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The Truth In Lending Act and Variable-Rate Mortgages and Balloon Notes
Published online by Cambridge University Press: 20 November 2018
Extract
To own one's own home has long been at the heart of the American dream. Despite the considerable recent attention to new and nontraditional modes of living–in planned communities, town houses, communes, condominiums, and cooperatives–and although some social reformers and intellectuals have criticized conventional modes of living, owning a home and “cooking hamburgers over a charcoal fire” remain a dominant part of the middle class ethos.
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- Copyright © American Bar Foundation, 1976
References
1 The University of Kansas has entered into the swing of things with the following offering taught by Geoffrey Steere: American Studies 402: Alternative Family Patterns in the United States. “The class will be an exploration of alternatives to the monogamous, nuclear family in the United States. The primary focus is on current forms and practices, but some attention is given also to examples of alternative family patterns in the American past and to the family in cross-cultural perspectives. Topics include monogamy, communal families, open marriage, swinging, divorce, the affair, ambisexual marriage, group marriage, homosexual marriage, and non-married living together.” Readings include: Howard S. Becker, The Outsiders: Studies in the Sociology of Deviance (New York: Free Press, 1963); Nena & George O'Neill, Open Marriage, a New Life Style for Couples (New York: M. Evans, 1972); Gilbert D. Bartell, Group Sex: A Scientist's Eyewitness Report on Swinging in the Suburbs (New York: Peter H. Wyden, 1971); Paul Bohannon, ed., Divorce and After (Garden City, N.Y.: Doubleday & Co., 1971); Nigel Nicolson, Portrait of a Marriage (New York: Bantam Books, 1974); Isabel Miller, Patience and Sarah (New York: McGraw-Hill Book Co., 1972); Robert H. Rimmer, Proposition Thirty-One (New York: New American Library, 1971); Morton Hunt, The Affair (New York: New American Library, 1973).Google Scholar
2 One example of legislative interest in the problem was the enactment of legislation to give tax credits to the purchasers of new homes. Pub. L. 94–12, sec. 208, 89 Stat. 26, 32 (Mar. 29, 1975). Another recently considered tax proposal–which illustrated the pervasive role of the tax laws in social and economic policy–would exempt from taxation interest payments by certain financial institutions. H. R. 16994, 93d Cong., 2d Sess. (1974). If enacted, this would presumably permit such institutions to obtain deposits at less cost, and it is hoped that some of the “savings” would result in more available mortgage money at lower rates.Google Scholar
3 8 FHLBB Journal 50 (Mar. 1975). Although life insurers were at one time significant factors in the home mortgage market, in the third quarter of 1974 they held only 5 percent of mortgage debts on one- to four-family nonfarm properties as compared with almost 10 percent in 1970. At present, such companies have virtually ended their involvement in such lending.Google Scholar
4 In 1974, total mortgage loans by savings and loan associations were approximately 25 percent lower than in 1972 or 1973; in January 1975-the last month for which figures are available–total mortgage loans were 15 percent lower than in January 1974, 8 FHLBB Journal 44 (Mar. 1975). These figures are even more significant if one considers the need of borrowers for larger loans because of inflation.Google Scholar
5 See U.S., President's Commission on Financial Structure and Regulation, Report 34 (1970) (hereinafter cited as Hunt Commission Report). In addition to loans secured by residential property, federally chartered institutions may make some loans for mobile homes, old age facilities, and educational purposes, 12 C.F.R. 545.6–545.10 (1974); 12 U.S.C. sec. 1464(c) (1970). Membership in the Federal Home Loan Bank System is limited to institutions that make home mortgage loans, 12 U.S.C. sec. 1424(a)(3) (1970). In addition, savings and loan associations are permitted to take additional bad-debt losses if 82 percent of their assets are certain assets–primarily loans secured by residential real property; for mutual savings banks, 72 percent of their assets must be in such property, Int. Rev. Code of 1954, secs. 593, 7701(a)(19)(C). See generally Charles W. Schoeneman & Jerry J. McCoy, The Bad Debt Reserves of Financial Institutions, 11 Wm. & Mary L. Rev. 797, 811–35 (1970).Google Scholar
6 See Hunt Commission Report, supra note 5, at 24; Paul R. Verkuil, Perspectives on Reform of Financial Institutions, 83 Yale L.J. 1349 (1974).CrossRefGoogle Scholar
7 Eugene F. Brigham & R. Richardson Pettit, Effects of Structure on Performance in the Savings and Loan Industry, in 3 Irwin Friend, ed., Study of the Savings and Loan Industry 983, prepared for the FHLBB (4 vols.; Washington, D.C.: Government Printing Office, 1969) (herein-after cited as Friend); Hearings on Variable Rate Mortgages Before the Senate Comm. on Banking, Housing and Urban Affairs, 94th Cong., 1st Sess. 12, 167 (1975) (hereinafter cited as Variable Rate Hearings).Google Scholar
8 As of September 1974, about three-fourths of all deposits in savings and loan associations had maturities of one year or less; many of the others with longer maturities could be withdrawn almost at will if the depositor was willing to forgo some interest. Richard C. Pickering, Changes in S. & L. Savings Account Structure, April-September 1974, 8 FHLBB Journal 23 (Feb. 1975).Google Scholar
9 See Reuben A. Kessel, The Allocation of Mortgage Funds in 2 Friend, supra note 7, at 662. Of course, costs do not immediately reflect revenues unless the FHLBB raises the maximum rates which can be paid on savings deposits. If the rates on savings deposits are not raised, however, the consequences may be catastrophic. See p. 39 infra. For a general analysis of the defects in the traditional mortgage, see a working paper by Donald Lessard & Franco Modigliani, Inflation and the Housing Market: Problems and Potential Solutions 3–17 (Alfred P. Sloan School of Management, MIT, Oct. 1975).Google Scholar
10 Variable Rate Hearings, supra note 7, at 58, 172; Paul S. Anderson & J. Philip Hinson, Variable Interest Rates on Mortgages: Their Impact and Use, New Eng. Econ. Rev. 3 (Mar.-Apr. 1970); Hearings on S.5 Before the Subcomm. on Financial Institutions of the Senate Comm. on Banking and Currency, 90th Cong., 1st Sess. 356 (1967) (Darrel M. Holt, Mortgage Bankers Association of America); David I. Fand, Savings Intermediaries and Consumer Credit Markets, in 4 Friend, supra note 7, at 1461–62; Hearings on S. 2591 Before the Subcomm. on Financial Institutions of the Senate Comm. on Banking, Housing and Urban Affairs, 93d Cong., 2d Sess. 211 (1974); Fairfax Leary, Jr., & David G. Blake, Twentieth Century Real Estate Business and Eighteenth Century Recording, 22 Am. U.L. Rev. 275, 308–9 (1973).Google Scholar
11 See Franco Modigliani, Some Economic Implications of the Indexing of Financial Assets with Special Reference to Mortgages, in Mortgage Study Reports, Report No. 1, 13–14 (MIT, 1974). During the period April-September 1974, federally insured savings and loan associations suffered a net outflow of deposits in excess of $2.7 billion; at the same time, total cash and investment securities in both insured and noninsured associations decreased from $23.5 billion to $21.1 billion. 8 FHLBB Journal 43 (Mar. 1975). It appears that during that period there was a net inflow of deposits into noninsured savings and loan associations. Since the noninsured associations are not subject to federal interest ceilings, they were presumably better able to adjust interest rates to those prevailing in the financial markets. There is some institutional loyalty and, at least, considerable inertia on the part of consumers in shifting funds out of savings and loan associations. The FHLBB thinks that today's consumers may be showing more financial acumen. Variable Rate Hearings, supra note 7, at 42.Google Scholar
12 In recent years, state legislatures have found it necessary to do something which would raise unrealistically low interest rates to a sufficiently high level to stimulate home mortgage lending. In some cases, the increases have been made temporary and have reflected legislative hopes for a return to the halcyon days of yore. See, e.g., Mo. Rev. Stat. sec. 408.030 (Vernon Cum. Pamphlet Sept. 1975) (maximum increased to 10 percent from 8 percent); Pa. Stat. tit. 41 sec. 301(b) (Purdon 1975) (2.5 percent over yields on long-term government bonds); Ill. Ann. Stat. ch. 74, sec. 4 (III. Legis. Serv. Supp. 1975) (usual rate of 8 percent increased to 9.5 percent for loans secured by residential real estate until January 1, 1977; no prepayment penalty permitted if rate exceeds 8 percent); N.Y. Banking Law sec. 14-a (McKinney Sess. Law News, July 25, 1975) (banking board sets maximum rate between 5 and 8 percent; superintendent of banks may increase the rate to 8.5 percent if he determines supply of funds for home mortgages is inadequate because the rate is not competitive); Vt. Stat. Ann. tit. 9, sec. 41 (Supp. 1975) (until July 30, 1976, maximum rate of 1. 25 percent more than the average rates of 3–5 year treasury bills and seasoned corporate bonds). See also Marion Benfield, Money, Mortgages, and Migraine-The Usury Headache, 19 Case W. Res. L. Rev. 819, 858–64, 879–80 (1968) (discussing UCCC proposed ceiling of 18 percent); David J. Brophy, The Usury Law: A Barrier to Home Financing, 22 Mich. Bus. Rev. 25 (1970); Bowsher, Usury Laws: Harmful When Effective, Fed. Res. Bank of St. Louis Rev. 16 (Aug. 1974).Google Scholar
13 Recent developments have restricted savings and loan associations–and other banking institutions-from using some devices that tended to raise the effective rate of return on mortgage loans. For example, statutes have increasingly restricted the use of noninterest bearing escrow accounts for taxes and insurance by requiring interest payments on such accounts: N.Y. Bank. Law sec. 14-b (McKinney Supp. 1974), sustained in Jamaica Savings Bank v. Lefkowitz, 390 F. Supp. 1357 (1975); Fed. Nat'l Mortgage Ass'n v. Lefkowitz, 390 F. Supp. 1364 (1975). Consumerists have attacked the widespread use of prepayment penalties, which resulted in additional income in the frequent case where the consumer did not complete the mortgage contract to maturity. See Comment, Secured Real Estate Prepayment and the Prepayment Penalty, 51 Calif. L. Rev. 923 (1963); cf. National Conference of Commissioners on Uniform State Laws, Uniform Land Transactions Act sec. 3–208 (Working draft, 1975). And, so-called due-on-sales clauses, which prevented consumers from passing on a favorable mortgage to a subsequent purchaser, have come under close judicial scrutiny. See Comment, Judicial Treatment of the Due-on-Sale Clause: The Case for Adopting Standards of Reasonableness and Unconscionability, 27 Stan L. Rev. 1109 (1975). It is claimed that the widespread use of variable-rate loans may eliminate the need for such devices. Variable Rate Hearings, supra note 7, at 252–53, 264.Google Scholar
14 For a long time, both religious and social pressures limited legal interest rates to 6 percent. See National Commission on Consumer Finance, Consumer Credit in the United States, 215 CCH Instalment Credit Guide 91–93 (1972); Homer Kripke, Consumer Credit Regulation: A Creditor-Oriented Viewpoint, 68 Colum. L. Rev. 445, 446–47 (1968).Google Scholar
15 See Verkuil, supra note 6, at 1359–61 and n. 68 (reviewing authorities).Google Scholar
16 The Federal Home Loan Bank Board has intimated that it recognizes the problem and might be inclined to permit higher savings account interest rates if savings and loan associations could utilize variable-rate mortgages. Proposed Amendments Relating to Interest Rate Adjustments, FHLBB Release No. 75–118 (Feb. 6, 1975), 40 Fed. Reg. 6870 (1975); Variable Rate Hearings, supra note 7, at 6–7, 9, 25, 101–63; see Richard Cohn & Stanley Fischer, An Analysis of Alternative Nonstandard Mortgages, in Mortgage Study Reports, Report No. 5, 47 (MIT, 1974); Paul S. Anderson & Robert W. Eisenmenger, Structural Reform with the Variable Rate Mortgage, in Housing and Monetary Policy 121, Federal Reserve Bank of Boston, Conference Series No. 4 (1970); Consumer Reports, 306, 308 (May 1975) (no variable rates unless interest ceilings eliminated); cf. Modigliani, supra note 8, at 15–17.Google Scholar
17 Variable Rate Hearings, supra note 7, at 48–50, 150, 162, 421.Google Scholar
18 See Cohn & Fischer, supra note 16, at 3; Anderson & Hinson, supra note 10, at 6; Donald R. Lessard, Roll-Over Mortgages in Canada, Alternative Mortgage Study, Background Paper for Task IV, 1–3 (MIT, 1974). There is some indication that such mortgages were used by early settlers in some states. See Allison Dunham, Book Review, 23 U. Chi. L. Rev. 156 157 (1955). See generally Robert H. Skilton, Government and the Mortgage Debtor (1929 to 1939) (Ph.D. diss., University of Pennsylvania, 1944); E. S. Wallace, Survey of Federal Legislation Affecting Private Home Financing Since 1932, 5 Law & Contemp. Prob. 481 (1938).Google Scholar
19 12 C.F.R. 541.14(a) (1974).CrossRefGoogle Scholar
20 See, e.g., Hearings on S. 2755 Before a Subcomm. of the Senate Comm. on Banking and Currency, 86th Cong., 2d Sess. 671–74 (1960).Google Scholar
21 National Commission on Consumer Finance, supra note 14, at 39. National Consumer Act sec. 2.402 (from National Consumer Law Center, Boston College Law School; 1st Final Draft 1970).Google Scholar
22 But see Variable Rate Hearings, supra note 7, at 13, 176.Google Scholar
23 Variable Rate Hearings, supra note 7, at 389–90; cf id. at 411, 414, 430–31. For a general analysis of the principle of indexing, and its application to home mortgages, see Lessard & Modigliani, supra note 9; Modigliani, supra note 11; Cohn & Fischer, supra note 16. The latter work contains a lengthy bibliography of the literature of indexing and variable-rate mortgages. The issue may be undergoing some “popularization.”See Gannon, Perplexed Economists Hunt for Ways to Cure U.S. Economy's Woes, Wall St. J., May 9, 1975, at 1, col. 6 (Midwest ed.). See also J. Kearl, K. Rosen & C. Swan, Relationships between the Mortgage Instrument, the Demand for Housing and Mortgage Credit, A Review of Empirical Studies, Mortgage Study Reports, Report No. 3 (MIT, 1974).Google Scholar
24 For example, assume a $30,000 mortgage at a real interest rate of 3 percent, and to simplify, assume yearly payments. If the payment the first year is $2,000, $900 would be allocated to interest and $1,100 to principal, leaving a balance of $28,900. If the inflation rate were 5 percent, this amount would be raised to $30,345. The next year, the consumer's payments would be increased 5 percent to $2,100. At the end of the second year, $910. 25 would be allocated to interest (3 percent of $30,345) and $1,189.65 to principal, leaving a new balance of $29,255.35. If the inflation rate were 1 percent, this amount would be increased to $29,446.90, and the consumer's new yearly payment would be $2,121.Google Scholar
25 See Hunt Commission Report, supra note 5; Verkuil, supra note 6, at 1350–66; Charles E. Allen & Robert W. Bartlett, The Hunt Commission Report: A Panel, 29 Bus. Lawyer 497 (1974).Google Scholar
26 See Staff of the Subcomm. on Domestic Finance of the House Comm. on Banking and Currency, 93d Cong., 1st Sess., Financial Institutions: Reform and the Public Interest (Comm. Print 1973); Hearings on Financial Structure and Regulation Before the Subcomm. on Financial Institutions of the Senate Comm. on Banking, Housing and Urban Affairs, 93d Cong., 1st Sess. (1973); Hearings on the Credit Crunch and Reform of Financial Institutions Before the House Comm. on Banking and Currency, 93d Cong., 1st Sess. pts. 1 and 2 (1973); Hearings on S. 2591, supra note 10. The Hunt Commission's recommendations have been introduced as S. 2591, 93d Cong., 1st Sess. (1973); H.R. 10990, 93d Cong., 1st Sess. (1973). They were reintroduced as S. 1267, 94th Cong., 1st Sess. (1975); H.R. 5618, 94th Cong., 1st Sess. (1975).Google Scholar
27 See, e.g., S. 2591, supra note 26, which is subtitled a bill to improve the financial system of the United States “in order to promote sound economic growth, including the provision of adequate funds for housing”; President Nixon's Message to Congress, Aug. 2, 1973, reprinted in Department of the Treasury, Recommendations for Change in the U.S. Financial System, Sept. 24, 1973, which speaks of the need for providing “adequate funds for housing.” A good analysis of the proposals and their likely effect on housing is found in Verkuil, supra note 6, at 1350–66, and includes extensive citations to sources which have been involved in the housing debates.Google Scholar
28 It is impossible to cite all the pertinent references to the variable-rate issue. See, e.g., Hunt Commission Report, supra note 5, at 77 (urging variable rates); House Hearings on Credit Crunch, supra note 26, at 321 (FRB Chairman Burns favors variable rates); House Staff Report, supra note 26, at 30–31 (opposing variable rates); Hearings on S. 2591, supra note 10, at 3, 8–9, 29–30, 37–38, 47, 58–59, 208–10, 604–6 (also discussing alternative of indexing).Google Scholar
29 For sharp criticism of the variable-rate proposal, see Variable Rate Hearings, supra note 7, at 295–403; Lessard & Modigliani, supra note 9, at 17–22. The FHLBB was not so positive about such mortgages some years ago. See Subcomm. on Housing and Urban Affairs of the Senate Comm. on Banking and Currency, 90th Cong., 1st Sess., A Study of Mortgage Credit 35–36 (Comm. Print 1967). Among some recent discussions of the variable-rate issue are Board Proposes Variable Rate Mortgages for Federal S & Ls, 8 FHLBB Journal 9 (Mar. 1975); Cohn & Fischer, supra note 16, at 1–5, 47–48; Poole, Opper & Taylor, The Variable Rate Mortgage on Single-Family Homes, in Ways to Moderate Fluctuations in Housing Construction 377 (FRB, 1972); Paul S. Anderson & Robert W. Eisenmenger, Structural Reform for Thrift Institutions: The Experience in the United States and Canada, New Eng. Econ. Rev. 3 (July-Aug. 1972); Note, The Variable Interest Rate Clause and Its Use in California Real Estate Transactions, 19 U.C.L.A.L. Rev. 468 (1972); Richard P. McManus, Variable Mortgage Note: Route to Increased Housing, 55 A.B.A.J. 557 (1969); Hearings on Assembly Bill 1583 Before the Assembly Finance and Insurance Comm., California Legislature (1969); Authorities cited in notes 10, 26, supra. The British experience with variable-rate mortgages suggests that the variable-rate solution may be far from perfect. See David L. Cohen & Donald R. Lessard, Experience with Variable Rate Mortgages: The Case of the United Kingdom, Alternative Mortgage Study, Background Paper for Task IV (MIT, 1974).Google Scholar
30 The proposed amendments are contained in FHLBB Reg.No. 75–118, supra note 16, at 14, 40 Fed. Reg. 6870 (1975) (hereinafter cited as Proposed FHLBB Reg.). This was not the first FHLBB proposal on variable rates. The last time, the proposal met congressional resistance on the basis that associations were better able to handle the risk of changes in the cost of money than consumers, and one observer concluded that “the idea of a variable rate is not yet acceptable to the public at large.” Allen & Bartlett, supra note 25, at 497, 507, 519.Google Scholar
31 The House has passed legislation to forbid savings and loan associations to offer variable-rate mortgages, and thereby delay the effectiveness of of the FHLBB's proposed regulations which would otherwise have become effective May 15. Wall St. J., May 9, 1975, at 2, col. 3 (Midwest ed.). The Senate Banking Committee adopted a sense-of-Congress resolution that the FHLBB should not authorize variable-rate mortgages without congressional approval. 56 Savings Bank J. 108 (June 1975). The board initially indicated it would delay the implementation of its proposal until the congressional deliberations are completed. Wall St. J., June 17, 1975, at 14, col. 3 (Midwest ed.). Then, the board withdrew its proposal because of “substantial Congressional opposition” but reaffirmed its belief in the desirability of variable-rate mortgages. New York Times, Nov. 5, 1975, at 55, col. 5.Google Scholar
32 Cal. Civ. Code sec. 1916.5 (West Supp. 1975).Google Scholar
33 In many states, present day mortgages are available at rates that are either at, or very close to, the maximum permitted under the usury statutes. In such states, variable rate authority is useless unless usury ceilings are raised, and frequently legislatures have made usury rate increases prospective only. If a variable-rate loan is made at or near the rate permitted by the usury statutes, there are a host of issues raised, including: (1) whether the variable-rate provision itself constitutes a violation of the usury law; (2) whether an agreement by the consumer to a higher rate if and when authorized by legislation will permit lending institutions to take advantage of prospective usury increases; and (3) the application of a variable usury law to a variable mortgage (e.g., if the mortgage is issued at the then maximum usury rate of 9 percent, and the variable usury rate rises to 11 percent, can the mortgage rate be raised?).Google Scholar
34 The fixed-rate mortgage is essentially a long-term loan whereas the variable-rate loan is essentially a short-term loan. As a consequence, the difference between fixed- and variable-rate loans will also reflect any differences between short-term and long-term rates.Google Scholar
35 The various views on the fixed-rate alternative, and indications that few fixed-rate mortgages had been written by those state-chartered institutions in California that were also offering variable-rate loans, are aired in the Variable Rate Hearings, supra note 7, at 10–11, 14, 44–46, 134, 174, 175, 206, 234–36, 247, 268, 284–86, 287, 290, 301, 328, 336, 349–50, 352, 367, 401, 403, 420–21, 422, 429, 433, 439–40. The Hunt Commission recommended that fixed-rate mortgages be available and that borrowers be given an option. Hunt Commission Report, supra note 5, at 82.Google Scholar
36 The FHLBB has indicated that it intends to prescribe a specific index for the variable-rate loans which it purchases. While the FHLBB's index will not be binding for other transactions, there will be obvious incentives for savings and loan associations to use it. In addition, the FHLBB will have to approve the use of a particular index. Proposed FHLBB Reg. sec. 545.6–2(c)(2)(i), 40 Fed. Reg. 6874 (1975). See Variable Rate Hearings, supra note 7, at 80–83.Google Scholar
37 The FHLBB's proposed regulation requires that the index be beyond the influence of the lender-sec. 545.6–2(c)(2)(i), 40 Fed. Reg. 6874 (1975). Compare Cohn & Fischer, supra note 16, at 48, 56 (use bank's deposit rate). The California provision allows the index to be prescribed by the savings and loan commissioner, without apparent limitations. Cal. Civ. Code sec. 1916.5(c) (West Supp. 1975). A recent proposed variable-rate formula which determines the rate from the interest rates paid on the lender's savings instruments and borrowings could run afoul of this no lender control requirement. See Note, Variable Interest Rate Clause, supra note 29, at 475 n.36, 479 n.56.Google Scholar
38 Proposed FHLBB Reg. sec. 545.6–2(c)(2)(vii), 40 Fed. Reg. 6874 (1975).Google Scholar
39 Compare Hunt Commission Report, supra note 5, at 82 (maximum change of 3 percent every 5 years; 1 percent in any single year); Cal. Civ. Code sec. 1916.5(3) (West Supp. 1975) (. 25 percent maximum change every six months; no limit on total changes). The FHLBB's proposal does permit “accumulating” changes. Thus, if an increase of .5 percent was authorized in one six-month period and a further .5 percent increase was authorized in a second six-month period, a creditor who did not raise rates at the end of the first period could raise the rates 1 percent at the end of the second period. Proposed FHLBB Reg. sec. 545.6–2(c)(2)(iv), 40 Fed. Reg. 6874 (1975).Google Scholar
40 Proposed FHLBB Reg. sec. 545.6–2(c), 40 Fed. Reg. 6873 (1975), would allow the term of the loan to be extended to 35 years.Google Scholar
41 Anderson & Hinson, supra note 10, at 10; see Note, Variable Interest Rate Clause, supra note 29, at 476–77; Modigliani, supra note 11, at 19.Google Scholar
42 Proposed FHLBB Reg. sec. 545.6–2(c)(vi), 40 Fed. Reg. 6874 (1975).Google Scholar
43 See id. (6 months between changes; 45 days notice of changes); Cal. Civ. Code sec. 1915.5(a)(2) (West Supp. 1975) (6 months between changes); Cohn & Fischer, supra note 16, at 27 (3 months between changes; 2 months notice of changes). For reasons which are unclear, a student note discussing the California provision sets forth a “typical proposed clause” which permits quarterly changes. Note, Variable Interest Rate Clause, supra note 29, at 475 n.36.Google Scholar
44 See, e.g., Wall St. J., Jan. 13, 1975, at 24, col. 1 (Midwest ed.); Modigliani, supra note 11, at 20; Hearings on S. 2591, supra note 10, at 209. This has also been the experience in England. See Cohen & Lessard, supra note 29, at 13; Study of Mortgage Credit, supra note 29, at 35–36.Google Scholar
45 Proposed FHLBB Reg. sec. 545.6–2(c)(2)(vii), 40 Fed. Reg. 6874 (1975).Google Scholar
46 The FHLBB's proposed regulation would permit consumers to prepay all or part of the loan, without penalty, for as long as the rate exceeded the initial rate. Proposed FHLBB Reg. sec. 545.6–2(c)(2)(viii), 40 Fed. Reg. 6874 (1975). California permits prepayment without penalty within 90 days of notification of the rate increase. Cal. Civ. Code sec. 1916.5(a)(5) (West Supp. 1975).Google Scholar
47 Section 3.308 of the 1974 Uniform Consumer Credit Code permits the consumer to refinance the amount of any balloon payment on terms which are “no less favorable to the consumer than the terms of the original transaction.” That section also contains a number of exceptions to this right to refinance, but a home mortgage is not one of the exceptions. However, this right to refinance is only available in a “consumer credit transaction.” A “consumer credit transaction” is defined, inter alia, as a “consumer loan.” UCCC sec. 1.301(13). A “consumer loan” excludes a loan secured by an interest in land if the finance charge does not exceed 12 percent. UCCC sec. 1.301(15)(b)(ii). The effect of this is that a home mortgage would not be a consumer credit transaction and the right to refinance contained in section 3.308 would not apply. Under the National Consumer Act, supra note 21, balloon payments are prohibited, and it appears that this provision applies to home mortgages. Secs. 2.402, 1.301(10), 1.301(12), 1.301(13), 1.301(19) (1st Final Draft 1970). In Canada, consumers may refinance at then current rates without new closing costs. Lessard, supra note 18.Google Scholar
48 15 U.S.C. sec. 1601 (1970).Google Scholar
49 For example, in the last Senate hearings on Truth in Lending in 1967, only two of the large number of witnesses testified primarily with reference to first mortgage loans. Hearings on S.5, supra note 10, at 351, 562. While a few other witnesses did mention mortgage loans in the course of their testimony, such attention was quite sporadic. Almost all of the testimony related to nonfirst mortgage credit. After the Senate passed legislation exempting first mortgages, the House held hearings on both the Senate-passed bill and one proposed by Congresswoman Sullivan. The House did give somewhat greater attention to first mortgages, but virtually all of the debate related to the question of coverage vel non, and did not focus on the specific provisions of the bills. Hearings on H.R. 11601 Before the Subcomm. on Consumer Affairs of the House Comm. on Banking and Currency, 90th Cong., 1st Sess. (1967).Google Scholar
50 S. Rep. No. 392, 90th Cong., 1st Sess. 10 (1967); Hearings on S.5, supra note 10, at 664, 709; cf. N. C. Freed Co. v. FRB, 473 F. 2d 1210 (2d Cir.), cert. denied, 414 U.S.827 (1973); Gardner and North Roofing & Siding Corp. v. FRB, 464 F. 2d 838 (D.C. Cir. 1972).Google Scholar
51 S. Rep. No. 392, supra note 50, at 14, 22.Google Scholar
52 Hearings on S.5, supra note 10, at 664. Governor Robertson offered four reasons for the exemption: First, mortgage lenders were providing accurate information on rates and closing costs; second, the difficulty of handling “closing costs,” many of which were paid by the cash buyer; third, the inaccuracy of treating closing costs as part of the finance charge since borrowers must pay such costs whether the loan is paid at maturity or prepaid; fourth, it was misleading to disclose the total dollar finance charges because of inflation and the substantial chance of prepayment. As expected, mortgage lenders soon rallied to Governor Robertson's position. Id. at 711, 712, 715.Google Scholar
53 In the Hearings on TIL, former Senator Douglas stated: “I want to commend the home mortgage industry for only charging the rate on the amount actually owed.” Hearings on S.5, supra note 10, at 41. Later, former Senator Douglas supported the exemption for first mortgage loans. Hearings on H.R. 11601, supra note 49, at 180.Google Scholar
54 See Homer Kripke, Gesture and Reality in Consumer Credit Reform, 44 N.Y.U.L. Rev. 1, 2–13 (1969); Note, Consumer Legislation and the Poor, 76 Yale L.J. 745, 746–54 (1967).Google Scholar
55 It is difficult to be precise as to the rationale. Governor Robertson's explanation is noted above (supra note 52), and the Senate's was limited to the observation that “adequate disclosure was already being made in this area of credit [first mortgage loans].” S. Rep. No. 392, supra note 50, at 10. See also Hearings on H.R. 11601, supra note 49, at 844.Google Scholar
56 See, e.g., Hearings on H.R. 11601, supra note 49, at 80, 89–90, 184, 302–46, 557. There are wide variations in the nature and amount of such charges. Some of the more important charges are: points–amounts paid by the seller to induce the loan (and often added to the cash price as a consequence); origination fees (1 percent on FHA loans) which purport to cover some of the lender's overhead costs; application fees which cover some of the lender's costs in deciding which loans to approve; attorney's fees for the attorney representing the bank in the mortgage transaction; and sundry charges for acknowledgments, notary services, preparation of forms, and the like. These costs, which are received by the lender, should be distinguished from other transactional costs for such matters as surveys and title insurance, which are frequently paid to third parties and would probably be incurred by any purchaser. Surveys of the full variety of such charges can be found in Hearings on S. 750 Before a Subcomm. of the Senate Comm. on Banking and Currency, 88th Cong., 1st & 2d Sess. 1195–1253 (1963, 1964) (Report on closing costs by Housing and Home Finance Agency); Department of Housing and Urban Development and Veteran's Administration, for the Senate Comm. on Banking, Housing and Urban Affairs, 92d Cong., 2d Sess., Mortgage Settlement Costs (Comm. Print 1972). In recent years, institutions have sometimes used such costs as a way of gaining additional interest. For example, for mortgages on previously occupied homes, the initial fees rose from .77 percent on the initial loan (amortized over 10 years) in 1972, to 1. 26 percent in January 1975. On newly built homes the comparable figures were .87 percent in 1971 and 1.51 percent in January 1975. 8 FHLBB Journal 48 (Mar. 1975).Google Scholar
57 See Variable Rate Hearings, supra note 7, at 3, 38. Comment, Due-on-Sale Clause, supra note 13, at 1111.Google Scholar
58 FRB Reg. Z/226.8(b) (Sept. 30, 1974). The text of regulation Z corresponds to title 12, chapter II, part 226 of the Code of Federal Regulation (12 C.F.R. 226).Google Scholar
59 TIL sec. 129 (a)(4), 15 U.S.C. sec. 1639(a)(4) (1970); Reg. Z/226.8(b)(3), (d)(3); Hearings on H.R. 11601, supra note 49, at 388–89; 114 Cong. Rec. 14388 (1968) (Rep. Sullivan); see Hearings on S.5, supra note 10, at 356, 358–60, 664; Robert L. Jordan & William D. Warren, Disclosure of Finance Charges: A Rationale, 64 Mich. L. Rev. 1285, 1296 (1966).Google Scholar
60 TIL sec. 106(e), 15 U.S.C. 1605(e) (1970); FRB Reg. Z/226.4(e), supra note 58.Google Scholar
61 TIL sec. 125(e), 15 U.S.C. 1635(e) (1970); FRB Reg. Z/226.9(g)(1), (2), supra note 58.Google Scholar
62 Professor Kripke has, perhaps, been the harshest critic as the following excerpt will show:Google Scholar
It is not too much to say that the strong support of witnesses, public officials, legal aid workers, and consumer representatives for the concept of full disclosure of the rate of finance charges and other aspects of a consumer credit transaction … was a “put on.” Many of them knew that disclosure would have only a slight effect on the evils about which they were testifying and agitating; yet everyone acted as if disclosure bills would solve the problem.Google Scholar
Kripke, supra note 54, at 2–3; Hearings on S. 750, supra note 56, at 12–13 (Sen. Simpson). See also Kenneth McLean, The Federal Consumer Credit Protection Act, 24 Bus. Lawyer 199, 206 (1968); Francis A. Miskell, Commentary, 24 Bus. Lawyer 221, 223 (1968); Paul R. Moo, Commentary, 24 Bus. Lawyer 223 (1968).Google Scholar
63 See Francis Thomas Juster & Robert Paul Shay, Consumer Sensitivity to Finance Rates: An Empirical and Analytical Investigation (New York: National Bureau of Economic Research, 1964); James J. White & Frank W. Munger, Jr., Consumer Sensitivity to Interest Rates: An Empirical Study of New Car Buyers and Auto Loans, 69 Mich. L. Rev. 1207 (1971) (data collected before TIL became effective); W. P. Mors, Consumer Credit Finance Charges: Rate Information and Quotation 80–91. Financial Research Series: Studies in Consumer Installment Financing No. 12 (New York: Columbia University Press, 1965).Google Scholar
64 See Robert P. Shay & Milton W. Schober, Consumer Awareness of Annual Percentage Rates of Charge in Consumer Instalment Credit: Before and After Truth in Lending Became Effective, in 1 National Commission on Consumer Finance, Technical Studies (1973); George S. Day & William K. Brandt, A Study of Consumer Credit Decisions: Implications for Present and Prospective Legislation, in 1 National Commission on Consumer Finance, Technical Studies (1973); Terry Deutscher, Credit Legislation Two Years Out: Awareness Changes and Behavioral Effects on Different Awareness Levels, in 1 National Commission on Consumer Finance, Technical Studies (1973); Comment, The Impact of Truth in Lending on Automobile Financing–An Empirical Study, 4 U. Cal. Davis L. Rev. 179 (1971); Lewis Mandell, Consumer Perception of Incurred Interest Rates: An Empirical Test of the Efficacy of the Truth-in-Lending Law, 26 J. Finance 1143 (1971). See generally, William C. Whitford, The Function of Disclosure Regulation in Consumer Transactions, 1973 Wis. L. Rev. 400. A similar issue has been raised with regard to insurance price disclosure. See Spencer L. Kimball & Mark S. Rapaport, What Price “Price Disclosure”? The Trend to Consumer Protection in Life Insurance, 1972 Wis. L. Rev. 1025.Google Scholar
65 See Bissette v. Colonial Mortgage Corp. of D.C., 477 F. 2d 1245 (D.C. Cir. 1973); Stavrides v. Mellon Nat'l Bank & Trust Co., 353 F. Supp. 1072 (W.D. Pa.), aff'd, 487 F. 2d 953 (3d Cir. 1973); Foster v. Maryland State Sav. & Loan Ass'n, 369 F. Supp. 843 (D.D.C. 1974).Google Scholar
66 See FRB Reg. Z/226. 2(k), (m), supra note 58.Google Scholar
67 FRB Letter, CCH Cons. Credit Guide, 1969–74 TIL Special Releases Transfer Binder, para. 31,006 (July 17, 1973). Compare William D. Warren & Thomas R. Larmore, Truth in Lending, Problems of Coverage, 24 Stan. L. Rev. 793, 829–33 (1972) (discussing earlier FRB views).Google Scholar
68 Scott v. Liberty Fin. Co., 4 CCH Cons. Credit Guide, para. 98,750 at 88,357 (D. Neb. 1974); see Johnson v. McCrackin-Sturman Ford, Inc., 381 F. Supp. 153, 156 (W.D. Pa. 1974) (suggesting consumers may compare acceleration clauses of. different creditors).Google Scholar
69 Real Estate Settlement Procedures Act, 88 Stat. 1724 (1974). Some of the inadequacies of TIL as applied to real estate transactions are set forth in Hearings on Real Estate Settlement Costs Before a Subcomm. on Housing of the House Comm. on Banking and Currency, 93d Cong., 1st & 2d Sess. (1974). The Senate recently enacted legislation to suspend this act for one year so that it can work out better procedures. New York Times, Oct. 10, 1975, at 54, col. 3. As noted (note 31 supra) the board has recently withdrawn its variable-rate mortgage proposal.Google Scholar
70 1 CCH Consumer Credit Guide, para. 3813, at 3592 (May 20, 1975). The model disclosure form is as follows:Google Scholar
71 39 Fed. Reg. 44779 (1974). If approved, the regulation will be contained in FRB Reg. Z/226.8(b)(8), supra note 58.Google Scholar
72 FRB Int. sec. 226.810, 34 Fed. Reg. 11083 (1969); FRB Letter, CCH Cons. Credit Guide, para. 31,229 (May 27, 1975).Google Scholar
73 40 Fed. Reg. 13009 n. 2 (1975).Google Scholar
74 Questions have been raised whether consumers understand mortgage terms and actually shop among different lenders. Variable Rate Hearings, supra note 7, at 247, 315, 368, 370–71, 392, 400, 429–30. Some commentators have urged that consumers should be given their choice between different types of mortgages that vary with the price index, short- or long-term interest rates, or some combination of these. Cohn & Fischer, supra note 16, at 51–57. These authors have responded to possible consumerist objections that consumers could not understand the different alternatives and exercise an effective choice, by noting that “full and fair disclosure is essential to the successful introduction of new designs”; calling for mortgage institutions to educate consumers; and, requiring consumers to sign a disclosure statement appropriate to the particular mortgage design. ld. at 57. However, if consumers have not been very successful in understanding the relatively simple concept of an annual percentage rate (supra notes 63, 64), it is not clear how they can possibly be expected to understand the complex formulae necessary to explain the various alternatives. The explanation offered by these authors requires substantial knowledge of such economic concepts as real and nominal interest rates, and calculus, and one must despair of composing an explanation intelligible to the vast majority of consumers.Google Scholar
75 The FHLBB's regulations have a similar provision which is subject to the same ambiguity as discussed in the text. Proposed FHLBB Reg. sec. 545.6–2(c)(2)(x)(c), 40 Fed. Reg. 6874 (1975).Google Scholar
76 Cf. Ljepava v. M.L.S.C. Properties, 511 F. 2d 935, 942 (9th Cir. 1975). It appears, however, that if the creditor includes the disclosures in the contract documents, the disclosures may be on the reverse side of the document. FRB Int. sec. 226.801, 34 Fed. Reg. 7571 (1969).Google Scholar
77 The staff has intimated that such a provision would suffice. FRB Letter, 4 CCH Cons. Credit Guide, para. 31,229 (May 27, 1975).Google Scholar
78 TIL sec. 102, 15 U.S.C. sec. 1601 (1970).Google Scholar
79 While the FHLBB's discussion of the subject suggests that the method of determining the index rate, the present index rate, and the method for calculating changes must all be disclosed, the actual regulation simply requires disclosure of the “index rate” and also that the index rate “can be explained in clear and simple terms.” Proposed FHLBB Reg. secs. 545.6–2(c)(2)(i)(C) and (c)(2)(x)(A)(1), 40 Fed. Reg. 6874 (1975). While the regulation would probably be construed to require complete disclosure of these items, perhaps that should be spelled out more precisely.Google Scholar
80 FRB Letter No. 271, CCH Cons. Credit Guide, 1969–74 TIL Special Releases Transfer Binder, para. 30,522 (Mar. 6, 1970).Google Scholar
81 Bone v. Hibernia Bank, 493 F. 2d 135, 1.40 (9th Cir. 1974) (quoting J. L. Robertson, Vice-Chairman, FRB); accord, Evans v. Household Fin. Co., 4 CCH Cons. Credit Guide, para. 98,678 (S.D. Iowa, 1974); Burrell v. City Dodge, Inc., 4 CCH Cons. Credit Guide, para. 98,764 (N.D. Ga. 1974); Beneficial Discount Co. v. Johnson, 211 S.E. 2d 571 (Va. Sup. Ct. 1975).Google Scholar
82 APR disclosure was, of course, a major objective of the TIL Act. See Ratner v. Chemical Bank N.Y. Trust Co., 329 F. Supp. 270, 275–77 (S.D.N.Y. 1971); Kripke, supra note 14, at 459–60 (1968); Jordan & Warren, supra note 59, at 1313–20. If closed-end credit is advertised, the APR is one of only four required disclosures. TIL sec. 144(d)(4), 15 U.S.C. sec. 1664(d)(4) (1970). The APR is one of two required disclosures on periodic statements in closed-end transactions. FRB Reg. Z/226.8(n), supra note 58. Finally, the APR must be printed more prominently than most other required disclosures. Id., sec. 226.6(a).Google Scholar
83 Proposed FHLBB Reg. sec. 545.6–2(c)(2)(i)(C), 40 Fed. Reg. 6874 (1975). As noted above (note 79 supra), it is not clear that the formula itself must be disclosed. However, there seems little reason to require simplicity if no disclosure is required. The California commissioner has proposed a formula based on the weighted average cost to savings and loan associations of savings and borrowings for each district. Title 10 Cal. Admin. Code, Subch. 18, Reg. sec. 240. 2(a) (May 29, 1971). It is questionable whether this would be explainable in clear terms to borrowers. See the explanation in Note, Variable Interest Rate Clause, supra note 29, at 479 n. 56.Google Scholar
84 This is a requirement in the FHLBB regulation. Proposed FHLBB Reg. sec. 545.6–2(c)(2)(x)(A), 40 Fed. Reg. 6874 (1975). The staff has stated that no disclosure of maximum and minimum rates is required if there are none. FRB Letter, 4 CCH Cons. Credit Guide, para. 31,229 (May 27, 1975).Google Scholar
85 FRB Letter, CCH Cons. Credit Guide, para. 31,299 (May 27, 1975).Google Scholar
86 When TIL was being debated, critics claimed that there should be no APR disclosure for open-end accounts since it would be impossible to disclose an accurate figure prior to the consumer's actual payment of the account. See H.R. Rep. No. 1040, 90th Cong. 2d Sess., 14–16, 107–13, 125–28 (1968); Hearings on S.5, supra note 50, at 201–22 (William M. Batten, Chairman of the Board, J. C. Penney Co.). Congress rejected the no disclosure approach in favor of stating a nominal rate which, while not accurate, would provide consumers at least some information. TIL sec. 107(a), 15 U.S.C. sec. 1606(a) (1970); FRB Reg. Z/226.5(a), supra note 58.Google Scholar
87 See Sec. Exch. Act, Rel. No. 5586 (May 9, 1975), 40 Fed. Reg. 23770 (1975) (variable annunities); Joseph L. Belth, Price Disclosure in Life Insurance, 1972 Wis. L. Rev. 1054.Google Scholar
88 See Variable Rate Hearings, supra note 7, at 10–11, 45–46, 133, 174, 175. See also id. at 207 (comparative information has helped state-chartered institutions sell variable-rate mortgages).Google Scholar
89 Several witnesses at the hearings on variable-rate mortgages questioned the ability of consumers to compare fixed-rate and variable-rate mortgages.Google Scholar
90 FRB Letter, CCH Cons. Credit Guide, 1969–74 TIL Special Releases Transfer Binder, para. 30,345 (Apr. 16, 1970).Google Scholar
91 Cal. Civ. Code sec. 1916.5 (West Supp. 1975).Google Scholar
92 See, e.g., FRB Int. sec. 226.810, 34 Fed. Reg. 11083 (1969). The requirement contained in the model disclosure statement for real estate transactions, which simply requires creditors to “describe” the variable-rate provision, is so vague that it is impossible to say what it requires.Google Scholar
93 See Day & Brandt, supra note 64, at 77–80; Gerhardt Research Service, An Evaluation of the Truth in Lending Advertising Campaign 20 (FTC Seattle Regional Office, Feb. 1974) (30 percent of consumers wish to know amount of monthly payment; this was the second most important category of information sought by consumers when purchasing on credit); Note, Truth in Lending: The Impossible Dream, 22 Case W. Res. L. Rev. 89, 109 n.105 (1970) (citing authorities).Google Scholar
94 Proposed FHLBB Reg. sec. 545.6–2(c)(x), 40 Fed. Reg. 6874 (1975). Under the FHLBB proposal, interest rate decreases are automatic and no disclosure is required. id. sec. 545.6–2(c)(vii), 40 Fed. Reg. 6874 (1975).Google Scholar
95 Lest this suggestion be considered fanciful, it finds some support in FRB Letter No. 815, 4 CCH Cons. Credit Guide, para. 31.137 (June 27, 1974).Google Scholar
96 No point of change disclosures are required by either the FRB's Interpretive Ruling or by any of the published letters or responses to information requests. FRB Int. sec. 226.810, 34 F.R. 11083 (1969); FRB Letter No. 232, CCH Cons. Credit Guide, 1969–74 TIL Special Releases Transfer Binder, para. 30,265 (Jan. 13, 1970); FRB Letter, id., para. 30,345 (Apr. 16, 1970).Google Scholar
97 FRB Int. sec. 226.810, 34 Fed. Reg. 11083 (1969); Reg. Z/226.6(g), supra note 58. An interesting comparison is the board's attitude toward small changes in payment terms on nonvariable-rate transactions. See Letter No. 882, 4 CCH Cons. Credit Guide, para. 31,207 (Mar. 21, 1975).Google Scholar
98 On the congressional attempts to deal with the open-end–closed-end distinction, see H.R. Rep. No. 1040, supra note 86, at 14–16, 112–13 (1968); William D. Warren, Consumer Credit Law: Rates, Costs, and Benefits, 27 Stan. L. Rev. 951, 962–63 (1975); cf. Zachary v. R. H. Macy & Co., 31 N.Y. 2d 443, 293 N.E. 2d 80, 340 N.Y.S. 2d 908 (1973) (court sustained previous balance method of computing finance charges on open-end plan by analogy to closed-end transaction). One state has attempted to distinguish between open- and closed-end transactions by forbidding security interests on open-end accounts. See N.C. Gen. Stat. sec. 24–11 (cumulative supp. 1974).Google Scholar
99 FRB Reg. Z/226. 2(r), supra note 58.Google Scholar
100 FRB Int. sec. 226. 203, 34 Fed. Reg. 8698 (1969); see FRB Letter No. 673, CCH Cons. Credit Guide, 1969–74 TIL Special Releases Transfer Binder, para. 30,949 (Feb. 22, 1973).Google Scholar
101 356 F. Supp. 47 (N.D. Cal. 1973).Google Scholar
102 See generally 55 Am. Jur. 2d. Mortgages sec. 137–40 (1971).Google Scholar
103 FRB Reg. Z/226. 2(r), supra note 58.Google Scholar
104 Robert W. Johnson, Robert L. Jordan & William D. Warren, Attorneys' Guide to Truth in Lending 84 (California Continuing Education of the Bar, 1969).Google Scholar
105 Under the FHLBB's regulations, the consumer must receive notice at least 45 days before any rate change. Proposed FHLBB Reg. sec. 545.6–2(c)(2)(xi), 545.6–2(c)(2)(x)(A)(7), 40 Fed. Reg. 6874 (1975).Google Scholar
106 See Reg. Z/226.7(b), supra note 58.Google Scholar
107 Proposed FHLBB Reg. sec. 545.6–2(c)(2)(x)(A)(8), 40 Fed. Reg. 6874 (1975).Google Scholar
108 An intense debate has developed in class actions as to whether individual class members should be required to “opt in” to a class action. Those who oppose such a requirement argue that such a requirement would be tantamount to excluding a large number of class members who will simply not take the necessary affirmative steps. See Jonathan M. Landers, Of Legalized Blackmail and Legalized Theft: Consumer Class Actions and the Substance-Procedure Dilemma, 47 So. Cal. L. Rev. 842, 895 (1974).Google Scholar
109 There are indications that lenders would oppose standardized mortgage contracts for variable-rate loans. See Variable Rate Hearings, supra note 7, at 28, 130–31.Google Scholar
110 FRB Reg. Z/226.8(b)(3), supra note 58.Google Scholar
111 FRB Letter No. 203, CCH Cons. Credit Guide, 1969–74 TIL Special Releases Transfer Binder, para. 30,234 (Dec. 8, 1969).Google Scholar
112 One lower court judge has expressed his frustration as follows:Google Scholar
Young v. Tri-City Remodeling Enterprises, Inc., 71 Misc. 2d 108, 335 N.Y.S. 2d 308, 309 (Albany City Ct. 1972).Google Scholar
113 See Variable Rate Hearings, supra note 7, at 349.Google Scholar