boilerplate? Let's talk about the second reason, and that is the so-called social scientists term of information overload. The theory is consumers can only handle five or six bits of information. That may or may not be true. I don't know. I don't think we have any studies that would indicate for sure that it is true. But let's assume that is true. If that is true, then we are dealing with the present state of things as they are now. The present state is that consumer education is something that is just beginning in the United States. In Texas in the last 4 years we finally have an optional course on consumer education where high school students are being taught how to shop for credit. This is the first time. Americans in general have little or no information as to how to use credit terminology. Now the question is, do we want to pass legislation at this point which would eliminate terminology that-maybe consumers would become more sophisticated as consumer education courses improve and spread throughout high schools and elementary schools and community colleges across the United States. There is a tremendous movement in this area and there's more and more money being made available for this purpose. So I suggest that when we get greater v sophistication and consumer education spreads throughout the United States that instead of being able to effectively utilize five or six bits of information we will find consumers are better able to use much more information. But second, suppose consumers in fact were only able to use one term. I think you will find that the very unsophisticated consumer going to buy an automobile may really only effectively utilize one term-how much does it cost per month? Now let's assume that that's the only term that's being effectively utilized. Does that mean and is that an argument for eliminating the annual percentage rate or eliminating the finance charge or the other disclosures because that individual consumer is only effectively utilizing that one term? Or let's talk about Magnuson and Moss. Suppose consumers-suppose we do a study and find they are not reading their warranties. Does that mean we should eliminate the warranties and the warranty requirements of Magnuson and Moss? I don't think anybody would argue for hat. So the kind of test of whether it's being effectively utilized may not be the problem. The problem may be in the marketplace or consumer education where we haven't effectively educated consumers to use this information which is very necessary for the consumer, or in the case of truth in lending a very serious problem might be that of the timing of the disclosures. There should be a greater time between when the disclosures are given and when the transaction is consummated. So there are a number of things we could look at in this area. Now information overload really only goes to one question and it's only responsive to one question. That is, the information being given at the time the transaction is being consummated and how effectively it's being utilized. That's a one-purpose approach to truth in lending and it's often cited by the courts as the only approach. That is not and it was not when truth in lending was originally passed. There was another theory for truth in lending when it passed. That is, this information should be given so that fraud and deception be prevented in credit transactions so that the charges— when you're buying an automobile for example, the registration fee or the documentary fee or the charges for insurance would be laid out in public. What we found generally is when these charges are hidden there are great overcharges for registration fees and for documentary fees. An unscrupulous creditor who doesn't disclose these things is going to engage in that conduct because it's so difficult to ferret out. The creditor who is somewhat unscrupulous who has to disclose this, is less likely to put his dirty linen out to wash-that is, to engage in this kind of fraud and deception, because it's so much easier to tell. These disclosures are extremely important in preventing fraud and deception in credit transactions particularly those that relate to the cash price, the fees charged for registration or documentary fees or insurance premiums. These are crucial disclosures in terms of figuring the amount that went into the amount financed whether in fact some of that money should have gone into the finance charge instead of the amount financed.' I have had dealers who have told me they have made as much as $30,000 in these charges and a dealer recently told me other dealers were making more than that. I think there's a real danger here when we eliminate these cost disclosures. Now if we just analyze one question-that is, the question of disclosures at the time of consummation-I think some of the others are going to talk more about postconsummation disclosures-but it is an extremely important time and we should not analyze this whole. question just at the time when the transaction is going to be consummated. There's another question. Let's take the Federal Reserve form. We're talking about only being able to handle five or six pieces of information. If it's disclosed on the contract is not the consumer going to read the other parts of the contract? What are we saving? Are we saying that the warranty disclosures that are there, the holder in due course disclosures-that the consumer is not to see that-not to read it? Are we saying that all this archaic and boilerplate language will not be there any more? Are we going to say that the disclosure should be made in a separate sheet of paper then? Well, will the consumer place much importance to it when they're getting a ream of paper at the time of closing an automobile deal or mobile home transaction or getting one of these packets with all the tearouts in a loan transaction? Are we saying they are going to place much confidence and emphasis in the document that's separate from the very document they sign which I'm sure they regard most important, the contract itself, which obligates them to pay the money? So what have we accomplished if we have States requiring all of the disclosure information that's currently required by truth in lending? Are we going to have two disclosure statements, one for the State and one for truth in lending, as separate disclosure statements? What are we going to do about that, or are we going to have States do away with all disclosure requirements, even though those disclosure requirements are meeting particular needs and special needs of the States, particularly insurance disclosure requirements that some of the States have that have been particularly helpful in fraud in the sale of insurance? The other reason that's given is the complexity of the contract. The second one is the information overload, and the third is there's been so much litigation and, Mr. Chairman, we have already commented on that. The litigation is rapidly slowing down. The litigation by and large came from the young lawyers who are recent graduates of law schools that came out in the early 1960's and 1970's who are interested and very idealistic about serving and making changes in this country. Unfortunately, I think the consensus would be in law schools today that this old idea and attitude is changing. I find the young lawyers, recent graduates of law schools, primary emphasis is to see how much money they can make and how quickly, and I'm afraid that the interest in serving the consumer and being able to stay and serve that consumer, and to be a consumers' lawyer as opposed to a bank lawyer or some other lawyer-and there's nothing wrong with that except consumers need good representation. They need people who are dedicated to serve their cause and we are losing much of that. That's one of the reasons that litigation is slowing down. The other reason is that the law is still relatively new. It's only about 9 years old and it's becoming much more settled and that's another reason that I think litigation is slowing down and will continue to slow down. I think there are several things that could be one to help simplify and clarify truth in lending. One is we ought to be looking at is where you've got a lot of litigation and confusion now which is describing the security interest, rebating upon acceleration, I suggest the simple interest or actuarial method be used, on whether premiums for credit life or credit accident and health insurance should always be added to the finance charge-I believe they should. If you clarified these three things it would take away much of the litigation that's going on currently in the country and clarify much of truth in lending. Finally, there's one other provision. Truth in lending obviously is not a static law. Truth in lending should not be put in a straitjacket. So it will change from time to time. I think the Federal Reserve's suggestion about being able to make changes and corrections if they discover an error prior to being notified in writing by a consumer and they make that correction in 30 days should be considered and adopted. So the good faith creditor who's using reasonable procedures to avoid the error will be amply protected and truth in lending in that situation will not be a trap to the unwary. I think, in conclusion, all I would say at this pont is I hope the committee will not look to the elimination of very important credit disclosures which could promote fraud and deception in the marketplace and at the same time look for some simple solutions as far as clarification and not take away disclosures. As we're coming along here we are getting more and more consumer education and we expect the public to become more sophisticated, so let's not take away disclosures in the future they will use effectively. Thank you, Mr. Chairman. Senator RIEGLE. Thank you, Mr. Boyle. We welcome your testimony and your recommendations. [Complete statement follows:] |