"To 95 per cent of my customers today, the annual percentage rate is something that hangs up in the sky that they don't understand."
William I. Levenson
Baltimore furniture dealer
Like Prohibition, the Truth in Lending Act was supposed to cure a specific evil. But critics and friends alike say it, too, has proved excessive and ineffective.
TIL was intended to let consumers know how much interest they are really paying and, by the public disclosure of the rates to curtail excessive charges. Nine year after its passage, supporters and foes alike agree that TIL is not working well.
The commission on Federal Paperwork found the law was too long and complicated to be useful in helping consumers shop for credit. Moreover, since finance charge disclosures are normally made only at the time of purchase, it is impossible to use them to comparison shop.
Less than a quarter of the population uses the information that TIL requires lenders to disclose, according to the National Commission on Consumer Finance.
Two scientific samplings showed that few persons understand finance charges when expressed in annual percentage terms. Because that understanding is linked to education, the disclosures have not affected the buying behavior of low income consumers, who dominate the bad risk category, which is charged the highest interest rates.
At a hearing last month on a bill to reform TIL, Senate Banking committee chairman William Proxmire (D-Wis.) declared. "It is just so frustrating to have a law like this that doesn't see to be working in practice. It is true that it is better than nothing, better than what we had before 1969. But it could be so much better if we could get the majority of people using it instead of a small minority."
Some small businesses are unable - or unwilling - to cope with TIL disclosure statements. At the hearing, a Chicago businessman displayed a 31-inch loan contract incorporating TIL disclosures.
The Baltimore furniture store president said some customers walked out in disgust after waiting from 30 minutes to an hour for the credit department to handle the arrangements. (Had they remained, they would have found that the store charges an annual interest rate of 20 per cent.)
The government has been unable to come up with a reliable cost analysis of those extra minutes, labor and forms.
The Consumer Bankers Association polled 40 members and found the average cost for collecting old consumer load applications and printing new forms (to satisfy frequent changes in TIL regulations) was $12,000. The National Consumer Finance Association estimated even one additional sheet of TIL paper would cost its 3,376 members collectively $20 million the first year, $10 million a year thereafter.
Lack of itemization - as well as lax enforcement - has prompted numbers of avaricious lenders to add hidden charges to loan contracts, witnesses testified. James Boyle, executive director of the Texas Consumer Association, told of a $200 documentary fee hidden in the finance contract for mobile homes, and a $50 registration fee hidden in automobile purchase contracts when the registration receipt read $20.
Property insurance is a "tremendous ripoff." Boyle said. "The consumer is sold what we call dual interest insurance, which protects both the creditor and the consumer and then is sold insurance against defects. In mobile homes, we get county mutual insurance where the rates are not fixed and approved."
Credit life insurance is another profitable item. The charges, Proxmire observed, are "outrageous," but still 98 per cent of the customers buy it even though it is optional. That option is actually spelled out in the form, but Proxmire contends that it is lost in the over all complexity.
The third major dawback of TIL has been the number of lawsuits it has generated as a result of the vagueness and ambiguity of the oft-amended act. The U.S. League of Savings Associations estimated there have been 4,500 over the past five years. Adding criminal suits, the Paperwork Commission said the total is 8,000 suits.
The better part of these were litigated in the heyday of consumerism, generally by young, so-called public interest lawyers, who sought out technical errors on which to base cases. As that generation of advocates grew older and more anxious to make big money, the number of suits tapered off, Consumer Union reported.
Unlike the Volstead Act, Truth in Lending will not be repealed. Even though it is a monster - TIL has been the subject of 50 official Federal Reserve interpretations, 80 staff interpretations, and 1,200 Fed newsletters - its supporters believe that it has had some effect on the consumer lendind industry.
They point out that the number of finance companies (which charge an average annual rate of 20.5 per cent) has dropped from 6.424 in 1960 to 3.376 in 1977. Their share of the market has fallen from 27 per cent in 1970 to 22 this year. The finance company industry claims that most of the cutback is due to the recession.
Like temperance champions before them, consumer groups that fought so hard for TIL oppose weakening the stringent provisions of the current law. The argue that all the disclosures and liabilities are necessary and good. Their primary revision consists of turning the contract legalese into plain English.
Sen. Proxmire's bill has the backing of the Federal Reserve and the Federal Trade Commission - the two regulatory bodies most closely involved in TIL - as well as the business community.
Studies have shown that the average shopper tunes out when s have shown that the average shopper tunes out outwhen presented with a large set of numbers. The Proxmire bill would cut the required disclosures in half (down to a third in some cases) to include the total price, finance charge, the amount of monthly payment, and the annual percentage rate.