Opinion ID: 381256
Heading Depth: 2
Heading Rank: 1

Heading: time of disclosure

Text: 10 The principal issue is whether the Act, as amplified by Regulation Z, required a written disclosure by Oriental of the terms of the credit extension at the time Oriental agreed to lend the $27,300 or at least sometime before the Postows paid the $305 forfeitable stand-by fee, or whether the requirements of the Act were satisfied by disclosure just prior to settlement. Section 129(a) of the Act sets forth those items that must be disclosed in an extension of consumer credit including residential mortgage loans; they include (a)ll charges, individually itemized, which are included in the amount of credit extended but which are not part of the finance charge. 15 U.S.C. § 1639(a) (2) (1976). In the Postows' case this meant various closing costs amounting to $1,827.78. 4 Some of these closing costs, i. e., the appraisal, credit report and inspection fees (totaling $95.00) were disclosed in the commitment letter. But the Postows did not learn of the $194.50 charge for title insurance until almost two weeks after paying the stand-by fee, and other charges totaling $1,538.28 for title examination, survey, document preparation, real estate taxes and other settlement fees were first disclosed to the Postows on the day of settlement. The disclosure form also described for the first time at settlement two of Oriental's loan repayment policies: the late charge that Oriental would assess (4 percent) if the Postows' monthly payments were more than 15 days late, and the rebate formula Oriental would use to return unearned fire insurance premiums to the Postows if they repaid the loan before maturity. 5 11 All of these charges were included in the amount of credit extended 6 and, along with Oriental's loan repayment policies, were required to be disclosed to the Postows under § 129 of the Act. As noted above, the issue is when those disclosures were required.
12 Section 129(b) of the Act requires that the (aforesaid) disclosures . . . shall be made before the credit is extended, and may be made by disclosing the information in the note or other evidence of indebtedness to be signed by the obligor. 15 U.S.C. § 1639(b) (1976). Regulation Z, 12 C.F.R. § 226.8(a) (1979), interpreting that section of the Act, provides: 13 The disclosures shall be made before the transaction is consummated. At the time disclosures are made, the creditor shall furnish the customer with a duplicate of the instrument or a statement by which the required disclosures are made and on which the creditor is identified. All of the disclosures shall be made together on either: 14 (1) The note or other instrument evidencing the obligation on the same side of the page and above the place for the customer's signature; or 15 (2) One side of a separate statement which identifies the transaction. 16 (Emphasis supplied.) Regulation Z goes on to define when the transaction is consummated as the time a contractual relationship is created between a creditor and a customer . . . irrespective of the time of performance of either party. Id. § 226.2(kk) (emphasis supplied). 17 The relevant question here is whether credit was extended when Oriental became obligated to make the loan and the Postows paid the stand-by fee which they would lose if they later decided not to borrow from Oriental. In our view, and in that of the district court whose construction of the statute we affirm, credit was extended at that point; a transaction was consummated, a contractual relationship was created, and disclosure was required by the Act. Once the commitment letter was signed and the stand-by fee paid, Oriental could have been sued by the Postows if it refused to lend the money; the Postows would have forfeited their $305 if they had not subsequently borrowed the money from Oriental. 18 Oriental's arguments against this interpretation center first on language in the Act and in Regulation Z that allows the required disclosures to be made in the note or other evidence of indebtedness to be signed by the obligor. 15 U.S.C. § 1639(b) (1976); see 12 C.F.R. § 226.8(a) (allowing disclosure in (t)he note or other instrument evidencing the obligation). This language is cited by Oriental to show that Congress and the Board meant only to require disclosures at some point before the ultimate sale or finance transaction is completed; in this case when both the borrower and the lender signed the mortgage note. 19 We disagree with that interpretation. We can find no indication that in authorizing disclosure to be made on a particular piece of paper, Congress meant to authorize by implication a timing for disclosure at odds with other more specific mandates as to when disclosure is to take place. This Act requires disclosure at the time of extend(ing) credit, and Regulation Z mandates disclosure at the consummation of either the transaction (§ 226.8(a)) or a transaction (§ 226.2(kk)) without defining any particular transaction, and at the time of creating a contractual relationship (id.) without defining any particular kind of contractual relationship. Nor does Regulation Z specify that it is only the final loan transaction or the final contractual relationship legally obligating both parties to borrow and lend that creates the disclosure obligation. In fact, Regulation Z explicitly provides that a transaction is consummated when a contractual relationship to extend credit is created, irrespective of when the parties perform their obligations under that agreement. 20 The legislative history of § 129(b) of the Act is consistent with this interpretation. As introduced in 1967, the bill provided for disclosures prior to the consummation of the transaction. S.Rep. No. 392, 90th Cong., 1st Sess. 15 (1967) (hereinafter 1967 Senate Report ). This was changed by the Senate Banking and Currency Committee to require the disclosures before the credit is extended. Id. In addition, the Senate Report added an additional authorization for such disclosures to be put in the note or other instrument of indebtedness itself or in a separate statement, 7 still subject, however, to the major requirement that the disclosures come before the credit was extended: 21 Section 4 contains the principal elements of the bill and sets forth the various disclosure requirements on consumer credit transactions. The disclosure would have to be made before the credit is extended. In most cases it would amount to providing the required information on the installment contract or other evidence of indebtedness which the consumer would sign in order to complete the transaction. A creditor could also furnish the information on a separate document, providing the information was given before the consumer actually agreed to the credit transaction. 22 Id. at 7 (emphasis supplied). 23 In providing for disclosure in the note itself as the general rule, Congress and the Board seem to have indicated that a separate, earlier notice is not required as long as the borrower receives the required disclosure before becoming liable for a significant amount if he or she does not utilize the credit. In most consumer loans, the creditor does not become liable in any way until the note is signed, and disclosure in the note would thus be sufficient. If the note is not signed until after the borrower becomes liable, however, disclosure in the note would be untimely. 8 A requirement for disclosure before the borrower becomes liable, if he or she does not utilize the credit, through payment of a substantial, forfeitable standby fee is therefore entirely consistent with the Act. 24
25 Public Information letters are written by various officials and employees of the Board to inquiries regarding the statute and the Board's regulations. From June 1969 through July 1979, over 1350 of these Board staff letter responses have been made available for the staff's use and for public access in the Board's Office of Public Information; those letters are also available to the public in a commercial reporting service. 26 In March 1970 only months after the Act went into effect a Public Information letter written by Kenneth A. Kenyon, then the Board's Deputy Secretary, specifically addressed whether disclosures were required before the payment of a forfeitable stand-by fee by a borrower not contractually bound to complete the ultimate transaction: 9 27 (The payment of that fee) does consummate the transaction, in that it subjects (the purchaser) . . . to a penalty for not utilizing the credit. Clearly, it creates a contractual relationship between the creditor and the customer. Accordingly, the Regulation Z disclosures must be furnished to the customer before he pays the commitment fee. 28 The Deputy Secretary's March 1970 letter which has been in effect almost ten years is the only administrative pronouncement directly on point. Courts frequently examine manuals, forms and advice issued to the public 10 in determining the proper construction of an administrative regulation. Further, we are not restricted to considering only the actions formally taken by the agency. Federal courts, including the Supreme Court, have given considerable weight to the practical application of a statute or regulation by government field personnel, compliance officers and auditors. 11 In fact, our own court in Bissette v. Colonial Mtg. Corp. of D. C., 477 F.2d 1245, 1246 (D.C.Cir.1973), found that the Board's Public Information letters, like the one at issue here, although not legally binding should be treated as persuasive . . . . Accord, McLaren v. Fleischer, supra n.11, 256 U.S. at 480-81, 41 S.Ct. at 577-78 (the practical construction of a statute by those charged with its execution is entitled to great respect). 12 We thus conclude that the Deputy Secretary's March 1970 letter is highly probative on the proper construction of Regulation Z. 13 29 Just this term, the Supreme Court in Ford Motor Co. v. Milhollin, 444 U.S. 555, ----, 100 S.Ct. 790, 792, 63 L.Ed.2d 22 (1980), accorded a high degree of deference to the Board staff's interpretations of Regulation Z in Truth-in-Lending Act cases. 14 30 The Truth in Lending Act has the broad purpose of promoting the informed use of credit by assuring meaningful disclosure of credit terms to consumers. 15 U.S.C. § 1601. Because of their complexity and variety, however, credit transactions defy exhaustive regulation by a single statute. Congress therefore delegated expansive authority to the Federal Reserve Board to elaborate and expand the legal framework governing commerce in credit. 15 U.S.C. § 1604; Mourning v. Family Publications Service, Inc., 411 U.S. 356, 93 S.Ct. 1652, 36 L.Ed.2d 318 (1973). The Board executed its responsibility by promulgating Regulation Z, 12 CFR Part 226, which at least partly fills the statutory gaps. Even Regulation Z, however, cannot speak explicitly to every credit disclosure issue. . . . 31 Id. 100 S.Ct. at 794. 32 In Milhollin, the Board staff had issued an official staff interpretation (which has a special status under the 1976 amendments to the Act 15 ) as well as three public information letters dealing with the portions of the Act and Regulation Z at issue there. The Deputy Secretary's 1970 interpretation at issue here was necessarily unofficial, since it was issued before the 1976 amendments, thus this case is not controlled by Milhollin. But the Court also concluded in Milhollin that wholly apart from jurisprudential considerations or congressional intent, deference to the Federal Reserve (Board) is compelled by necessity . . . . Id. 100 S.Ct. at 798 (emphasis supplied). As the Court explained: 33 . . . (A) court that tries to chart a true course to the Act's purpose embarks upon a voyage without a compass when it disregards the agency's views. The concept of meaningful disclosure that animates TILA, see St. Germain (v. Bank of Hawaii, 573 F.2d 572 (CA9),) supra, at 577, cannot be applied in the abstract. Meaningful disclosure does not mean more disclosure. Rather, it describes a balance between competing considerations of complete disclosure . . . and the need to avoid . . . 'informational overload.'  S.Rep. 96-73, 96th Cong., 1st Sess., 3 (1979) (accompanying S. 108, Truth in Lending Simplification and Reform Act); see S.Rep.No. 95-720, 95th Cong., 2d Sess., 2-3 (1978); Federal Reserve Board, 63d Annual Report, 326, 349-350 (1976), Comment Acceleration Clause Disclosure Under the Truth in Lending Act, 77 Colum.L.Rev. 649, 662-663 (1977). And striking the appropriate balance is an empirical process that entails investigation into consumer psychology and that presupposes broad experience with credit practices. Administrative agencies are simply better suited than courts to engage in such a process. 34 Id. (emphasis in original). We therefore find Milhollin at least persuasive authority for our reliance on the Board staff letter here. 35 Finally, our interpretation that the Act and Regulation Z required disclosure before the Postows paid the stand-by fee furthers the policy of the Act to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit. 15 U.S.C. § 1601 (1976). As this court expressly found in Bissette, it would be preferable, from the Consumer's vantage point, to require disclosure well before the final formalities. 477 F.2d at 1247. 36 The realities of home financing practices underscore this concern. When a contract for the sale of a house is executed, the buyer usually leaves a forfeitable deposit with the seller to compensate for taking the house off the market until the buyer can locate the proper financing. If financing is unavailable, the buyer's deposit is typically refunded. If the buyer could obtain appropriate financing but does not, the buyer stands to lose the deposit with the seller. If disclosure is not made until the last moment before final settlement, the buyer is in a double bind and will be heavily pressured to take the credit, whatever the terms, in order not to lose both the deposit with the seller and the stand-by fee paid to the lender. 16 On the other hand, if the borrower learns of the lender's credit terms before putting down a substantial, forfeitable stand-by fee, the borrower is in a better position to reject that lender's offer and look for another in time to meet his obligations to the seller and avoid losing either a deposit or a stand-by fee. The policy of the Act permitting consumers to comparatively shop for credit therefore militates strongly in favor of affirming the court below. 37
38 In spite of these considerations, Oriental argues that congressional actions after the passage of the Act, the promulgation of Regulation Z, and the events in question here undercut the district court's interpretation of § 129. In 1974, two years after the Postows' home purchase, Congress added subsection (c) to § 121 of the Act to require disclosure in real estate transactions at the time the creditor makes a commitment with respect to the transaction. 17 Shortly thereafter, Congress enacted the Real Estate Settlement Procedures Act of 1974 (RESPA); § 6 of RESPA required an itemized disclosure in writing of each charge arising in connection with the settlement of a federally related (i. e., federally insured) loan at the time of the loan commitment, but in no case later than twelve calendar days prior to settlement. 18 Congress repealed both those provisions on January 2, 1976, 19 finding that (w)hile the advance disclosure provisions of RESPA are a logical way to reach the Act's objectives, they are neither necessary nor as experience has borne out, desirable. H.R.Rep. No. 667, 94th Cong., 1st Sess. 4 (1975), U.S.Code Cong. & Admin.News 1975, pp. 2448, 2451. 39 Oriental relies on the enactments and repeals of § 121(c) and § 6 to support its restrictive interpretation of the disclosure requirements as they existed in 1972 when the Postows purchased their house. Oriental in effect argues that the 1976 repeals of § 121(c) after it had been in effect only two months and § 6 of RESPA after only seven months indicate that Congress did not intend in 1968, when it initially passed the Act, to require disclosures before final settlement of the loan transaction. 40 We do not agree. Even assuming later congressional action could be relied upon as an aid to interpreting the Act as it was originally passed, 20 § 121(c) and § 6 of RESPA mandated more than our holding here; they required disclosures at the time of the lender's commitment regardless of whether the buyer was required to pay a stand-by fee. 21 The Deputy Secretary's 1970 interpretation discussed above and this case deal with a commitment to extend credit secured by the buyer's payment of a stand-by fee. 41 We thus conclude that the repeals of § 121(c) and § 6 in 1976 do not establish that the Board exceeded its authority either in 1969 by promulgating Regulation Z, which places the time of disclosure at consummation of a transaction or when a contractual relationship is established, or in 1970 when the Deputy Secretary's letter interpreted that regulation to mandate disclosure before the prospective borrower puts up a forfeitable stand-by fee. We therefore affirm the district court's ruling on Count II that the Act required the disclosures at issue here sometime before Oriental's commitment was secured by the Postows' payment of a stand-by fee. That ruling implements the overriding policy of the Act to allow a borrower to compare credit opportunities; it in no way conflicts with the language of the Act; it follows the spirit of this court's earlier Bissette opinion; most important, it reflects the Board staff's interpretation of Regulation Z.