APPENDIX A: Lending Institution: Surveyed (cont'd) Person-to-Person Financial Center, 7166 Crowder Road Preferred Finance Co., 230 S. Broad Ave. Public Finance Corp., 3927 Tulane Ave. Service Finance Co., 138 St. Charles Ave. Sun Finance Co., Inc., 509 Borronne St. Senator RIEGLE. Mr. Clendenen, can we hear from you now? STATEMENT OF WILLIAM H. CLENDENEN, JR., NEW HAVEN, CONN. · Mr. CLENDENEN. My name is Bill Clendenen. I'm an attorney in private practice in New Haven, Conn. In that practice I represent large numbers of consumers. I also represent retailers, savings banks, and national banks in the capacity of revising forms and advising them on consumer credit practices so I think some of my perspective is a little different from the other panel members here. The one point that I really have to make that I feel strongly about is I think the committee should leave truth in lending alone. I don't think that the proposals that have been made-and there are some very good proposals that have been made and there are some very bad ones-but I think it should be left alone. The creditors in our area have become quite sophisticated, as have the consumers, about the various disclosure examples and problems. One of the major banks in New Haven-they serve most of Connecticut changed recently from the "Rule of 78" type of loan transaction to the simple interest transaction. They have a form that's modeled on the First National City Bank form and they are taking full page ads in the paper "9.5 percent loans" and they have been running those for month after month after month, and people talk about it and people go in to see them about it. The other banks have started to compete with this bank. Prior to this kind of competition the rates were 12, 13, 14, 15 percent for simple loans; but because this bank decided that it was a good marketing tool, I assume I had nothing to do with it-they are capturing a lot of the business. They are giving consumers good credit at very reasonable rates and they are forcing the other banks to do the same thing. They are pulling people away from small loan companies where they were paying 21, 22, 23 percent and now giving loans for 9.5 percent. I think that's what truth in lending is all about, where the market pressures make it to the advantage of a creditor to change the mode or the practice of the loan transaction, moving away, for example, from the "Rule of 78" to the simple interest form. Other banks are doing that now. They want to compete. They want to get some of that business. I don't think that until those kinds of effects are studied and looked at will the committee be able to make a judgment that the whole premise of truth in lending, the competition as to rates and as to terms, has not worked, and that's the presumption that's the basis of many of the proposals here that truth in lending hasn't worked. The curious thing about the debates over the long period of time. that truth in lending was before Congress was would Congress regulate practices, would it regulate rates, or would it allow the market. to operate and allow free competition to set rates and set practices. We have found in Connecticut that the competition has changed practices and has lowered rates. I think in line with that, section 7 of S. 1312 which deals with model forms is wrong. I'm against that and the reason I'm against it is that it reduces competition. If the Federal Reserve promulgates a form, that's the form that people are going to use. The Fed can develop clauses and develop formats and-let's take prepayment. You can have four or five or six different types of clauses that a creditor can choose and offer to the public. Why should they just have one? But I know for a fact if it's a model form that comes out they are all going to use it. They are going to say this is safe. But it's easy to have a whole number of forms and it covers this kind of competition. In Connecticut, Commissioner Connell, who's on the next panel and who by the way, I must disagree with Mr. Ogburn-Commissioner Connell has done a wonderful job in Connecticut, very effective enforcement, and I think sets a model for what some of the other States can do but he's promulgated a model form for the student loan, the insured student loan program, and the reason he could do that I think is every bank had to do it the same way. It was not a competition situation because you have got a very low rate and you have got subsidized interest and you have got the Federal Government setting all the terms. So in that situation, sure, model forms work; but you can't regulate transactions as between States by saying here's a form and go use it. Senator RIEGLE. Let me just stop you at that point. Don't you run, however, into a problem where you may have a situation in Connecticut where competitive market forces have produced an environment conducive to simplification and straightforwardness and lower rates. But it's not clear to me that that's been the national experience overall, and I'm just wondering if the usual approach in other areas may be less progressive than the kind of business enviroment that you speak of in Connecticut. In those other areas we want to see that consumers are assured certain basic information in a form that they can assimilate and digest. Mr. CLENDENEN. I think the certain basic information-if you look at the Citibank form under the regulations you could probably eliminate 8 or 10 lines on that form and still comply with the law. I think the current law provides that flexibility and allows an imaginative creditor to do exactly that. The lazy creditor, though, or the creditor who does not want to look seriously at the forms or at the practices, of course not. Mr. Boyle talked about boilerplate language, but I'll tell you something. When we work for an institution we insist that the institution review its practices so that we can disclose them accurately and it's surprising what the upper management people do when they look at some of the practices that their frontline people are doing. They say, "We don't do that. That's bad business. We don't like it. That's not our practice. That should not be our practice." What happens is that many times the different levels don't know what they are doing. The consumer doesn't benefit from that at all. The process where you have to disclose what the prepayment terms are, what the default conditions are, what the security interests are-if you took this mortgage disclosure over here and you tied it with the FHLMC mortgage deed, you would be totally misdisclosing what was going on. If you're going to accurately disclose the security interests that are in the standard Government mortgage deed, which has nothing to do with truth in lending, you would have to do a lot more than you do up there. You've got a built-in violation on that. Senator RIEGLE. Let me pose it another way. We have had this law on the books now for 9 years but we still find too many situations where the amount of information on forms-whether you want to term it boilerplate or whether you want to say that it meets the letter of the law-just overwhelms the average person and these natural economic and competitive forces have not brought about a comprehensible format in most places. Now it may exist to some extent in your State and I'm delighted that that development has taken place, but the fact that it's taken this long and the fact that it hasn't happened everywhere suggests to me that there ought to be a faster remedy to get to that desirable end than the one you're suggesting. Mr. CLENDENEN. Well, there are two remedies. You can take a lot of disclosures that are here and you can prohibit them because a lot of disclosures there are State law requirements that don't really deal with truth in lending. We did a form that I'm not at all pleased with for an institution that was very, very long and we worked very hard and advised them to shorten it because we thought it was to their advantage. But there were so many different practices they wanted to maintain and so many different advantages they wanted to have over the consumer that they had to be put in this one form. If they had opted to go with a separate disclosure statement, which was their choice, and not just one contract, it would have been much shorter because the required disclosures were nowhere near as long as the ones that appear in that form. I think that the problem that you're confronted with is that unless Congress decides and that may not be a bad idea-unless Congress decides that it will regulate on a national basis all consumer credit practices, you cannot control the forms like this because when you are talking about is disclosing some information-there were proposals before the Congress to do that, to regulate it totally. Then you can do exactly that. You can control the amount of information that's given to the consumer. You will say you will not use the "Rule of 78," you will just use simple interest. What we are finding is there is a slow process for the market to make that kind of adjustment. If Congress gets into it piecemeal and deals with this part and that part of it, you're disrupting this principle which I really think is very important, of this competition factor. It doesn't go as fast. Senator RIEGLE. Let me just ask you this. If we were to develop this sort of standard form, one of the two versions here or something close to it, what's to prevent a lending institution from augmenting that with as many other pieces of paper as it may think useful? Why would that have any bearing on the usefulness of some basic information in some standardized format that people can sink their teeth into so that if they go from one lending institution to another they can make comparisons? Mr. CLENDENEN. I have two points on that. One is that I think I agree with the idea and I would like to see more and more consumers just get into what I call simple loan transactions where they go and borrow unsecured and you wouldn't even need to disclose all of that information on that kind of a loan transaction. It would be a very short disclosure. It is only when the creditor decides to make the transaction complicated for the consumer, wants a greater advantage, that the additional disclosures come in. We had a situation recently where someone wanted to refinance a mortgage. They went in and it was a very complicated disclosure and the customer decided to go take a very simple loan which the customer could do when he realized what kind of security the creditor wanted to take in the situation. And what I'm trying to say is that's an important disclosure to the consumer because he sees the increased information, the increased security interest, the increased penalties that he has to pay in the transaction. Hopefully through education programs and through the basic information, he says, "I can go borrow that money cheaper and with better terms either in another department of the bank"-and this frequently happens-different departments of the bank have different terms "or I can go to a credit union and borrow it," a much simpler situation. I think if you say, well, I'm just going to give you this little bit of information, what you're doing is in effect hiding from the consumer other relevant and very important pieces of information that he might be worthy of in a credit sense, because that's what you're talking about, as the customer can borrow. I can call up the bank that I do business with and over the phone get a very good rate on a very simple transaction, but other people who may make the same salary that I do or whatever who don't know how to do that; they go in and get the long form and they sign up all sorts of security, their wives have to sign, all sorts of things Senator SCHMITT. Mr. Chairman, if you would yield, it seems to me that you're justifying what the chairman says. A simple form required across the board would be an advantage. Mr. CLENDENEN. Yes, sir, if the transaction is simple. I'm agreeing that if the transaction is simple and I think they should be, then of course under the current law right now-that's why I say don't change it-you could make those kind of disclosures very simply and very quickly and at a very low cost. But as the transaction is made more complicated-and the consumer is not making it complicated-the creditor is making it complicated-I think there's a need to give the consumer more information because he's losing more of his rights. It's a much more difficult transaction for him. That's my only point in that regard. Senator RIEGLE. I think you have more to say here, so I'll let you finish your presentation. Mr. CLENDENEN. I will be very brief. Senator RIEGLE. I appreciate your responses. Mr. CLENDENEN. I think that irrespective of what is done that the current mode of State exemption with Federal monitoring should remain. I think that the liability sections should not be changed. I think that the thing that offends my sense of intelligence-this is a very technical violation where you have a regulation which says you shall use such and such a word and a creditor doesn't use such and such a word after the advice of counsel and everything else that just appalls me. That may be a very technical violation, but I really question what kind of sympathy anybody should have in that kind of situation. So I think the liability section should remains it is if there are changes made in the disclosure. If there are clauses promulgated and if there are forms, there's no reason for any creditor not to comply. The creditors can comply. They are complying now. I don't think that 94-056 - 77 - 23 |