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Case Western Reserve Law Review
Volume 22
1970
Issue 1
Article 9
Truth in Lending: The Impossible Dream
John M. Drain
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John M. Drain,
Truth in Lending: The Impossible Dream,
22 Case W. Rsrv. L. Rev. 89 (1970)
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19701
NOTE
Truth in Lending: The Impossible Dream
I.
INTRODUCTION
T
to
defer payment for a debt or for
the purchase of property or services is at least as much a part
of the American way of life as apple pie and Saturday afternoon
football.' Everybody buys on credit, and, what is more, no one is
ashamed to admit it.
2
Buying on credit has been cited as a principal
cause of the rapid acceleration of economic growth in the United
HE RIGHT
OF
A CONSUMER
1
See
D.
BELL,
THE
END
OF
IDEOLOGY
246 (1960).
See also
BOARD
OF
GOVER-
NORS
OF
THE FEDERAL RESERVE
SYSTEM, CONSUMER
INSTALLMENT CRtEDIT ptS.
I-IV
(1957) [hereinafter cited as CONSUMER CREDIT STUDY], a massive study of the insti-
tution
of consumer credit, especially Part I,
Growth andImport.
The availability of credit to anyone who meets the minimum qualifications may
serve to reinforce American democracy:
Credit, if used properly, serves as an important democratizing force. Stated in
its simplest terms, people with modest incomes usually do not have the cash
with which to purchase furniture, TV sets, refrigerators, cars, and washing
machines. Time buying does afford low- and middle-income couples greater
opportunity to marry earlier, raise families while they are young, and to enjoy
many of the benefits that others
take
for granted.
Hearings on S. 1740 Before
the Subcomm. op Productionand Stabilization of the Senate Comm. on Bank-
ing and Currency,
87th Cong., 1st Sess.
75
(1961) [hereinafter cited as
1961
Hearings on S. 1740]
(statement of Hillel Black, author of BUY Now, PAY
LATER
(1961)).
2
In the past the use of credit was considered a taint of the lower classes.
See Hear-
ings on
S.
5 Before the Subcomm. on Financial Institutions of the Senate Comm. on
Banking and Currency,
90th Cong., 1st Sess.
38, 56
(1967) [hereinafter cited as
Hearings on
S.
53.
The advent of the automobile, however, encouraged installment
buying, and today the "buy now, pay later" philosophy has been adopted in every eco-
nomic stratum of our society.
See generally
J.
GALBRAITH, THE AFFLUENT
SOCIETY
(1960). Outstanding consumer credit increased from $64 billion in 1962 to $117
billion in August 1969, and rose at a rate of over
$1
billion a month in the latter half
of 1968. This growth of installment debt has been horizontal
-
an increase in the
number of debtors
-
rather than vertical
-
an increase in the volume of debt among
prior debtors. Shapiro,
Installment Credit,
in INTERNATIONAL
ENCYCLOPEDIA OF
THE
SOCIAL SCIENCES
354,357
(1968).
Professor Galbraith attributes much of the change in consumer credit attitudes to
advertising: "The relation of emulation [due to advertising] to indebtedness is even
more direct.
.
.
People have changed their view of debt. Thus there has been an
inexplicable but very real retreat from the Puritan canon that required an individual
to save first and enjoy later...
.
J.
GALBRAITH,
supra
at 159. This change in attitude
is reflected in the present use of credit from the cradle to the grave.
[Many [Americans] are virtually living on time. Babies are born on the
installment plan, people go on African safaries and hunt polar bear and if
they outsmart the bear have him stuffed, all through the flick of a credit card.
Even funerals are being paid for on what the English quaintly call the never-
never.
1961
Hearings on
S.
1740, supra
note
1,
at
75
(statement of Hillel
Black).
CASE WESTERN RESERVE LAW REVIEW
[Vol.
22:89
States since World War
11.
3
In addition, the American consumer
is able to make the most of his leisure time because he can buy goods
today and pay for them tomorrow. Most consumers would agree
that buying on credit is a worthwhile convenience which is here to
stay. Creditors feel the same way because most consumers are faith-
4
ful about making their payments.
Yet, despite the general post-World War II prosperity,
5
there
was a growing awareness among consumers that all was not so
well. Many consumers were unable to shop for the best credit terms.
Consumers were not adequately informed when they bought on
credit, and they were often exploited by overreaching merchants.'
In an effort to provide the uninformed consumer with some pro-
tection from being gouged by excessive interest rates, Congress re-
cently enacted the Truth in Lending ActC as Title I of the Consumer
Credit Protection Act.
8
Truth in Lending applies to both kinds of
11 CONG. REc. 16,425 (1965) (remarks of Senator Douglas).
Expressed in 1958 dollars, the gross national product doubled from 1950 to 1968,
3
rising from
$355
billion to $707 billion.
BUiAU OF
THE CENSUS,
STATISTICAL
ABSTRACT OF
THE UNITED
STATES
Table No. 457, at 312 (1969). Per capita personal
income rose from $1,800 in 1950 to $2,900 in 1968.
Id.
Table No. 459, at 313. The
entire economy has experienced constant growth since 1946.
Id.
Table No. 460.
For a brief history of consumer credit extension in this country, see Shapiro,
supra
note 2.
See also Hearingson S. 2755 Before the Subcomm. on Productionand Stabili-
zation of the Senate Comm. on Banking and Currency,
86th Cong., 2d Sess. 23-24,
353-55, 537-39 (1960) (Consumer Credit Labelling Bill) [hereinafter cited as
Hear-
ings on
S.
2755];
Note,
Consumer Credit
-
Proposed Truth-in-Lending Legislation,
16
DEPAUL L. REv. 464, 465 (1967).
4
That creditors are making money from their credit operations is demonstrated by
the tremendous growth of credit extension since World War II.
See
note 2
supra.
There is evidence that some merchants make as much profit from the credit aspect
of their sales as from the mark up on the product itself.
1961
Hearings on
S.
1740,
supra
note 1, at 75-76. In 1960, Spiegel's, Inc., one of the country's largest mail-order
houses, made $39.7 million from its credit charges, which accounted for
55
percent of
its gross income.
Id.
at 220-21. Nevertheless, creditors repeat the lament that credit
operations cost them money.
See Hearings on
S.
750 Before the Subcomm. on Produc-
tion and Stabilization of the Senate Comm. on Banking and Currency,
88th Cong., 1st
Sess., pt. 2, at 1493-542 (1963) [hereinafter cited as
1963
Hearings on
S. 750];
Hear-
ings on
S.
1740 Before the Subcomm. on Production and Stabilization of the Senate
Comm. on Banking and Currency,
87th Cong., 2d Sess. 15 (1962) [hereinafter cited
as
1962
Hearingson
S.
1740]. See also
N.Y. Times, Nov.
5, 1963,
at 39, col. 2.
5
See
note 3
supra.
6
One of the examples of excess credit charges presented to a subcommittee conduct-
ing hearings on Truth in Lending was the case of an electrical worker who owed $182
on a $123.88 television set after paying $175 in 11 months. N.Y. Times, Aug. 17, 1963,
at
25,
col.
5.
7
15 U.S.C. §§ 1601-13, 1631-41,
1661-65
(Supp. IV, 1969).
8
Pub. L. No. 90-321,
tits.
I-V, 82 Star. 144 (1968) (codified in scattered sections
of
15,
18 U.S.C.). The Act was passed on May 29, 1968. Truth in Lending went into
effect on July
1,
1969.
See
Andrews,
Truth in Lending Law Takes Effect Today
As
Consumers Cheer But Lenders Grumble,
Wall Street
J.,
July 1,
1969,
at 9, cols. 1-2
(Midwest ed.). Title II of the Consumer Credit Protection Act regulates extortionate
1970]
TRUTH
IN LENDING
consumer credit
-
consumer credit purchases and consumer loans.
The basic requirements of the Act and the regulations thereunder'
(Federal Reserve Regulation Z) are that certain items be disclosed
to the buyer or borrower before the credit transaction is completed,
including the total amount of the finance charge and the finance
charge stated as an annual percentage rate of the unpaid balance.
10
The finance charge is the sum of all direct and indirect charges im-
posed
by
the creditor incident to the extension of credit, including
interest or time-price differential, service or carrying charges, loan
fees, credit investigation fees, and insurance premiums if coverage
is required before credit will be extended.
1
The annual percentage
rate is that rate which will yield an amount equal to the finance
credit transactions; Title III restricts garnishments; Title IV establishes a National Com-
mission on Consumer Finance; and Title V contains miscellaneous guidelines for judi-
cial interpretation of the Act.
The Consumer Credit Protection Act was first introduced by Senator Douglas of
Illinois in
1960
as the Consumer Credit Labelling Bill.
See generally, Hearings on
S.
2755, supra
note 3. After its initial rejection in 1960, Senator Douglas reintroduced
it the following year
[See generally
1961
Hearings on
S.
1740, supra
note
1],
but it
was again short-lived.
See
N.Y. Times, Sept. 7, 1962, at 15, col. 1. The bill was revived
in
1963
[see Hearingson S. 750 Before the Subcomm. on Productionand Stabilization
of the Senate Comm. on Banking and Currency,
88th Cong., 2d Sess.,
pt. 1
(1964)
[hereinafter cited as
1964 Hearings on
S. 750]; 1963
Hearings on
S.
750, supra
note
4],
and was introduced a fourth time in
1965
as
S.
2275
[see
111
CONG.
REC. 16,428
(1965) (remarks of Senator Douglas)], but never got out of committee. Senator Doug-
las labeled this defeat a "victory for the usurers and money lenders." Wall Street J.,
June 24, 1964, at 2, col. 3. In its final form, the bill passed the Senate under the aegis
of Senator Proxmire on July
11, 1967,
by a vote of 92-0. Wall Street J., July 12, 1967,
at 3, col. 2 (Midwest ed.).
See generally Hearings on
S.
5., supra
note 2; 113 CoNG.
REC. 2042 (1967) (remarks of Senator Proxmire).
It was not until the Truth in Lending Bill reached the House of Representatives
in
1967,
after being delayed in the Senate for 7 years, that the broader consumer protec-
tion package was conceived. The bill's leading supporter in the House was Representa-
tive Leonor Sullivan, who introduced the provisions restricting garnishment (Title III)
and establishing a National Commission on Consumer Finance (Title IV). The follow-
ing Truth in Lending (Tide I) proposals by Representative Sullivan failed to receive
approval: required disclosure of total finance charges on first mortgage loans to home
buyers
[see
note 44
infra];
a statutory ceiling of 18 percent on annual interest rates;
authorization for the Federal Reserve Board to exercise credit controls during a national
emergency; and authorization for the Federal Reserve Board to regulate downpayments
for credit purchases or contracts for future delivery of commodities traded on commod-
ity exchanges.
See
Wall Street J., July 21,
1967,
at
3,
col. 2 (Midwest ed.);
id.,
Oct.
5,
1967,
at
9,
col.
I
(Midwest ed.). But two important parts of the Truth in Lending title
were added in the House: (1) the advertising provisions
[see
text accompanying notes
69-72
infra],
and (2) the requirement that the cost of credit life insurance be figured as
a part of the total finance charge if the customer is required to buy such insurance.
Truth in Lending Act,
15
U.S.C. § 1605(b) (Supp. IV,
1969);
see
Fed. Res. Reg. Z,
12 C.F.R. 226.4(a)(5) (1970).
9
Fed. Res. Reg. Z, 12 C.F.R. §§ 226.1-.12 (1970).
10
15 U.S.C. §§ 1631, 1637-39 (Supp. IV,
1969);
see
Fed. Res. Reg. Z, 12 C.F.R. §
226.1(a)(2) (1970).
11 15
U.S.C. § 1605 (Supp. IV,
1969);
see
Fed. Res. Reg. Z, 12
C.F.R.
§ 226.4(a)
(1970).
CASE
WESTERN RESERVE LAW REVIEW
[Vol. 22:89
charge when applied to the unpaid balances of the amount being
financed.
12
The premise behind Truth in Lending is that disclosure of fi-
nance charges as an annual percentage rate will accomplish two
things: (1) it will enable the consumer to more easily identify and
compare credit terms and thus make better use of his credit dollar,
and (2) it will enhance economic stability because consumer credit
will be more responsive to variations in general monetary policy.'
This Note attempts to demonstrate that Truth in Lending does
not deserve all the praise it has been receiving.
4
Held out by poli-
ticians as a comprehensive program of consumer protection, it gives
the consumer only mild protection at best because it employs the
vehicle of disclosure rather than regulation.
5
Truth in Lending
will only help those who are both able and willing to shop for
credit.'
In addition, Truth in Lending will fail to enhance eco-
nomic stability because the average consumer is insensitive to the
interest rates he pays.'
7
The discussion will begin with an examina-
tion of consumer confusion over credit charges, followed by a review
of the legislative responses of the states, a description of Truth in
Lending's major provisions, and an evaluation of the Act.
II.
TRUTH IN LENDING: A NECESSARY ITEM
Truth in Lending grew out of the existing consumer confusion
12
15
U.S.C. §
1606 (Supp. IV, 1969);
see
Fed.
Res.
Reg.
Z, 12
C.F.R.
§
226.5
(1970).
The annual rate may be rounded off to the nearest one-quarter of 1 percent
(15 U.S.C.
§ 1606(c) (Supp. IV, 1969)
),
and until July 1, 1971, creditors have the option of dis-
dosing finance charges in dollars per hundred instead of an annual percentage.
Id.
§
1606(f).
3
1
See
15 U.S.C. § 1601 (Supp. IV, 1969).
14
See
Hodges
&
Flint,
Full Disclosure of Credit Charges,
23
FED.
B.J. 170 (1963);
Jordan & Warren,
Disclosure of Finance Charges: A Rationale,
64 MIcH. L. REV. 1285
(1966); McEwen,
Economic Issues in State Regulation of Consumer Credit,
8 B.C. IND.
& COM. L. REV. 387, 396 (1967); Zeisel & Boschan,
The Simple Truth-in-Lending,
116 U. PA. L. REv. 799 (1968); Note,
Consumer Credit
-
ProposedTruth-in-Lending
Legislation, supra
note 3; Comment,
The Consumer in the Market Place
-
A Survey of
the Law of Informed Buying,
38 NoTRE DAME LAW. 555 (1963); 18 VAND. L REV.
856 (1965).
But the comments have not been altogether favorable.
See
Johnson,
Regulation of
Finance Charges on Consumer Installment Credit,
66 MicH. L. REv.
81
(1967);
Kripke,
Consumer Credit Regulation: A Creditor-OrientedViewpoint,
68 COLUM.
L.
REV. 81 (1968); Note,
Truth in Lending?
-
A Viable Subject,
32 GEo. WASH. L
REV.
861, 888-91 (1964).
15
See
notes 110-26
infra
& accompanying text.
16
See
text accompanying notes 110-12
infra.
17
See
notes 104-07
infra
& accompanying text.

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