[Congressional Record (Bound Edition), Volume 145 (1999), Part 4]
[Extensions of Remarks]
[Pages 6072-6073]
[From the U.S. Government Publishing Office, www.gpo.gov]




             TRUTH IN LENDING MODERNIZATION ACTION OF 1999

                                 ______
                                 

                          HON. JOHN J. LaFALCE

                              of new york

                    in the house of representatives

                        Thursday, March 25, 1999

  Mr. LaFALCE. Mr. Speaker, today I am introducing legislation to 
update key provisions of the Truth in Lending Act, some of which have 
not been revised by Congress since the Act's passage in 1968. The 
``Truth in Lending Modernization Act of 1999'' will restore important 
consumer protections that have been weakened by inflation and assure 
that outdated, anti-consumer accounting practices are eliminated. This 
legislation is strongly supported by the Consumer Federation of 
America, Consumers Union, the National Consumer Law Center and by the 
U.S. Public Interest Research Group.
  Congress has given considerable time and attention in recent sessions 
to modernizing our nation's banking laws to free financial institutions 
of outdated restrictions that date back to the 1930s. I believe it is 
time for Congress to give equal attention to modernizing the 
cornerstone of consumer credit protection--the Truth in Lending Act 
(TILA).
  Congress enacted TILA in 1968 to assure that consumers receive 
accurate and meaningful disclosure of the costs of consumer credit to 
enable them to compare credit terms and make informed credit choices. 
Prior to that time, consumers had no easy way to determine how much 
credit actually cost nor any basis for comparing various creditors. 
What little useful information consumers did receive was typically 
buried in fine print or couched in legalese. TILA addressed these 
problems by providing a standardized finance cost calculation--a 
simple, or actuarial annual percentage rate (APR)--to provide a 
comparable calculation of total financing costs for all credit 
transactions. It also required creditors to provide clear and accurate 
disclosure of all credit terms and costs.
  Over the past thirty years, TILA has played a dual role in the 
financial marketplace. It has been the primary source of financial 
consumer protection, recognizing the rights of consumers to be informed 
and to be protected against fraudulent, deceitful, or grossly 
misleading information and advertising. It has also stimulated market 
competition by forcing creditors to openly compete for borrowers and by 
protecting ethical and efficient lenders from deceitful competitors. 
Congress believed in 1968 that an informed consumer credit market would 
help stabilize the economy by encouraging consumer restraint when 
credit costs increase. The need for an informed consumer market is as 
important today as it was thirty years ago.
  Unfortunately, key consumer protections and remedies that Congress 
stated in dollar amounts in 1968 have not been updated to provide 
comparable protections today. The effects of thirty years of inflation 
have permitted increasing numbers of credit and lease transactions to 
fall outside the scope of TILA protections and have weakened the 
deterrent value of the penalties available to injured consumers. The 
Truth in Lending Modernization Act that I am introducing today would 
remedy these problems in several important areas.

  TILA disclosure requirements and protections currently apply to all 
credit transactions secured by home equity and to other non-business 
consumer loans under $25,000. In 1968 this $25,000 limit on unsecured 
credit transactions was considered more than adequate to ensure that 
most automobile, credit card and personal loan transactions would be 
covered. This is clearly not the case today, particularly in the area 
of automobile loans. A January Washington Post article estimated that 
the average price of new automobiles sold today is $22,000. This means 
that increasing numbers of automobile transactions are falling outside 
the scope of TILA, with no requirements to provide consumers with full 
and accurate credit disclosure. Many consumers also routinely receive 
offers of unsecured credit and debt consolidation loans that can easily 
approach or exceed $25,000. These transactions also will increasingly 
fall outside the scope of TILA.
  The Congressional Budget Office estimates that the value of the 
dollar has declined by 75 percent since 1968, which means that it would 
require an exception over four times larger than the $25,000 in the 
1968 Act (or over $108,000) to provide a comparable level of exempted 
transactions today. However, this fully adjusted amount is clearly 
excessive for today's marketplace. My bill would double the amount of 
this statutory exception, from $25,000 to $50,000, to assure that all 
typical credit transactions will continue to be accorded TILA 
protections.
  A similar problem exists with the transaction exemption in the 
Consumer Leasing Act sections of TILA that restricts application of 
consumer disclosure and advertising requirements only to leases with 
total contractual obligation below $25,000. Again, this was considered 
more than adequate when Congress enacted the Consumer Leasing Act in 
1976, but it is clearly inadequate today, particularly for automobile 
leases. Congress could not have anticipated the enormous role of 
leasing in our current auto markets. Leases now account for over 40 
percent of all new automobile transactions, and an even more 
substantial percentage of transactions involving high-end luxury 
automobiles. My bill would assure that increasing numbers of automobile 
leases do not fall outside the scope of TILA by increasing the level of 
exempted leases from $25,000 to $50,000.
  As a primary enforcement mechanism, TILA provides individual 
consumers with a right of action against creditors that engage in 
misleading or deceitful practices. Creditors that violate any TILA 
requirement are liable for actual damages, additional statutory damages 
and court costs. TILA permits statutory damages, in credit transactions 
of twice the amount of any finance charge and, in lease transactions, 
of 25 percent of the total amount of monthly payments under the lease. 
In both instances, however, these damages are limited by the 
requirement that damages ``not be less than $100 nor greater than 
$1,000.
  These statutory liability provisions were included in the statute in 
1968 to provide ample economic incentive to deter violations. This is 
clearly not the case today. From my own analysis of abusive automobile 
leases, for example, I find that a clever and unethical dealer can 
easily exact thousands of dollars just in the initial stages of an auto 
lease, simply by not crediting trade-ins, adding undisclosed fees and 
including higher finance charges than disclosed to the consumer. A 
$1,000 maximum statutory damage clearly would not deter these and other 
actions that can cheat consumers out of thousands of dollars over the 
term of a loan or lease. My bill would increase the statutory damage 
limit to $5,000 for both credit and lease transactions.

  It would also raise the statutory damages available to consumers in 
class action litigation. Currently, TILA limits statutory damages in 
class actions that arise out of the same violation to the lesser of 
$500,000 or 1 percent of the creditor's net worth. For most of today's 
financial corporations this $500,000 limit represents a fraction of 1 
percent of their net worth. The bill would raise this statutory damage 
limit to $1 million for all credit and lease transactions.
  Finally, my bill seeks to prohibit in credit transactions a little 
known accounting procedure, known as the Rule of 78, that is used 
whenever possible by creditors because it maximizes interest income to 
the creditor at the expense of consumers. TILA requires that consumers 
receive a refund of any unearned interest on precomputed installment 
loans when they prepay or refinance their loan. Until recently, most 
creditors used Rule of 78 accounting for calculating these refunds, a 
method that heavily favors creditors by counting interest paid in the 
early phases of the loan more heavily than actuarial accounting 
methods. While justified in the 1930s as helping to reduce costs of 
computing interest, modern calculators and computers have rendered the 
Rule of 78 obsolete and unjustifiable. It serves no other purpose today 
than to maximize interest income to creditors.
  Bank regulators and the IRS have banned banks from using the Rule of 
78 in reporting interest income. In 1992 Congress prohibited its use in 
calculating interest refunds on mortgages and other installment loans 
with terms over 61 months. In 1994, the Home Owners

[[Page 6073]]

and Equity Protection Act ended the use of Rule of 78 accounting in all 
high costs home equity loans. My bill would complete the task of 
eliminating Rule of 78 accounting in all remaining consumer credit 
transactions by prohibiting its use for calculating consumer interest 
refunds for precomputed installment loans with terms of less than 61 
months, and also be requiring that creditors compute interest refunds 
using methods that are as favorable to the consumer as widely used 
actuarial methods.
  Mr. Speaker, in enacting TILA Congress recognized the consumer's 
right to be informed and to be protected from deceitful and misleading 
credit practices. The ``Truth In Lending Modernization Act'' will 
assure that these basic consumer protections remain effective in the 
future. I urge my colleagues to join me as co-sponsors of this 
legislation and work with me toward its adoption.

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