Truth in Lending

"In A Form The Consumer May Keep"
Lots of consumer protection regulations that require disclosures contain rules about timing, format, and form of disclosures. There are rules that apply to signatures and even a few that mandate type size. Truth in Lending is no exception.

Truth in lending has a variety of rules - in a variety of places - that dictate that certain disclosures, such as the APR, must be more prominent than other disclosures. TIL has some timing requirements, such as those for ARM, credit card, and HELOC disclosures.

One of Truth in Lending's disclosure rules is that disclosures must be provided to the customer "in a form the consumer may keep." The timing requirement is that these disclosures be provided to the consumer "before consummation."

This sounds pretty straightforward. Creditors and regulators alike have treated it as such. "In a form the consumer may keep" was understood to mean that the customer should be able to take the disclosures home and keep them - in whatever file the consumer should choose. The disclosures are a form, and taking the form away from the table is keeping. Isn't it?

Timing has been understood to mean that the creditor must show the disclosures to the consumer before asking the consumer to sign the credit obligation. This meets the timing requirement. Doesn't it? At least one federal judge doesn't think so. The judge in Polk v. Crown Auto drew some disturbing conclusions about Truth in Lending, disclosure forms, and timing requirements.

This judge thinks that when you put together the requirements for "in a form the consumer may keep" with "before consummation" the disclosure ceremony must take place - both the giving and the keeping, that is - before the contract is signed. All of this must happen - including the consumer's ability to fold up the disclosures and place them in his or her pocket - before the contract is signed.

This is an interesting, if bizarre, approach to thinking about how "reasonable" consumers behave. The judge's reasoning assumes that the consumer, prior to signing on the note's dotted line, will carefully read and consider the Truth in Lending disclosure, draw conclusions about the APR and finance charge, consider carefully the fact that the lender is taking a security interest in the car the consumer is purchasing (and eager to drive away in), fold up the TIL disclosures and place them in a convenient pocket. All of this should happen before consummation, before signing. Then and only then should the customer get down to the business of signing the note.

The truth is that consumers don't behave this way. They want the loan and they want the car - now. Another truth (sad but true) is that consumers don't study the TIL disclosures before signing the note. The only time consumers seem to study the TIL disclosures is when they are in default and their attorney asks for all the forms.

The court supported the conclusion by citing the credit shopping goals of TIL. Congress' stated purpose in enacting Truth in Lending was to encourage credit shopping. The Act was to provide "meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available."

So where does this decision leave creditors? Unless and until the Federal Reserve clarifies the situation by revising either Regulation Z or the Official Staff Commentary to Regulation Z, creditors are in limbo. The opinion flies in the face of years of accepted practice, including the FRB's tolerance of the type of combined form used by Crown Auto. However, the opinion interprets the law and, at least in the Fourth Circuit, is law.

Cautious creditors should take steps to ensure that the disclosures are provided to the consumer before the consumer signs the note. Loan officers should be trained to explain the TIL disclosures, give the form to the consumer to review, and then and only then begin the signing process. This is a good time for training.

ACTION STEPS

Review your Truth in Lending disclosure forms for all types of loans.
If you have any forms that integrate TIL into the contract form, consider whether you need to establish procedures to clarify when and how to give the consumer disclosures before consummation.
Train your lenders about the importance of giving and explaining the TIL disclosures before asking the consumer to sign the note.
Consider having two bank staff members at loan closings. It might not hurt to have a witness for the bank.
Send a comment letter to the Board of Governors of the Federal Reserve System. Describe how your customers actually want the disclosure process to happen.
Review the purpose statement in each consumer credit protection law. Then consider the steps your bank is taking to comply with each law. Consider whether the results of your compliance efforts are consistent with the purpose of each law.