Module 1: Introduction

The Truth in Lending Act and the Equal Credit Opportunity Act

Introduction
On March 15, 1962, President John F. Kennedy sent a special message to Congress which
included a call to action on behalf of American consumers.[1] The message proposed a Consumer
Bill of Rights which included: 

(1)  the right to safety, which is protection from marketing of goods which are hazardous to
health or life;

(2)  the right to be informed, or protection from fraudulent, deceitful, or grossly

misleading information, advertising, labeling, or other practices and the right to have the
facts needed to make an informed choice;

(3)  the right to choose, meaning the right to have access to a variety of products and
services at competitive prices, or, for a regulated industry, the assurance of satisfactory
quality and service at fair prices; and

(4)  the right to be heard, where the consumer interests should be fully considered in the
formulation of government policy and treated fairly in administrative hearings.  

A few months later, in July 1962, President Kennedy established a Consumer Advisory
Council which subsequently reported the need for greater representation.[2]  In February 1964,
President Lyndon Johnson reaffirmed Kennedy’s Consumer Bill of Rights and recommended that
Congress pass sweeping legislation to protect the American consumer.[3]   

Consumer protection laws exist at both the federal and state levels. These laws seek to
achieve President Kennedy’s mission by protecting consumers and educating consumers on how to
protect themselves.

In our introductory module, we’ll examine two critical federal laws in this field, the  Truth in
Lending Act and the Equal Credit Opportunity Act. We’ll learn about how they operate and how they
protect the American consumer from predatory practices.

The Truth in Lending Act

Borrowing money can be a daunting process. A first-time applicant for a loan or line of credit
may not fully understand what he’s signing up for and may be confused as to whether he’s signing
up for the best possible deal. It appears easy to just fill out a form, but a consumer may have a
difficult time understanding how a credit transaction works and all the terms associated with it.

The 1968 Truth in Lending Act[4] obligates lenders to make loan disclosures so that
consumers could compare credit costs and become fully aware of the costs of credit offered by a
financial institution.[5] This Act has changed federal policy from a philosophy of “let the buyer
beware” to one of “let the seller disclose” over the last 50 years.[6] This federal act preempts any
state laws that are inconsistent with its disclosure provisions.  The mandates in the Truth in Lending
Act are implemented by regulations commonly known as Regulation Z.[7]

Prior to the enactment of the Truth in Lending Act and Regulation Z, it was difficult for
consumers to compare loans because there was no consistent format for presentation of rates and
terms.  Under the Act, lenders must disclose information in standardized ways, are required to use
the same credit terminology and must express interest rates in standard format so that consumers
have the best chance to understand all the terms to which they are agreeing.

          Truth in Lending Act disclosures include terms such as the number of payments, the monthly
payments, late fees and whether a loan can be pre-paid without a penalty. Furthermore, the
following terms must also be disclosed to the consumer:[8]

·       the Annual Percentage Rate: the APR is the cost of credit expressed as a yearly rate, in
percentage format;

·       the Amount Financed: the dollar amount of credit provided to the applicant;

·       the Total of Payments: the sum of all the payments that the applicant will have made
until the end of the loan, including repayment of the principal plus the finance charges.

In addition to providing a uniform system for disclosures, the Act: [9]

·       protects consumers against inaccurate and unfair credit billing and credit card practices;

·       provides rights of rescission;

·       provides rate caps and minimum standards on certain loans secured by the consumer’s
dwelling;

·       imposes limitations on home equity lines of credit; and

·       prohibits unfair or deceptive mortgage lending practices. 

Regulation Z applies to individuals and businesses that offer or extend credit when all the
following conditions are met: 

·       the credit must be extended to a natural person;

·       for personal, family or household use;

·       by a creditor who offers or extends credit regularly; and

·       the credit is subject to a finance charge or is payable by written agreement in more than
four installments to the original creditor.[10]  

The finance charge is the measure (in dollars) of the cost of the consumer credit and
includes any charges, fees and interest payable by the consumer in exchange for the extension of
credit.[11]  For example, finance charges may include interest, points, transaction fees and service
fees.  It does not include charges that are also payable in a cash transaction, such as taxes and title
or license fees.

The rules a creditor must follow may differ depending on whether the creditor is offering
“open-ended credit”, such as credit cards or home-equity lines, or “closed-ended credit”, such as car
loans or mortgages.    Some disclosures and rules are the same for both types of transactions.   For
example, the disclosures of the finance charge and the annual percentage rate are central to the
purpose of the Truth in Lending Act and such disclosures must be made for applications for open-
ended credit and closed-ended credit.

Because not all charges must be disclosed to a borrower and because the Truth in Lending
Act has been amended many times since its inception in 1969, this complex set of laws and
regulations continues to present a challenge for lenders and industry experts to comply with.

The Rodash Case and Congressional Reaction

In 1995, Congress enacted amendments to address concerns stemming from a 1994 court
decision, Rodash v. AIB Mortgage Co.[12] a case where a consumer was allowed to rescind a
mortgage loan and recover all fees and finance charges that he had paid based on errors in the
creditor’s finance charge disclosures.

The Rodash case involved a consumer who obtained a home equity loan of $102,000 to pay
for medical treatment, which was secured by a mortgage on her principal residence.    At the January
18, 1991 loan closing, AIB gave Rodash a Truth in Lending Disclosure Statement and a Mortgage
Settlement Statement.  The Settlement Statement reflected itemized charges, including a $22
Federal Express delivery fee. This fee was itemized under “amount financed” in the transaction.[13] 

Rodash stopped making her mortgage payments as of July 1, 1991, and on December 26,
1991, Rodash’s attorney wrote a letter stating that she was rescinding the transaction under the
Truth in Lending Act and seeking statutory penalties, including cancellation of the mortgage. The
lender accelerated the balance due under the Note, which is often allowed as a remedy for failure to
make a payment and filed a foreclosure action in state court. 

Rodash argued that AIB did not make all the required material disclosures because it
included the Federal Express charge of $22 in the “amount financed” section instead of as a “finance
charge.”  The finance charge was understated because of this omission, resulting in a Truth in
Lending Act violation. The Court of Appeals sided with Rodash because AIB incurred the Federal
Express fee to pay off Rodash's then-existing mortgage held by another creditor.  This payment was
part of the fulfillment of the transaction and, without mailing the check, the home equity loan could
not have been consummated.  AIB therefore violated the Truth in Lending Act by failing to disclose
as part of the finance charge, the $22 Federal Express delivery fee.[14]

The Rodash decision spurred on class action lawsuits involving thousands of mortgage loans

alleging similar violations and seeking rescission. To address these concerns and the subsequent
class-action lawsuits, the 1995 congressional amendments clarified the treatment of several fees
and provided tolerances for errors in the finance charge calculation for loans secured by real estate
or dwellings.[15]

Equal Credit Opportunity Act

 Prior to 1974, it was common practice to discount a married woman’s income, especially if
she was of child bearing age on the theory that she was more likely to decrease or cease working to
raise children.[16]

In response to this practice, Congress passed the Equal Credit Opportunity Act[17] in 1974
to ensure that banks and other lenders such as small loan and finance companies, retail and
department stores, and credit unions, would make credit available without regard to the applicant’s
sex or marital status. Two years later, Congress amended the Act to include prohibitions on
discrimination against race, color, national origin, age, receipt of public assistance income or the
exercise in good faith of the rights guaranteed under the Consumer Credit Protection Act.[18] 

The Equal Credit and Opportunity Act’s primary regulation is known as Regulation B.[19] 
The Act applies to all creditors and Regulation B’s prohibitions apply to every aspect of an
applicant’s dealings with a creditor regarding an application for credit or an existing extension of
credit.  This includes information requirements, investigation procedures, standards of
creditworthiness, terms of credit, furnishing of credit information, revocation, alteration, or
termination of credit and collection procedures. 

Regulation B prohibits a creditor from requesting information about the applicant’s spouse or
former spouse unless he or she will be liable for, or have access to, the account, or unless the
applicant is relying on the spouse’s income.[20]  For example, if the applicant is relying on alimony,
child support or separate maintenance from the former spouse as a basis for obtaining the credit,
then the creditor can request this information.

A creditor may also not require the signature of the applicant’s spouse if the applicant is able
to meet the standards of creditworthiness on her own.[21]  This rule was implemented to enforce the
ban on marital status discrimination. 

The Consumer Financial Protection Bureau provides creditors with model application forms
to demonstrate how one can comply with Regulation B. It is not mandatory to use these forms, but if
they are used, the creditor is deemed to be following Regulation B’s application requirements. 

If the creditor chooses to deny an application for credit, it must provide a written notice to the
applicant called an Adverse Action Notice. It requires that, within 30 days of adverse action, the
creditor must give the applicant a statement of the specific reasons for the denial of credit.[22] 
Forcing the creditor to articulate legitimate reasons for denial of credit is meant to prevent
discriminatory actions in the credit decision.

Remedies
A creditor that fails to comply with the Equal Credit Opportunity Act or Regulation B is subject
to civil liability for actual and punitive damages or can be subject to class action lawsuits. In the case
of an individual plaintiff, punitive damages are available, but limited to $10,000. In the case of a class
action, damages are limited to the lesser of $500,000 or one percent of the creditor’s net worth.[23]  

Administrative enforcement of both acts is delegated to several federal administrative

agencies, depending on the type of credit involved. Overall enforcement authority is provided to the
Federal Trade Commission and the Consumer Financial Protection Bureau.[24]  Through its
enforcement authority, the Consumer Financial Protection Bureau may join forces with the United
States Department of Justice to pursue violations of the Equal Credit Opportunity Act.  This often
results in a consent order agreed to by the lender to settle the action, which may include payment of
damages to consumers who were harmed as well as an agreement to change policies and practices.

          An example of such enforcement by the Consumer Financial Protection Bureau and the
Justice Department involved a complaint against Provident Funding Associates for discrimination in
mortgage pricing.[25]  Provident originates mortgage loans through a nationwide network of brokers.
Between 2006 and 2011, Provident made over 450,000 mortgage loans through this broker network.
During this time, Provident set risk-based interest rates, which means that they offered different
consumers different interest rates or other varying loan terms, based on the estimated risk that the
consumers will fail to pay back their loans. They also allowed brokers to charge higher fees to
consumers of higher risk loans.

The Bureau and Department of Justice claimed that Provident’s discretionary broker
compensation policies resulted in unlawful discrimination. They alleged that Provident charged
thousands of African-American and Hispanic borrowers higher total broker fees than white
borrowers, not based on their creditworthiness or other objective criteria related to borrower risk and
loan characteristics, but because of their race and national origin. As a result, approximately 14,000
African-American and Hispanic borrowers paid higher total broker fees.   

The consent order that the parties reached required Provident to pay $9 million dollars to a
settlement fund for the harmed African-American and Hispanic borrowers who were victimized by
the practice. Furthermore, Provident was required to engage a policy which did not allow individual
brokers to charge or collect different fees for different loans based on interest rate or risk criteria.  
Finally, the consent order required a fair lending training program and broker monitoring program.

In our next module, we’ll discuss the Fair Credit Reporting Act and the requirements for
credit reporting agencies, users of consumer reports, furnishers of information and the rights and
remedies of consumers.