Opinion ID: 2994918
Heading Depth: 2
Heading Rank: 1

Heading: TILA Disclosure Requirements

Text: Mr. Szumny maintains on appeal that state law should govern the adequacy of disclosure of security interests under TILA, just as it controls the adequacy of disclosure when security interests are created under Illinois’ Uniform Commercial Code. Specifically, Mr. Szumny contends that AGFI’s description of the collateral underlying the security interest was not sufficiently detailed; it did not delineate with the required precision the encumbered property. Thus, he concludes, no security interest exists, and a violation of TILA arises because AGFI has described a security interest that it does not possess. In rejecting Mr. Szumny’s claim, the district court, relying on our decision in In re Dingledine, 916 F.2d 408 (7th Cir. 1990), determined that AGFI had complied with TILA’s requirement that security interests in property be described by item or type. See 15 U.S.C. sec. 1638(a)(9). The district court explained that courts have been loath to apply state requirements and federal requirements from other federal regulatory schemes to TILA disclosure rules. R.40 at 5. Although recognizing that state law may give debtors different, even better, protections with respect to the required description of collateral, the court cautioned that such requirements should not be confused with the TILA requirement that the property subject to the security interest be accurately described for purposes of advising the debtor of his rights under TILA. The district court, therefore, took the view that TILA does not require perfect congruence between the description of security interests required by state law and that required by TILA. The district court was correct. TILA mandates that lenders disclose, in statements to consumers, property subject to security interests by item or type. 15 U.S.C. sec. 1638(a)(9). Regulation Z, promulgated by the Federal Reserve Board to implement TILA, similarly instructs creditors to include in their disclosures descriptions of security interests by item or type. The regulation provides that: For each transaction, the creditor shall disclose the following information as applicable: . . . . (m) Security interest. The fact that the creditor has or will acquire a security interest in the property purchased as part of the transaction, or in other property identified by item or type. 12 C.F.R. sec. 226.18(m). Because the Federal Reserve Board is the agency charged with TILA’s administration, we accord its regulation deference. See Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 566 (1980) (explaining that the Court has often repeated the general proposition that considerable respect is due the interpretation given [a] statute by the officers or agency charged with its administration. . . . This traditional acquiescence in administrative expertise is particularly apt under TILA, because the Federal Reserve Board has played a pivotal role in setting [the statutory] machinery in motion. . . .) (internal quotations omitted). The official commentary to Regulation Z, also instructive here, has been regarded as an authoritative interpretation of TILA and Regulation Z by this court. In re Dingledine, 916 F.2d at 411. The commentary echoes the item or type requirement, explaining that: In nonpurchase money transactions, the property subject to the security interest must be identified by item or type. This disclosure is satisfied by a general disclosure of the category of property subject to the security interest, such as motor vehicles, securities, certain household items, or household goods. (Creditors should be aware, however, that the Federal credit practices rules, as well as some state laws, prohibit certain security interests in household goods.) At the creditor’s option, however, a more precise identification of the property or goods may be provided. 12 C.F.R. Pt. 226, Supp. I, sec. 226.18(m)(2) (emphasis supplied). Thus, because TILA and the regulation promulgated to implement it require only a general description of a category of property, AGFI’s description of Home Office Equip, TV/Video/Audio Equip, Pool/Patio Equip. passes muster. Indeed, in Dingledine, 916 F.2d at 411, we recognized that TILA’s disclosure requirements were designed to give adequate notice to the debtor of the existence of security interests under state law so that the debtor could further investigate, by reference to the documents required by state law, the specific contours of that security interest: [The description at issue] is sufficiently general in nature to put the consumer on notice that the disclosure statement is disclosing only the fact of a security interest in the consumer’s property, not the specific property covered by the security interest. The consumer must look to the security agreement to ascertain the exact items securing the loan. The Federal Reserve Board certainly contemplated this result when it decided to allow the disclosure to identify the property by a general disclosure of the category of property. . . . While a more specific description of categories or a more detailed description of property certainly is possible, the commentary leaves that to the discretion of the creditor. Id. We note that this general disclosure requirement is compatible with TILA’s consumer-protection purpose. TILA was enacted 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. sec. 1601(a); see also Gibson v. Bob Watson Chevrolet- Geo, Inc., 112 F.3d 283, 285 (7th Cir. 1997) (explaining that TILA’s purpose is to protect consumers from being misled about the cost of credit). TILA is a disclosure statute; it does not regulate substantively consumer credit but rather requires disclosure of certain terms and conditions of credit before consummation of a consumer credit transaction. Valencia v. Anderson Bros. Ford, 617 F.2d 1278, 1282 (7th Cir. 1980), rev’d on other grounds, 452 U.S. 205 (1981). A creditor’s substantive rights are still governed by state law; federal law merely classifies those rights for disclosure purposes. Id. at 1285./2 Smith v. Cash Store Management, Inc., 195 F.3d 325 (7th Cir. 1999), illustrates in a particularly graphic way the different roles played by state law governing security interests and TILA--a difference that explains the lack of absolute congruence between a state definition of a security interest and a security interest for purposes of TILA. In Smith, the lender indicated in its TILA disclosure statement that [the consumer’s] post-dated check is security for this loan. Id. at 326. The plaintiff argued that this disclosure violated TILA because Illinois law does not permit a borrower’s post-dated check to serve as collateral for security interests and, therefore, that the statement in the TILA disclosure was inaccurate. We rejected that argument. Although the check may not have constituted a security interest as defined in state law, it did represent additional security for the loan, and the lender did not violate TILA by stating that the post-dated check served as security. See id. at 330-31. The purpose of TILA- -notice to the consumer--was fulfilled by disclosing the check. The differences between state statutes establishing security interests and TILA also are demonstrated by the rule that, although TILA disclosures must be accurate, see Williams v. Chartwell Fin. Servs., Ltd., 204 F.3d 748, 753 (7th Cir. 2000), lenders may be overinclusive in their disclosures if unsure whether a particular interest is a security interest under applicable law. 12 C.F.R. Pt. 226, Supp. I sec. 226.2(a)(25)(1); see also Smith, 195 F.3d at 328 n.1. Lenders, of course, should not disclose nonexistent security interests because overinclusive disclosures might deter a borrower’s future borrowing or property acquisition out of an exaggerated belief in the security interest to which [he] would be subject, or [give] a lender an apparent right which, even if ultimately unenforceable, could serve as a significant bargaining lever in any future negotiations concerning rights or obligations under the loan. Id. at 328 (citing Bizier v. Globe Fin. Servs., Inc., 654 F.2d 1, 3 (1st Cir. 1981)). However, a lender’s reasonable, bona fide attempt to describe the security interest it intends to take in the chattels of the consumer does not violate TILA but, rather, is commensurate with its purpose.