We urge the Subcommittee to consider drafting a completely new law to supersede the present Truth in Lending Act. We believe a new law would correct the shortcomings of the present law and truly accomplish the goals of simplification. An effective disclosure law should contain the following fundamental features: • disclosure of no more than six to eight of the most ⚫ disclosure in a format separate from contractual ⚫ publication of model disclosure forms, the optional use • civil liability for material misstatement of the six to • restitution to consumers charged an amount in excess • federal preemption of state disclosure laws. Credit Shopping Number of disclosure items: We believe a meaningful credit shopping vehicle can result only if the number of required disclosures is kept to a minimum. This will allow the consumer to focus attention on the important terms of the complete credit transaction. Mr. Chairman, as a manager active in the day-to-day business of my credit union, I have seen confusion in the faces of consumers when confronted with disclosures under the present law. This doesn't facilitate credit shopping it frustrates it. I believe this confusion is caused, in large part, by too much and too complex information. Content of Disclosures: For credit shopping purposes, the Annual Percentage Rate (APR) is the single most important item. Because of its paramount role, the APR (and thus the finance charge) should reflect the cost of credit to the consumer. Therefore, we would urge that the APR (and finance charge) include all charges incident to a credit transaction which are not present in a similar cash transaction, except charges voluntarily incurred by the borrower (e.g. credit-related insurance). This is the only way a borrower will know the actual cost of credit in order to shop among creditors. Format of Disclosure: In order to enhance consumer understanding of the disclosures furnished, we think it is necessary to remove disclosures from the text of contract documents. Under Truth in Lending as it now With exists, required disclosures must be printed "more conspicuously" than other terms, but may be incorporated into the text of a contract. this approach, significant credit terms become lost in a morass of complex terminology. It is more likely that the consumer's attention will be drawn to disclosures furnished in a format segregated from other contractual provisions. Consumer Protection Mr. Chairman, the very best protection a consumer can receive through a disclosure law is sufficient information to permit him or her to reject a proposed contract and seek another credit source. This is prospective consumer protection. Consistent with the notion that disclosures must be relatively few in number, care must be taken to select the most vitally important terms to be disclosed in the interest of consumer protection. For example, the consumer should know at the outset whether a closed-end credit transaction contemplates a balloon payment or under what conditions the entire balance will be due in an open-end plan. Similarly, in the interest of consumer protection, the consequences of default in a secured transaction, such as repossession of collateral, should be emphasized prior to the consummation of a transaction. On the other hand, disclosure items that do not offer prospective consumer protection are of little value and should not appear in the Examples in the present law are the "type" of security disclosure statement. interest retained by a creditor, and the "method" of calculating a rebate of interest in the event of prepayment. In this regard, at the time of the credit transaction, it is the fact that a security interest is retained or an interest rebate will be available that is important to the consumer. Restitution to Borrowers: S. 1312 would require a creditor to make restitution to borrowers to ensure that payments are not made in excess of the APR or finance charge actually disclosed. This is nothing more than a guarantee that a borrower pay no more than the "price tag" for credit. We doubt any reputable creditor will object to the substance of this provision. However, Section 4 of S. 1312 would permit a regulatory agency to order restitution upon its finding that disclosures were made inaccurately. No mechanism is provided to resolve a dispute between a creditor and examining agency concerning whether disclosures given were in fact inaccurate. We believe this provision, as drafted, is constitutionally defective because of the absence of due process protections to the creditor. With appropriate procedural safeguards, we believe restitution offers effective consumer protection. Creditor Compliance and Liability Furthermore, we want to see Mr. Chairman, credit unions, like all responsible creditors, want to comply with the Truth in Lending laws. consumers use credit wisely and be shielded from unscrupulous credit practices. These objectives not only benefit consumers and creditors alike but, historically are the bases of the credit union concept. Today, however, creditors view Truth in Lending with fear and dismay. Always present is the threat of litigation over highly technical and relatively unimportant violations of the Act. Whether a violation has actually occurred often winds up being of secondary importance. The cost of litigation is exorbitant and had led to criticism of the law as a Lawyer's Relief Act. This atmosphere casts creditors and borrowers in the roles of adversaries. We believe this situation is undesirable and unnecessary. Creditor liability should be limited to misstatement of material credit terms which deprives a consumer of the ability to use credit wisely. If, as we are suggesting, the disclosure statement contains only a few substantive disclosures, all disclosures would be "material credit terms," misstatement of which could result in civil liability. Much of the litigation generated by Truth in Lending has involved exceptionally minor numerical errors in disclosures or technically incorrect variance in the format of disclosure. With extraordinary regularity, these alleged violations are raised as defenses or counterclaims in response to a creditor's lawsuit to collect a debt. The alleged violations invariably do not affect the consumer's ability to shop for credit. These lawsuits cannot be justified under the guise of consumer protection--less than 5 in every 1000 loans granted are ever the subject of a lawsuit. This situation contributes significantly to the intolerable congestion in the court system. 94-056 - 77-39 Prescribed tolerances for making numerical disclosures and publication of model forms would eliminate senseless lawsuits which do nothing to contribute to consumer awareness and consumer protection. Further, model forms would tend to promote uniformity of disclosures from creditor to creditor and thus enhance consumer understanding of the credit process. Finally, the last item to enhance creditor compliance with disclosure No laws concerns the issue of preemption. After serious consideration, we have concluded that the experience gained with nine years of Truth in Lending calls for Federal preemption of state disclosure laws. In many states dual disclosures are now required. Consumers are confused by dual disclosures and creditors are uncertain of the requirements they must meet. Under current law a requirement imposed by state law is preempted "only if inconsistent," and then "only to the extent of the inconsistency." reliable test has evolved to determine compliance requirements. Consequently, disclosure requirements are constantly in a state of uncertainty. unproductive to consumers, creditors and society is fostered by this rule. We recognize a state's need to address consumer protection issues with legislation. However, we believe total preemption is the only workable approach to disclosure laws. This would not tie the hands of a state legislature in responding to consumer protection issues with substantive credit practices laws. Litigation The bills under consideration by this Subcommittee address many of the features we have outlined in the manner we have suggested. We strongly support those provisions of the bills which are consistent with or reflect the spirit of our suggestions. Absence of comment should not be construed as non-support. We have the following specific suggestions. |