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«CHAPTER TWO THE CONSUMER CREDIT PROTECTION ACT A. INTRODUCTION In the late 1960s, Congress, after many years of discussion, passed legislation that ...»

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In the late 1960s, Congress, after many years of discussion, passed legislation that

intruded into the long-standing province of the states in regulating consumer transactions by

enacting the Consumer Credit Protection Act, 15 U.S.C. § 1601 et seq. (CCPA). At that time, the intrusion, though significant, involved only limited baseline substantive restrictions on garnishment (15 U.S.C. § 1671 et seq.), one substantive right of rescission for second or lesser priority mortgages on the home (15 U.S.C. § 1635), and certain disclosures mandated by the so- called Truth in Lending Act (TILA) (15 U.S.C. § 1637 et seq.). However, once the ice was broken, further acts followed under the CCPA umbrella requiring disclosure and often setting forth substantive requirements for the following situations: consumer leases (15 U.S.C. § 1667 et seq.); consumer credit reporting (15 U.S.C. § 1681 et seq.), credit cards (15 U.S.C. § 1642 et seq.), and credit billing (15 U.S.C. § 1666 et seq.); discrimination in credit on prohibited bases (Equal Credit Opportunity Act, 15 U.S.C. § 1691 et seq.); debt collection by third-party debt collectors (including lawyers) (15 U.S.C. § 1692 et seq.); and electronic fund transfers from consumer accounts (15 U.S.C. § 1693 et seq.). Moreover, TILA subsequently was amended several times to add additional required disclosures; for example, in 2001, disclosures for reverse mortgages were added to reflect the growing use of such instruments by the elderly as a source of capital. The disclosures under TILA are especially important for an elderly consumer who may need additional clarity in disclosure information. (15 U.S.C. § 1648; Regulation Z, 12 C.F.R. § 226.1). Also, amendments added substantive provisions beyond disclosure, such as prohibiting use of the so-called “Rule of 78” (15 U.S.C. § 1615), mandating “restitution” for some disclosure errors (15 U.S.C. § 1607(e)), and limiting freedom of contract in connection with so-called “high-rate” mortgages and home equity plans (15 U.S.C. §§ 1639, 1647). The overall result clearly was a very significant intrusion on state law. This intrusion was not limited to the subjects covered in the CCPA, as other federal initiatives (discussed in the next chapter) occurred at the same time, such as the Magnuson-Moss Act and Real Estate Settlement Procedures Act.

Perhaps because these intrusions represented a perceived change of some magnitude in federal/state relations, Congress—in the subjects covered in the CCPA—did not broadly preempt state law but rather, though the standards used are not the same in every enactment, preempted state law only if a person subject to both the federal and state laws could not comply with both.

See, e.g., 15 U.S.C. § 1610. What has been called a “Swiss cheese” effect on state law was the result. In this context, a lawyer had to first determine the applicability of the federal law. If the determination was in favor of applicability, the lawyer then had to match state law to federal law to discern what portion of state law was preempted. This was often very difficult, and the Federal Reserve Board assisted from time to time by rendering interpretations. See Regulation Z, 12 C.F.R. § 226.28 (preempting much state law in the area; for more detail see Rohner and Miller, Truth in Lending, Chpt. 14, 2003 Suppl.). The federal/state law mix from this process then had to be applied to the transaction. Of course, in many instances the result was one not intended by either Congress or the legislature of the state whose law had been thus modified.

Congress also sought to mitigate adverse reaction to its enactments in another way. In many instances, the federal law allows a state to “opt out” of the federal law (that is, to be governed by state, not federal, law). See, e.g., 15 U.S.C. § 1633. For that to occur, the state law, as determined by the Federal Reserve Board, must be at least equal to the federal law in terms of consumer protection and must provide adequate means for enforcement. In the case of TILA, five states exercised the option. It is a mixed blessing. On the whole, the resulting state enforcement, if adequately funded, is better than the federal effort, but there is a constant task in keeping the state law in tandem with the federal. Overall, the option has not been widely used.

Finally, contributing to the complexity this scheme imposed on consumer transactions was a “multiple source of law” problem. As discussed, federal and state law might both apply, as well as a body of law on preemption. Congress also tended to write these statutes somewhat generally and thus a great deal of detail was left for the Federal Reserve Board, which was given very broad power (in 15 U.S.C. § 1604, for example), to “fill in” by regulation. The Board used this authority to promulgate regulations containing more detail about requirements under the statutes, such as Regulation Z under TILA. (Compare Mourning v. Family Publications Serv., 411 U.S. 356 (1973), creating a strong “presumption of validity” and upholding the validity of Regulation Z, with Pfenning v. Household Credit Servs., Inc., 295 F.3d 522 (6th Cir. 2002), perhaps finding more clarity than exists in the statute, but stating that where a statute and a regulation conflict, courts must defer to the statute). But given the sanctions for many violations, persons subject to the legislation demanded even more; they sought as much certainty as possible. The reaction of the Board at first was to issue interpretations itself from time to time and allow its staff to issue specific opinion letters. Over time the volume and the difficulty of applying these multiple sources of proliferating law became immense, and the Board instead issued general—yet still detailed—“Commentary” under the regulations. The Commentary was similar in concept to the Official Comments to the Uniform Commercial Code. In other cases, so-called “guidelines” serving the same purpose were issued. Complexity was reduced but hardly eliminated, and practice in this area rapidly became the province of specialists, and still remains so.


1. PURPOSE AND SCOPE At the time TILA became law, state laws often mandated some disclosures about some transactions so the consumer could better understand the terms of the prospective transaction and avoid unwise contracts. But the disclosure of charges, particularly finance charges, was not uniform. The finance charge might be called “interest” or “time price differential,” and what constituted interest varied. The rate might be expressed as a simple rate, or an add-on or discount rate that was almost double the simple rate. As a consequence, it was difficult for consumers to comparison shop or to determine the best terms. TILA was aimed at this problem. TILA covers consumer credit transactions, defined as a credit transaction, primarily for a personal, family, or household purpose, that bears a finance charge, or such a transaction payable in more than four installments without a finance charge (designed to exclude sales with a down payment and thirty/sixty/ninety days “same as cash,” but to include longer-term credit with a finance charge built into the price). Extensions of credit primarily for a business, commercial, or agricultural purpose, or to a government or an organization, are not covered, nor are non-real-estate transactions in excess of $25,000, or credit subject to other regulation such as in the case of securities and commodities, public utilities, and certain student loans. See 15 U.S.C. §§ 1602(f),

1603. There are issues of scope; for example, is a debt due in thirty days, with a late charge if payment is not made, covered? The answer is yes if the creditor continues to extend further credit as if no default exists, as the late charge then in essence becomes a charge for a longer time to pay, which is the classic definition of a finance charge. See id. § 1605. For the most part, however, scope issues were settled long ago.

Both consumer credit sales and consumer loans are covered. There are a few, but significant, differences in the rules applicable to each. More important is the distinction between a so-called “closed-end” transaction, like a retail installment sale or loan to purchase a car, and a so-called “open-end” transaction, such as a retail revolving charge account, credit card, or home equity line. See 15 U.S.C. § 1602(i). Here there are significant disclosure and other differences.

In 2001, the Seventh Circuit, in deciding Rendler v. Corus Bank, N.A., 272 F.3d 992 (7th Cir.

2001), provided a good example of the difference between closed and open-end transactions. In Rendler, the Court found a home mortgage to be a closed-ended transaction while a separate but simultaneous home equity line of credit was found to be an open-end transaction.

2. DISCLOSURE For most closed-end transactions, disclosure is due before or at the closing. See Regulation Z, 12 C.F.R. § 226.17. This, of course, is not much advance notice, and so the restrictions on false and misleading credit advertising (id. §§ 226.24(a)-(d)) are particularly important. Earlier disclosures than required are allowed and even encouraged (see id.

§ 226.17(f)), but for the most part are not used. Early disclosures in some cases are mandated, however, such as in residential mortgage transactions subject to the Real Estate Settlement Procedures Act, in variable-rate mortgage transactions secured by the home with a term over one year, and in so-called high-rate mortgages and reverse-mortgage transactions. See, e.g., id.

§ 226.19. If the information required to be disclosed is not known this early, estimates may be used. See id. § 226.17(c).

There are certain form requirements for the mandated disclosures. For example, the terms “finance charge” and “annual percentage rate” must be particularly conspicuous. The disclosures generally must be segregated from other material, in what is sometimes known as “the federal box,” as this requirement often is accomplished by putting the disclosures in a black-outlined box in the contract. See Regulation Z, 12 C.F.R. § 226.17.

Generally, what is disclosed is determined by the contract and state law, which establish the legal obligation. However, there are some tolerances for irregular transactions. Generally, disclosure must be of the legal obligation at the time the disclosure is due. Thus, subsequent events do not require redisclosure as a rule, but there are exceptions for refinancing and assumptions of mortgages. See Regulation Z, 12 C.F.R. §§ 226.17, 226.20. There are modified rules for special transactions, like mail or telephone orders and interim student credit extensions.

See id. § 226.17.

The information to be disclosed in most closed-end transactions is listed in Regulation Z, 12 C.F.R. § 226.18, and includes the following: the identity of the creditor; the amount financed;

an itemization of the amount financed or notice that there is a right to that disclosure upon request; the amount of the finance charge; the annual percentage rate of the finance charge;

information about any variable rate; the payment schedule; the total of payments; any demand feature; in a sale, the total sale price; information, not in too much detail, about any prepayment penalty or rebate of the finance charge; late payment charges; information, again not in great detail, about any security interest; and information about insurance, fees such as filing fees, assumption policy, required deposit balances, and looking to the contract for further information.

See id. § 226.18. A Sixth Circuit case that deals with closed-end transactions is Inge v. Rock Fin.

Corp., 281 F.3d 613 (6th Cir. 2002), where a lender’s failure to disclose various fees were considered to give rise to a cause of action under TILA. Additional disclosures may be due in certain residential mortgage and variable-rate transactions, and in so-called high-rate mortgages and reverse mortgages. See id. §§ 226.19, 226.32, 226.33.

The “annual percentage rate” (APR) is the cost of credit as a yearly rate; it essentially is a simple interest rate as opposed to an add-on, discount, or some other method of rate computation. The concept of “finance charge” is somewhat different from that of “interest,” and is more inclusive because its focus is on the cost to the borrower. Thus, the disclosed APR may well exceed the rate of interest as computed for other purposes, such as a state usury law. See Regulation Z, 12 C.F.R. § 226.4.

Open-end disclosure generally is due before the first transaction under the open-end credit plan. Because disclosure is due before the plan is used, initial open-end disclosure is not specific, and consists more of the plan terms than disclosure about transactions. To illustrate, Regulation Z, 12 C.F.R. § 226.6, does not require disclosure of the finance charge, but of the circumstances under which a finance charge will be imposed and how it will be determined. Also required are disclosures about when the finance charge begins to accrue, the periodic rate and the balances to which it is applicable, the corresponding APR, information about other charges and any security interest, and a statement of billing-error rights. Format rules, such as requiring the terms “finance charge” and “annual percentage rate” to be more conspicuous, are similar to those for closed-end credit, and it is the legal obligation that must be disclosed. Estimates may be used, and subsequent events generally are not included. See id. § 226.5. Again, there are also special rules regarding timing, format, and substance for credit and charge card applications and solicitations, and home equity plans. See id. §§ 226.5(a), 226.5(b).

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