Opinion ID: 1757379
Heading Depth: 1
Heading Rank: 1

Heading: Federal Truth in Lending Act

Text: The Smails have alleged that several violations of the Federal Truth in Lending Act were contained in the retail sales installment contract provided for, and executed by, Mr. Smail in the purchase of their mobile home. Under the Federal Act a plaintiff is limited to one recovery even if multiple violations occur. 15 U.S.C.A. § 1640(g); [3] and Tinsman v. Moline Beneficial Finance Co., 531 F.2d 815 (7th Cir. 1976). So all parties agree that if the act has been violated, whether once or more, the Smails are entitled to the statutory penalty of one thousand ($1,000.00) dollars plus costs and reasonable attorney's fees. 15 U.S.C.A. § 1640(a). The Court of Civil Appeals found that the contract violates 12 Code of Federal Regulations § 226.801(b) [4] because the place provided for the buyer's signature is not below the full contents of the document; and because the agreement fails to show on both sides the words: Notice: see other sides for important information. As stated above, the terms of the contract appear on both sides with the signature line at the bottom of the face or front of the contract. Although the agreement does not use the exact language suggested in 12 Code of Federal Regulations § 226.801(b), it does contain on the face the following phrase: THE TERMS OF THIS CONTRACT ARE ON BOTH SIDES OF THIS PAGE. Furthermore, on the reverse side the following sentence is found after the additional terms and conditions: (See other side for Buyer's signature). On Motion for Rehearing in the court below, General Electric argued that the above-quoted passages substantially complied with section 226.801(b). The jury in the trial court had made a finding to that effect. The Court of Civil Appeals noted quite correctly that the availability of substantial compliance as a defense to violations of the Federal Act is somewhat in doubt. [5] The court below went on to hold that as a matter of law General Electric did not substantially comply with the notice provisions of section 226.801(b). Furthermore, it stated that in order not to thwart the purpose of the regulation the signature must follow the full content, and not just the required disclosures. We hold that section 226.801(b) is not applicable to the contract in question. The Federal Truth in Lending Act was enacted ... to assure a meaningful disclosure of credit terms so that a 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.A. § 1601; and Mourning v. Family Publications Service, Inc., 411 U.S. 356, 364, 93 S.Ct. 1652, 36 L.Ed.2d 318 (1973). Congress delegated to the Federal Reserve Board the duty of prescribing the regulations necessary to effectuate the purposes of the Federal Act. 15 U.S.C.A. § 1604. [6] The Board under the power granted to it by Congress in section 1604 promulgated Regulation Z, 12 Code of Federal Regulations §§ 226.1 et seq. Regulation Z is the name commonly used to describe the regulations published by the Federal Reserve Board to effectuate the Truth in Lending Act. These administrative regulations, even though authorized by a statute, are not the same as statutes. Congress alone can enact a statute. United States v. Mersky, 361 U.S. 431, 80 S.Ct. 459, 4 L.Ed.2d 423 (1960). However, those regulations promulgated under an enabling statute, or which Congress has declared will be the equivalent of a statute, have the force and effect of law. Batterton v. Francis, 432 U.S. 416, 97 S.Ct. 2399, 53 L.Ed.2d 448 (1977). These regulations have been termed legislative rules. [7] One authority describes these Congressionally-authorized regulations or legislative rules as follows: A legislative rule is the product of an exercise of legislative power by an administrative agency, pursuant to a grant of legislative power by the legislative body. In the clearest case of a legislative rule, a statute has conferred power upon the agency to issue the rule and the statute provides that the rule, if within the granted power, shall have the force of law. But a legislative rule may rest upon an implied or an unclear grant of power as well as upon an express and clear grant of power. When a rule is legislative, the reviewing court has no authority to substitute judgment as to the content of the rule, for the legislative body has placed the power in the agency and not in the court. A legislative rule is valid and is as binding upon a court as a statute if it is (a) within the granted power, (b) issued pursuant to the proper procedure, and (c) reasonable. The requirement of reasonableness stems both from the idea of constitutional due process and from the idea of statutory interpretation that legislative bodies are assumed to intend to avoid the delegation of power to act unreasonably. K. DAVIS, ADMINISTRATIVE LAW TREATISE § 5.03 (1958 ed. and Supps.). Regulation Z is a series of regulations which are in fact legislative rules, and therefore have the force and effect of federal law. Congress specifically passed the Federal Act with provisions for the Board to pass regulations to prevent circumvention and evasion of the law. [8] The United States Supreme Court in Mourning v. Family Publications Service, supra , stated that the force and effect and standard of review of the Board's authority was well established. It further held: Where the empowering provision of a statute states simply that the agency may make ... such rules and regulations as may be necessary to carry out the provisions of this Act, we have held that the validity of a regulation promulgated thereunder will be sustained so long as it is reasonably related to the purposes of the enabling legislation. Thorpe v. Housing Authority City of Durham, 393 U.S. 268, 280-281, 89 S.Ct. 518, 525, 21 L.Ed.2d 474 (1969). See also American Trucking Assns. v. United States, 344 U.S. 298, 73 S.Ct. 307, 97 L.Ed. 337 (1953). 411 U.S. at 369, 93 S.Ct. at 1660-1661. As Professor Davis states: Regulation Z is in all respects a legislative rule, binding on the court as if it were a statute unless the court has some reason to find it invalid. K. DAVIS, ADMINISTRATIVE LAW TREATISE § 5.03-3 (Supp.1976). There are two other sources which are used by the Federal Reserve Board to effectuate the Federal Act. There are Federal Reserve Board Interpretations of Regulation Z, [9] and there are Federal Reserve Board staff opinions which explain the statute, regulations, and interpretations, usually in a question and answer form. [10] The interpretations, although promulgated by the Federal Reserve Board, are not subject to the procedural review requirements of section 4 of the Administrative Procedure Act, [11] and therefore are not given the status of Board regulations. While not having the effect of law, these interpretations by the Board of their own regulations are entitled, like the interpretive rules of other agencies, to great deference. Udall v. Tallman, 380 U.S. 1, 85 S.Ct. 792, 13 L.Ed.2d 616 (1965); Bone v. Hibernia Bank, 493 F.2d 135 (9th Cir. 1974); and Allen M. Campbell Company General Contractors, Inc. v. Lloyd Wood Construction Co., 446 F.2d 261 (5th Cir. 1971). Federal Reserve Board staff opinions, although not as authoritative as Board interpretations, are entitled to weight when they concern the construction of a Board regulation or interpretation and are not in conflict with the Truth in Lending Act, a regulation, or an interpretation. Pollock v. General Finance Corporation, 552 F.2d 1142 (5th Cir. 1977). In Pollock the court said: The force with which these least authoritative pronouncements are allowed to press on the judicial scales, however, must vary with the circumstances of each case. Skidmore v. Swift & Co., 323 U.S. 134, 140, 65 S.Ct. 161, 89 L.Ed. 124 (1943); General Electric Co. v. Gilbert, 429 U.S. 125, 97 S.Ct. 401, 50 L.Ed.2d 343 (1976). [12] The Court of Civil Appeals in the instant case held that General Electric was liable for violating 12 Code of Federal Regulations § 226.801. The court mistakenly refers to this section as a regulation. [13] Such is not the case as section 226.801 is a Federal Reserve Board interpretation of Regulation Z. Section 226.801 of 12 Code of Federal Regulations states: § 226.801 Location of disclosures when contract, security agreement, and evidence of transaction are combined in a single document. (a) Some creditors incorporate the terms of a contract, a security agreement and evidence of a transaction in a single document. These documents are designed for processing by mechanical and electronic equipment. If all of the required disclosures under § 226.8 should be placed on the face of such a document, the creditor will be unable to utilize conventional accounting and record keeping equipment because of the size of the resulting document. The question arises as to whether required disclosures may be made on the face and the reverse side of such a document. (b) Where a creditor elects to combine disclosures with the contract, security agreement, and evidence of a transaction in a single document, the disclosures required under § 226.8 shall, in accordance with § 226.6, be made on the face of that document, on its reverse side, or on both sides: Provided, That the amount of the finance charge and the annual percentage rate shall appear on the face of the document, and, if the reverse side is used, the printing on both sides of the document shall be equally clear and conspicuous, both sides shall contain the statement NOTICE: See other side for important information, and the place for the customer's signature shall be provided following the full content of the document. [original emphasis] Part (a) of section 226.801 specifically points out the problem that exists in documents designed for processing by mechanical and electronic equipment. Part (b) provides that the disclosures required under section 226.8 and section 226.6 may be made on both sides if the proper notices are given. This section obviously refers to the problem of making a form small enough for use by mechanical and electronic equipment. It is a narrow exception to the general rule that required disclosures must be made on the same side of the instrument above the signature. Indeed, the Federal Reserve Board has discussed this interpretation in several of its staff opinions. As stated above, this court is not bound by these opinions, but will in appropriate cases give these opinions deference. In a letter opinion of February 10, 1977, found in 5 CCH Consumer Credit Guide ¶ 31,536, the Board wrote: It appears that you have misunderstood the intent of § 226.801. As explained in prior Public Information Letters .. this interpretation was written to alleviate a specific problem, and it only applies when the contract, security agreement (if any), are combined in a single document designed for processing by mechanical or electronic equipment .... [14] This has been the consistent interpretation of the Board since the regulation was promulgated in May 1969. See also, 5 CCH Consumer Credit Guide ¶ 31,147 (Letter of July 31, 1974) and 5 CCH Consumer Credit Guide ¶ 31,356 (Letter of March 19, 1976). The Fifth Circuit when facing a similar situation not only gave these letter opinions great weight, but went further to indicate that without these staff opinions which give section 226.801 a very limited application, section 226.801 might be considered an improper amendment to Regulation Z. Charles v. Krauss Co., 572 F.2d 544 (5th Cir. 1978). It stated: So long as the section 226.801 exception is limited to electronic and mechanical equipment as set out in the staff opinion letters, we think this Interpretation is sufficiently circumscribed that it need not be treated as a substantive change in the one-side rule of Regulation Z. The court went on to directly hold that 12 Code of Federal Regulations § 226.801 was limited to the narrow circumstance of forms designed for processing by electronic and mechanical devices. In Smith v. Chapman, 436 F.Supp. 58 (W.D.Tex.1977), the defendant tried to use section 226.801 as a defense for the actions he had undertaken. The court there held that: [t]his Interpretation is applicable only when all the disclosures cannot be put on one side because the form will not accommodate all the disclosures because it is designed for processing by mechanical and electronic equipment. There is no evidence, nor have the Smails ever contended, that the contract in the instant case was intended for processing by mechanical and electronic equipment. Therefore, General Electric cannot be held liable for its failure to comply with the provisions of section 226.801. Although section 226.801 does not apply, the contract must still conform with the requirements of Regulation Z. Section 226.8(a), which is a regulation as opposed to an interpretation, provides in summary that all of the disclosures required under section 226.8(b) must be made together on the same side of the page and above the customer's signature. See also Southwestern Investment Co. v. Mannix, 557 S.W.2d 755 (Tex. 1977). This contract contains all the required disclosures on the face of it above Mr. Smail's signature. We disagree with the Smails' contention that some required disclosures were contained on the back of the agreement; and therefore hold that this contract does not violate the one-side rule of Regulation Z. Also alleged is a violation of the Federal Truth in Lending Act in that the contract fails to adequately disclose the cost of property insurance as is required in 15 U.S.C.A. § 1605(c). Article 15 U.S.C.A. § 1605(c) states: (c) Charges or premiums for insurance, written in connection with any consumer credit transaction, against loss of or damage to property or against liability arising out of the ownership or use of property, shall be included in the finance charge unless a clear and specific statement in writing is furnished by the creditor to the person to whom the credit is extended, setting forth the cost of the insurance if obtained from or through the creditor, and stating that the person to whom the credit is extended may choose the person through which the insurance is to be obtained. The Smails also claim violations of two similar regulations: 12 Code of Federal Regulations § 226.4(h) and 12 Code of Federal Regulations § 226.4(a)(6). The latter concerns the necessity of including the insurance premium as part of the finance charge: (6) Charges or premiums for insurance, written in connection with any credit transaction, against loss of or damage to property or against liability arising out of the ownership or use of property [shall be included in the finance charge], unless a clear, conspicuous, and specific statement in writing is furnished by the creditor to the customer setting forth the cost of the insurance if obtained from or through the creditor and stating that the customer may choose the person through which the insurance is to be obtained. The former states: (h) Computation of insurance premiums. If any insurance premium is required to be included as a part of the finance charge, the amount to be included shall be the premium for coverage extending over the period of time the creditor will require the customer to maintain such insurance. For this purpose, rates and classifications applicable at the time the credit is extended shall be applied over the full time during which coverage is required, unless the creditor knows or has reason to know that other rates or classifications will be applicable, in which case such other rates or classification shall be used to the extent appropriate. As seen above, section 1605(c) requires that the premiums charged for the insurance shall be included in the finance charge unless a clear statement of the cost is set out and a person is informed that the insurance may be purchased elsewhere. The regulations simply restate that requirement and set out the necessary disclosures when the premium is included in the finance charge. General Electric clearly states in the contract that the cost of the insurance is $753.00 for a period lasting from the date of the contract (9/21/74) to the expiration date (9/21/77). Furthermore, found in bold type and underscored is the following sentence: BUYER HAS THE RIGHT TO OBTAIN SUCH INSURANCE THROUGH AN AGENT OR OTHER PERSON OF BUYER'S CHOICE AS WELL AS THROUGH SELLER. [Contract's emphasis]. Since both required disclosures are made, General Electric was not required to include the insurance premiums as part of the finance charge. The Smails further complain that the cost of the insurance for the whole term of the contract is not shown. To require one to project future insurance costs for years in the future would be impractical. Indeed, the Federal Reserve Board has interpreted section 1605 to require only that the cost for the initial term be disclosed when the insurance premiums are not required to be included in the finance charge. [15] This contract has fully complied with the federal statutes and regulations in question by its disclosure of the price and the term of the insurance.