Opinion ID: 381256
Heading Depth: 3
Heading Rank: 1

Heading: The Language of the Act and Regulation Z

Text: 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