When a door-to-door salesman sold a 73-year-old Florida widow a five-year subscription to four magazines in 1969, neither party expected to end up before the United States Supreme Court. Leila Mourning signed the magazine order which required her to pay $3.95 immediately and $3.95 a month for 30 months. The contract did not state the total purchase price, did not state the amount due after the initial payment, made no reference to service or finance charges and its fine print stated she could not cancel the subscription. Finally, it stipulated that if she did not make a payment, her remaining payments would be accelerated. She soon found herself in default and the magazine company, Family Publications Service, began sending her letters demanding the accelerated balance of $118.50.[1]
She sued the company under the 1968 Truth in Lending Act, claiming that it had failed to make required disclosures under the Act, such as disclosures of the total purchase price, finance charges and service charges for the financed amount. The Supreme Court had to determine whether requiring a company to make such mandatory disclosures violated the Fifth Amendment’s “due process” clause. The Court upheld the law.
In our final module on consumer protection laws, we will describe mandatory disclosures and examine the purposes and effects of the disclosures.
Truth in Lending Act Mandatory Disclosures
The Supreme Court used the Mourning case as an opportunity to describe the purpose and environment in which the Truth in Lending Act became law. At that time, more consumers were using credit than ever before. From World War II’s end through 1967, outstanding consumer credit increased from $5.6 billion to $95.9 billion.[2]
Mandatory creditor disclosures were necessary because of the sometimes-fraudulent practices by which creditors informed consumers of the terms of the credit extended to them. Lacking knowledge regarding these essential terms, American consumers couldn’t shop for the best terms available and had to assume liabilities they couldn’t meet.
The Truth in Lending Act attempts to remedy this situation and assure meaningful disclosure of terms by affording consumers the choice to pay cash or compare finance options[3] and it reflects the transition from a philosophy of “let the buyer beware” to “let the seller disclose.”[4] The Act’s Regulation Z embodies this philosophy, and the obligations to disclose have been expanded multiple times since the Act’s passage. Furthermore, the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act and establishment of the Consumer Financial Protection Bureau resulted from continuing congressional belief that mandatory disclosures are necessary for consumer protection.[5]
Open-ended Credit Disclosures and Closed-Ended Credit Disclosures
The Truth in Lending Act’s Regulation Z mandatory disclosures apply to credit transactions, both closed-ended and open-ended,[6] though their requirements differ.
Open-ended credit, usually referred to as a “line of credit,” is a loan that may be used repeatedly up to a limit. Its key is flexibility. The lender anticipates repeated transactions with the borrower.[7] The credit plan provides for an interest rate that is computed from time to time on an outstanding unpaid balance. This is how most credit cards work: a consumer is granted an amount of credit up to a limit to use any time he wants. He can pay off the entire amount any time or can just pay a specified periodic (usually monthly) minimum payment.
For open-ended credit, the lender provides disclosures at three different times: in connection with a solicitation, upon account opening and through periodic or billing statements. Annual Percentage Rate disclosures on credit cards can be particularly complex. For example, there may be different rates for purchases than for cash advances, there may be teaser rates that apply to the first months or years that the account is open and there may be penalty rates that kick in if payments are missed. All these rates must be disclosed.
Considering the latest amendments and the Truth in Lending Act’s Regulation Z, a creditor in a consumer transaction must disclose “in a reasonably understandable form and readily noticeable to the consumer” the:[8]
- identity of the creditor;
- amount financed, which is the amount of credit provided to a borrower minus prepaid finance charges;
- finance charges, including interest and loan fees paid over the life of the loan and all other charges;
- annual percentage rate, which is the interest rate plus points, fees and other charges.
- sum of the amount financed and the finance charge, which is the same as the total expected payments; and
- number, amount, and due dates of scheduled payments.
The Act also requires the creditor to provide “explanations and definitions” of each of those terms as well as information regarding “borrowers’ rights.”[9]
A major legislative revision for open-end credit occurred with the Fair Credit and Charge Card Disclosure Act of 1988.[10] This act sought to provide a borrower sufficient information in advance so that she could shop for the best deal.
Under the Act, the lender must place disclosures in a uniform tabular format to allow a consumer to compare credit card offers and select the one with the best rate and lowest fees.[11] The table format has become widely known as the “Schumer Box” named after New York Congressman Charles Schumer. The box contains a table for interest rates and a table for fees. Model forms are available from the Consumer Financial Protection Bureau to help creditors comply with the format and details.[12]
The Credit CARD Act
In 2004, the Federal Reserve’s Board of Governors initiated a comprehensive review of Regulation Z.[13] Five years later, the Credit Card Accountability Responsibility Disclosure Act, also known as the Credit CARD Act, expanded Regulation Z for open-end credit transactions to curtail deceptive and abusive practices by credit card issuers.[14]
The CARD Act imposed several additional mandatory disclosures: [15]
- Before opening a new account, the creditor must identify charges that may be imposed, circumstances under which they may be assessed and the method of computation;
- Statements must be delivered at least 21 days before the payment due date.[16]
- 45-day advance written notice is required before the effective date of an increase in an APR or other “significant change.”[17] Before the Act, some issuers were increasing APRs or changing other account terms shortly before the changes became effective or sometimes with no notice at all. The 45-day notice rule allows consumers time to respond to changes in terms. For example, a consumer notified of a rate increase might shop for a new card with lower APRs.
- Finally, a consumer is now allowed to reject a change enacted by the lender. However, if he does so, he can no longer use the credit card.[18]
We’ll next move to closed-ended credit, or credit that must be repaid in full by the end of a fixed time.[19] Repayment in full includes the original amount of the loan plus all associated finance charges. First home mortgages, car loans and other major purchase loans are typically examples of closed-end credit.
In addition to the Truth in Lending Act’s mandatory disclosure requirements, the 1974 Real Estate Settlement Procedures Act, known as RESPA, has several requirements that are meant to prevent mortgage lenders from overcharging consumers for services related to mortgage loan closings.[20]
RESPA applies to most mortgage loans on residential real estate, including those to purchase and refinance homes and home equity lines of credit. The act “requires lenders, mortgage brokers, or servicers of home loans to provide borrowers with pertinent and timely disclosures regarding the nature and costs of the real estate settlement process.”[21] For example, during the loan application process mortgage brokers and lenders must provide borrowers with a Special Information Booklet, a Good Faith Estimate of settlement costs and a Mortgage Servicing Disclosure Statement.[22]
Integrating the Two Laws
For more than 30 years, the Truth in Lending Act required creditors to give mortgage borrowers one set of disclosures, such as Truth in Lending Statements. The Real Estate Settlement Procedures Act required a settlement agent to give a borrower a different, overlapping, set of disclosures including Good Faith Estimates and HUD-1 settlement statements. These forms sometimes confused consumers and lenders and settlement agents found the forms burdensome and difficult to explain. [23]
Even federal agencies recognized this duplication as inefficient and unduly complex for both consumers and industry. It fueled more than one effort over the years to develop combined disclosure forms. In 1998, the Board of Governors of the Federal Reserve and HUD prepared a joint report as to how the two sets of disclosures could be streamlined and simplified.[24]
Moreover, the complex series of disclosure rules that came from required disclosures from these disparate rules were sometimes misleading and tended to make loans seem more affordable than they were.[25] Specifically, the required disclosures relating to the cost of credit were functionally ineffective[26] and lenders could and did hide behind obscure disclosures and surprise borrowers with increased interest rates and monthly payments after initial “teaser rates” low-interest periods.[27]
Truth in Lending Act-Real Estate Settlement Procedures Final Rule
In 2010, the federal government enacted reforms to address these problems. The Dodd-Frank Act directed the Consumer Financial Protection Bureau to integrate mortgage loan disclosures under both major consumer protection laws. In late 2013, after consumer and industry input, the agency issued a final rule which integrated both laws and is known as the Truth in Lending Act-Real Estate Settlement Procedures Final Rule.
The Rule included model forms, samples illustrating the use of those forms for different types of loans and extensive official statutory interpretations to provide guidance. The Final Rule led to the creation of two forms containing all necessary disclosures: a loan estimate disclosure and a closing disclosure.[28]
With this integration, the agencies sought to accomplish three objectives:
- Comprehension. The disclosures should enable consumers to understand the basic terms of a loan and its costs, both immediate and over time.
- Comparison. The disclosures should enable consumers to compare one Loan Estimate to another and identify the differences. The disclosures should also enable consumers to compare the Loan Estimate to the Closing Disclosure, to identify differences between the two and understand the reasons for those differences.
- Choice. Both comprehension and comparison should enable consumers to make informed decisions. For the Loan Estimate, consumers should be able to decide on the best loan for their personal situations. For the Closing Disclosure, they should be able to decide whether to close on the loan after reviewing the final terms and costs.[29]
The loan estimate is a standardized three-page form disclosing, in table format, key features of the costs and risks of a mortgage. Creditors must provide them to borrowers no later than three business days after they apply for mortgage loans. Page one summarizes key loan terms and costs, principal and interest payments and cash required to close. Page two itemizes loan and real estate transaction costs and describes adjustable rates, if applicable.[30]
Page three provides information to compare loan offers, including interest rates and finance charges and the Annual Percentage Rate. Consumers receive the Loan Estimate in lieu of Good Faith Estimate, Truth in Lending Statement disclosure and other disclosures originally required under the Equal Credit Opportunity Act and RESPA.
The lender must provide the closing disclosure to borrowers at least three business days before closing. This three-day window gives consumers the opportunity to compare final terms and costs to the Loan Estimate, and to ask questions of their lenders.[31]
The five-page closing disclosure uses the same design principles, structure and tabular format as the loan estimate, for ease of comparison. Page one mirrors the Loan Estimate’s first page and each of the following pages contains closing cost and real estate transaction details. On the last page is a chart of loan-specific calculations with disclosures such as: total payments, finance charge, amount financed, APR and total interest percentage.[32]
The Rule also benefits lenders by rendering the process of lending less complicated. If it uses the model forms provided, a court will deem it in compliance with federal laws.[33] In one recent lawsuit filed suit against Wells Fargo, the borrower claimed that disclosure of the finance charge did not comply with the federal disclosure requirements. The court rejected the claim, stating that the disclosure followed sample forms published by the Consumer Financial Protection Bureau, “the use of which suffices to satisfy . . . disclosure requirements.”[34]
Conclusion
Thank you for watching our video-course on consumer protection laws. This course should provide you with a comprehensive understanding of the most important legal issues and protections for American consumers. We encourage you to take advantage of our other offerings in this and other areas. Best of luck.
[1] Mourning v. Family Publications Service, Inc., 411 U.S. 356 (1973).
[2] Id. at 363; Reid Barnes, Truth-in-Lending: Regulation Uncertainty, 7 Cumb. L. Rev. 255 (1976).
[3] 15 U.S.C. §1601.
[4] Mourning, 411 U.S. at 377.
[5] Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (July 21, 2010); The Bureau, Consumer Financial Protection Bureau, https://www.consumerfinance.gov/about-us/the-bureau/ (last visited July 2, 2018).
[6] 12 C.F.R. §§ 1026.5(a)(1) & 1026.17(a)(1).
[7] 12 C.F.R. § 1026.2(a)(20).
[8] Krieger v.Bank of America, N.A., No. 17-1275 at *4 (3d Cir. May 16, 2018).
[9] Id.; KoonsBuick Pontiac GMC, Inc. v. Nigh, 543 U.S. 50, 54 (2004).
[10] Fair Credit and Charge Card Disclosure Act of 1988, Pub. L. 100-583, 102 Stat. 2960 (enacted as amended at 15 U.S.C. 1637).
[11] 12 U.S.C. §1637(c).
[12] 12 C.F.R.1026, App. G. For an example, see Consumer Financial Protection Bureau, https://s3.amazonaws.com/files.consumerfinance.gov/eregulations/ER22DE11.008-1.png (last visited July 2, 2018).
[13] Kenneth J. Benton, The Regulation Z Amendments for Open-End Credit Disclosures, in Consumer Compliance Outlook First Quarter (2009), https://consumercomplianceoutlook.org/2009/first-quarter/q1_03/.
[14] Credit Card Accountability Responsibility and Disclosure Act of 2009, Pub. L. 111-24, 123 Stat. 1734.
[15] 12 C.F.R. § 1026.6.
[16] 12 C.F.R. § 226.5(b)(2)(i).
[17] 12 C.F.R. § 1026.9(c)(2)(i)(A).
[18] 12 C.F.R. § 1026.9(c)(iv)(B).
[19] 12 C.F.R. § 1026.2(a)(10).
[20] Real Estate Settlement Procedures Act, Pub. L. 93-533, 88 Stat. 1725 (Dec. 22, 1974).
[21] Regulation X, Real Estate Settlement Procedures Act, Federal Reserve, https://www.federalreserve.gov/boarddocs/supmanual/cch/respa.pdf (last visited July 2, 2018).
[22] 40 Years Ago: Real Estate Settlement Procedures Act Passed, National Low Income Housing Coalition, (June 20, 2014)
[23] TILA-RESPA Guide to the Loan Estimate and Closing Disclosure Forms at 7, Consumer Financial Protection Bureau, (May 2018), https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/cfpb_kbyo_guide-loan-estimate-and-closing-disclosure-forms_v2.0.pdf.
[24] Bd. of Governors of the Fed. Reserve Sys. &U.S. Dep’t. of Housing and Urban Dev., Joint Report to the Congress Concerning Reform to the Truth in Lending Act and the Real Estate Settlement Procedures Act (1998)
[25] Jeff Sovern, Preventing Future Economic Crises Through Consumer Protection Law or How the Truth in Lending Act Failed the SubprimeBorrowers, 71 Ohio St. L.J. 761, 763 (2010).
[26] National Consumer Law Center, Mortgage Lending 1.3.3.2 (2d ed. 2014), https://library.nclc.org/node/1440776.
[27] Id.
[28] Know Before You Owe: Evolution of the Integrated TILA-RESPA Disclosures, Kleimann Communication Group, Inc., (July 9, 2012), https://s3.amazonaws.com/files.consumerfinance.gov/f/201207_cfpb_report_tila-respa-testing.pdf.
[29] Id.
[30] Id.
[31] What is a Closing Disclosure?, Consumer Financial Protection Bureau, (Sept. 12, 2017),https://www.consumerfinance.gov/ask-cfpb/what-is-a-closing-disclosure-en-1983/.
[32] Know Before You Owe: Evolution of the Integrated TILA-RESPA Disclosures at xi, Kleimann Communication Group, Inc., (July 9, 2012), https://s3.amazonaws.com/files.consumerfinance.gov/f/201207_cfpb_report_tila-respa-testing.pdf.
[33] 15 U.S.C. § 1604(b).
[34] Muniz v. Wells Fargo & Co., Case No. 17-cv-04995-MMC, 2018 WL 2197556 at *3 (N.D. California, May 14, 2018).