Ten years ago tomorrow, President Lyndon Johnson signed the truth-in-lending bill into law, and you gotta give him credit.
One of the oldest and most successful consumer laws ever enacted by Congress and a full seven years in the making, TIL brought understanding to hundreds of thousands of confused borrowers.
For the first time, a consumer who wanted to borrow money had to be told that the 3percent interest he was paying a month actually meant 36 percent interest a year. And the lender had to disclose the total cost in dollars of the credit extended.
Several restrictions were placed on creditors in the mortgage area. The most important one gave the borrower three days to back out on any agreement in which the borrower gave a second mortgage on his or her home.
Loan sharking, and the sometimes violent attempts to collect such loans, were made federal offenses by the bill. And in cases where a worker's pay was garnished for a debt, the new law protected 25 percent of his or her salary, or $48 a week, whichever was larger, from such attachment.
And through the years, the act has been updated and modified to conform to new developments. For example, the trend toward credit cards in the late '60s (In 1965 there were 5 million cards in circulation in 1965 and 50 million in 1970) led to 1970 amendment that restricted the issuance of unsolicited credit cards.
Four years later, another amendment - a reaction to rapidly increasing litigation - limited creditor liability.And in 1976, Congress voted a three-year trial allowing merchants to give discounts to customers paying with cash instead of a credit card. The move came in response to questions about whether the act would allow stores to put surcharges on credit card charges. In setting up the discount test, Congress banned any surcharges until 1979.
Later in 1976, Congress passed the last major amendment to the bill, extending TIL-type disclosure requirements to lease contracts to keep up with the times and the growing trend by consumers toward leasing rather than buying.
"The tenth anniversary of the statute provides a perfect time for reflection on how far we have come with truth in lending - and where we need to go from here," say White House consumer advocate Esther Peterson. "This act has successfully raised consumer consciousness about the cost of borrowing and the terms and conditions of credit contracts."
But truth in lending, like the consumer movement itself, is maturing and entering a new state. While the major thrust of the early legislation was toward disclosure by the lender, there is a new thrust, consistent with the times, toward making everything even more understandable to the consumer and trying to cut someof the voluminous paperwork that was forced on many banks and lenders by the regulators' interpretations of the acts mandate.
On May 10 of this year, the Senate passed the Truth in Lending Simplification Act by voice vote. And the House has introduced its own simplification legislation. In addition, many large corporations - notably banks - and several government agencies now have employes who sole job is to simplify existing rules and regulations.
In testimony last year before a Senate subcommittee studying the TIl Simplification Act, Federal Trade Commission consumer statutes specialist. Lewis Goldfarb called the original act "one of the most ambitious and far reaching federal consumer protectionstatutes ever passed."
"It provides those consumers interested in details with a great deal of information about cost and credit," says Mark Silbergeld of Consumer's Union. But, according to Silbergeld, there are still problemswith the legislation. "Administration of the act has clearly been lax on the part of the regulatory agencies," he said, noting that uniform enforcement guidelines proposed last October still are not in effect.
No one is doubting that the bill has had a major positive impact on the consumer. According to a study by the Federal Reserve, TIL is "possibly the most important federal consumer protection legislation in the credit area in recent years."
To gauge the impact of TIL on the consumer, The Fed studied consumer awareness of interest rates just before the TIL law was enacted, just after, and last year. One startling comparison came in the area of credit cards. Asked if they were aware of the annual interest rates they pay on their credit cards, only 26 percent of all consumers could answer yes in 1969. By 1970, after the bill had been in effect slightly over a year, that number had leaped to 63 percent. Last year, 71 percent knew.
"There has been another benefit," said Silbergeld. "TIL has provided substantial legal defenses for consumers who become involved in collection suit cases where payments have been justifiably discontinued."
One example of that can be seen in the area of legal aid defense of poor and underprivileged people. Public interest attorneys such as Will Ogburn of the National Consumer Law Center in Boston have had increasing success in defending the poor against creditors.
"The act has given th poor more leverage," Ogburn said in a telephone interview. "Because certain aspects of TIL may not have been satisfied by the creditor, the consumer is able to put the burdon on the creditor to complete his end of the bargain.
"For example, one of our biggest complaint areas is in home improvement contracts, where someone frequently will come to the door and offer to do some roofing work, or to repair a driveway. Quite often, they will do shoddy work, sometimes leaving things half-done, and then try to take a consumer to court because the consumer won't pay for the work. Because the home improver many times has not complied with some part of TIL, the consumer now frequently has the right to get out of the contract before there is any court battle," he said.
Ogburn has some startling figures of his own that show the decline of finance company business as a percentage of consumer lending.
"Finance companies traditionally charge the highest interest rates," Ogburn said. "Sometimes, before the act, you could see a finance company advertising 8 percent interest on a 36-month loan. But what they didn't say was that the consumer would be charged 8 percent of the full $1,000 for all three years, even though some of the balance had been paid off in the first two years. In fact, the true interest on that loan was 14.55 percent, which was higher than the bank loan at, say, 10 percent. But because the finance company didn't have to conform to the same reporting methods, if looked like a better deal."
In the decade since TIL was enacted, finance companies have increased their business 25 to 30 percent, Ogburn's studies show. But during the same period, credit unions, which he says "traditionally offer the lowest rates," have upped their consumer credit business between 200 and 250 percent. And banks, which he says are in the middle "but closer to the credit unions," are up about 150 percent in consumer lending.
"Clearly the consumer is getting a better deal," Ogburn said.
R.D. Perry, vice president for consumer lending of the Bank of America, agrees that TIL has inspired more efficient consumer borrowing. "It has been a good thing for the consumer, and that means it is good for us as well," he said. But he believes that "anincreased awareness on the part of banks of the benefits of being involved in consumer lending" has led the banks to pursue consumer lending business aggressively.
"Many banks hadn't participated in consumer lending before TIL," he said. "Now, while the market has expanded, the banks' penetration in the market is also expanding."
But Perry calls TIL "a difficult regulation to deal with because of its lack of clarity. It has added considerably to our paper work, and unfortunately the consumer has to pay for that."
Although he does see some relief from the complexities in the upcoming simplification act, Perry sees no help in cutting paper work.