Comments of the National Consumer Law Center, Consumer Action, Consumer Federation of America, Consumer Law Center of the South, National Consumers League, and U.S. Public Interest Research Groups on

Truth in Lending - Regulation Z; Docket No. R-1005

Introduction

On behalf of our low-income clients, the National Consumer Law Center, as well as Consumer Action, the Consumer Federation of America, the Consumer Law Center of the South, the National Consumers League, and the U.S. Public Interest Research Groups provide the following comments regarding the Federal Reserve Board's proposals to allow disclosures required under the Truth in Lending Act to be made electronically so long as the consumer agrees. Electronic disclosures are not warranted in almost all consumer credit transactions. The extent to which consumers will actually choose, and will truly benefit from, receiving TILA disclosures electronically is very unclear at this point in time. The Board must move cautiously because of the acute dangers to consumers that will result from allowing TILA disclosures to be made in such a way that they become effectively impossible to access, retrieve, and store. The proposed rule does not contain the necessary consumer protections to assure that consumers will actually receive and be able to retain their TILA disclosures.

This proposed rule goes beyond the Federal Reserve Board's authority to implement regulations under this basic federal consumer protection law. Allowing these essential disclosures to be made electronically only so long as the parties agree, is tantamount to a repeal of the consumer protection requirements of the Truth in Lending Act. As written this proposed rule undermines the requirements of TILA.

The consumer protection disclosures required under the TILA should be permitted electronically only pursuant to the following guidelines:

1. Disclosures relating to the financing of a home should always be made in writing. Electronic disclosures may accompany paper disclosures, but paper disclosures should always be required to meet the timing requirements for loans secured by the home. This rule is necessary because of the paramount importance of ensuring full information is provided to consumers in transactions secured by the home. Further, the relatively small costs of providing the paper disclosures, as compared to the risks to the consumer if the consumer does not receive full disclosure of the costs and terms of credit dictate that the current paper approach to providing disclosures be followed to ensure consumers receive TILA disclosures on these loans.

2. Electronic disclosures should only be permitted for closed end transactions, not secured by the home, under the following circumstances:

   1. When the consumer initiates the transaction with the creditor electronically from his home; and
   2. When the consumer affirmatively agrees -- via a separate signed and dated agreement -- that he wishes to receive the disclosures electronically (and this could be accomplished electronically); and
   3. When the creditor provides the electronic disclosures using a method that ensures the integrity of the document; and
   4. When the creditor provides a paper copy of the disclosures after they are made electronically.
3. Electronic disclosures should only be permitted for open end transactions, not secured by the home, under all of the same conditions described in subparagraphs a through c above for closed end transactions, as well as the following requirements:
4. When the creditor provides a paper copy of the initial disclosures after they are made electronically, and provides paper copies upon the request of the consumer for the periodic statements; and
5. For the ongoing disclosures required for monthly statements for open end credit, creditors should have the obligation to test the consumers' continuing capacity to receive the disclosures electronically. If the test fails, the obligation to make disclosures by paper should automatically apply; and
6. Consumers' obligations to correspond with the creditor regarding billing rights should be considered met if the consumer corresponds electronically.

Explanation for Proposed Guidelines:

1. Disclosures relating to the financing of a home should always be required to be made on paper.

Electronic disclosures may accompany paper disclosures, but paper disclosures should always be required for loans secured by the home.

Historically, Congress has recognized that financial transactions secured by the home warrant special scrutiny, additional disclosures, and heightened remedies. This assumption is based upon the well-entrenched and entirely justified belief that the purchase or refinance of a home is the single largest financial transaction in which most Americans will be involved in their lifetimes. In addition, the consumer's most valuable possession, the family home, is on the line. Congress's recognition of these facts is evident in the Truth In Lending Act which requires additional disclosures, provides for a right to cancel, and grants higher statutory penalties for the failure to abide by the disclosure rules. Congress did not stop there. It later enacted the Real Estate Settlement Procedures Act to protect consumers from unnecessarily high settlement charges and certain abusive practices that occur when borrowers finance the purchase of their homes, refinance their mortgages, escrow their taxes and insurance, and deal with entities who service their loans.

Thus, the Federal Reserve Board should continue to recognize that credit transactions secured by the home deserve extra protections, and special precautions should be taken to ensure that

consumers receive meaningful disclosures, clearly and conspicuously, in a manner they can be assured that they can really keep.

The paperwork provided in a credit transactions secured by the home is an essential benchmark against the behavior of the creditor can be measured and evaluated. It is absolutely critical to the protection of all consumers involved in home secured credit transactions that they actually receive full disclosure of the terms of the credit. The disclosures provided in a home secured transaction provide the consumer not only with information to facilitate shopping for credit, but also with basic information about the terms of the contract to which the consumer agreed. In other words, the consumer needs the information both before and after the contract is consummated. Given the significant number of problems and issues with assuring that authenticated disclosures actually reach the consumer in a form which the consumer can keep and use in the future, and given the amount of money involved in most home secured transactions, there is no reason not to require paper disclosures for all TILA purposes. Electronic disclosures can be made for the convenience of the parties. But paper disclosures should be required to comply with the mandates of the statute.

To allow electronic disclosures in lieu of paper ones is to extend a golden invitation to those elements of the lending and brokering industry whose business is to take advantage of  unwitting homeowners. Potential abuses which would be permitted under this Proposed Rule could involve: body-dragging (brokers taking homeowners to a lender who gives the TILA disclosures on a computer which the homeowner is expected to read and understand on the spot); brokers who solicit business door-to-door and bring a lap top computer to make the "early" TILA and RESPA disclosures electronically; lenders who change important dates or other contract terms which the homeowner could only cursorily scan when trying to read a computer screen at the lender's office. The Board cannot underestimate the predatory elements of in the home lending industry which would undoubtedly take advantage of the loopholes created by allowing electronic disclosures. These elements have been the subject of many Congressional and Board hearings over the years, as well as numerous exposes and court cases.

II. Allowing disclosures to be made electronically so long as the "parties agree" effectively repeals the requirements for disclosures.

The single requirement imposed on creditors in Proposed Regulation §226.5(a)(5) for providing electronic disclosures -- that the consumer "agrees" -- is completely inadequate to assure an actual and meaningful meeting of the minds on the question of whether electronic disclosures are appropriate in each consumer transaction. Allowing disclosures to be made electronically so long as the "parties agree" effectively repeals the requirements for disclosures. Congress' insistence that the disclosures required under TILA be made clearly and conspicuously could not be clearer. Creditors will effectively avoid the requirements of all this basic consumer protection law simply by hiding an agreement to receive electronic disclosures in the fine print of a contract. This must not be allowed. Contracts between creditors and consumers are, by definition, adhesion contracts. Adhesion contracts include provisions which cannot be negotiated by the party with less bargaining power. In the extremely rare instance where a consumer might be able to negotiate over the terms -- the interest rate or the up-front charges -- consumers are never able to negotiate over the pre-printed language in the contract. Requiring "agreement" between the parties, without ensuring actual meeting of the minds is a meaningless protection.

Punting the issue of whether there is an actual agreement between the parties to a question of state law is completely inadequate. Never before has the issue of the adequacy of providing federally required disclosures been subject to a question of state law.

3. Creditors must have the affirmative duty of ensuring that consumers have the capacity to receive electronic disclosures.

Initial Disclosures. Creditors must only be allowed to provide disclosures electronically when they have a reasonable basis for assuming that the consumer not only consents to the electronic medium, but also can access and retain the electronic disclosures.

Even if consumers affirmatively agrees to receive disclosures electronically, they may do so for several reasons which will not reasonably assure the ability to receive and retain the disclosures:

• The price for a credit product may be lower if all disclosures are provided electronically. The consumer who has not seen these disclosures before, will not understand their importance. Consumers will be bargaining away an essential right -- the right to receive federally required disclosures -- without understanding the value of what is being given up.
• The creditor may verbally indicate that if the consumer does not agree to receive disclosures electronically adverse action might be taken in some way. The historical problems of credit insurance provide an apt illustration of the reasons why assuring even, extra affirmative acceptance of electronic disclosures would not be adequate to assure that the consumer can actually receive the disclosures.
• There may be a misunderstanding over what technological capacity is necessary to access the disclosures. For example, the disclosures may only be provided in Word Perfect 6.0, and the consumer might only have Word software. Or, the consumer might believe he knew how to download information from the creditor's web site, only to find that his computer did not have the "reader" necessary.
• Consumers may initiate the relationship from a publicly accessible computer, such as from one in a public library where the consumer cannot store the document on the hard drive, only to find that no floppy disc is available and the library printer is not working. The result would be that the consumer would be completely unable to retain the disclosures.

Proposed Remedy. The remedy for this problem is to allow electronic disclosures to be made only when the consumer has initiated the electronic correspondence with the creditor from the consumer's home.

Periodic Statements. Another, related problem arises when continuing disclosures must be provided under the Truth in Lending Act for open end credit. Consumers who may have had the initial capacity to receive disclosures when the contractual relationship was established, may nevertheless lose it at some point. Computers break, telephone lines become disconnected, access to one's e-mail or the Internet may no longer be affordable.

Creditors should assure that consumers actually have this capacity when the initial disclosures are provided, as well as the ongoing capability to receive disclosures throughout the term of the contract required for open end credit under the Truth in Lending Act and periodic statements under the Electronic Funds Transfer Act.

Proposed Remedy. For the ongoing disclosures required under open end credit, creditors should have the obligation to test the consumers' continuing capacity to receive the disclosures electronically. If the test fails, the obligation to make disclosures by paper should automatically apply.

4. Electronic disclosures should only be permitted when the creditor can assure the authenticity and integrity of the disclosures.

There are many cases in which the consumer and the creditor disagree on the issue of the validity of TILA documents. One side to the dispute will say the papers were said one thing before the contract was consummated; the other side will say the papers said something. Both parties may have paper writings which purport to support their view of the events. In the paper based world, the party with the burden of proof will have to "authenticate" their documents. The process of authentication takes place under the applicable rules of evidence, including both the "authenticity" and the "best evidence" of the document in question. Both issues go to the integrity of the document: assurance that the information on the electronic recording accurately reflects what was originally on the document and that it was not altered, or even subject to alteration. Surprisingly, the Board would allow electronic disclosures without requiring that they be provided in a manner which assures their authenticity, their integrity, or the ability of either party to prove these issues in a court.

The Proposed Regulation would allow disclosure of crucial consumer information without any requirement that the method of disclosure assure that the electronic document is complete and unaltered between the time it was provided to the consumer and time it is being offered as proof. While a number of states have addressed the issue of authenticating electronic documents by amending their rules of evidence, or providing other rules to assure the integrity of electronic documents to be used as proof, the Proposed Regulation would allow the disclosure of essential consumer information to be provided electronically without assuring that a) the parties could not tamper with the date, the content, or proof of receipt of the disclosures, or b) that both parties would be able to meet the evidentiary burden under state or federal law of entering the electronic disclosures into evidence.

The issue of being able to prove the authenticity of a certain document under federal or state rules of evidence is very important. In the paper based world, whoever has the burden of proof on the underlying issue, has the burden of proving the authenticity and best evidence of the document in question. If the creditor has provided the disclosures to the consumer, and the creditor has control over the electronic method of disclosure, the creditor will likely be able to meet that burden. However, if the consumer has the burden of proof (as will be the case when the consumer must prove that a disclosure was not provided as required, or included different information from that which the creditor maintains), it will be impossible for a consumer to prove the best evidence and authenticity of a document downloaded on to a personal computer.

If the Proposed Regulation is allowed to stand as currently written, the following absurd and unfair situations would be allowed:

• If a consumer testifies that the consumer never received the TILA disclosures by e-mail, and the creditor maintains they were downloaded from the creditor's web site, who has the burden of proof, and how can the consumer prove a negative - that he did not receive something? Contrast this question with the situation in In re Pinder, in which the consumers testimony that she never received a TILA disclosure statement, sufficed to place the burden on the creditor to come forward with some evidence.. If the consumer had received the disclosure electronically, and simply was unable to download the document off the creditor's website, would that suffice to switch the burden and make the creditor show it had provided the disclosure?
• If a consumer testifies she received the cd-rom which included the disclosures but they were in a format that were unreadable by the software on her computer, how would the consumer meet the burden of proof of showing that the disclosures were not clear and conspicuous to her, and how would a consumer meet this burden? Contrast this question to the case of Cole v. Lovett, in which the disclosures on the third carbon copy (creditor kept original and first two) were illegible at the time of trial. Although the consumer had not established that creditor had failed to make a clear and conspicuous disclosure, the rebuttable presumption raised by signed acknowledgment of receipt was overcome and the burden placed on the creditor. If the disclosures were originally made electronically, who would have the burdens?
• Where the consumer testified that the disclosures received at the consummation of the contract showed that they only owed a certain amount, yet the creditor produced an electronic disclosure showing a different amount, who would have the burden of proof of showing what the documents said at the time the contract was consummated and how would the consumer be able to even rebut expert testimony on computer technology that was wholly within the control of the creditor? Even in the paper based world, this was a difficult question for the court in In re Underwood. In this case one consumer testified to a "hurried" closing at which they had been required to sign blank forms and the paperwork showed two different dates although consumers had been to creditor's office only once. Yet, if the disclosure had all be provided electronically, without some authentication requirement how could the consumer prove that the creditor's electronically stored disclosures were not the same as those provided to the consumer?
• When the consumer says there were no disclosures e-mailed as promised and as the creditor testifies, how does the consumer prove a negative under the proposed rules? Would the burden switch to the creditor as in the case of In re Herbert, in which an unsophisticated consumer produced the "stack of papers" received at the closing, which contained no disclosure statement, and testified that none had been provided? This shifted the burden to the creditor to produce the statement.

The credit industry providing the electronic disclosures will have full control over the technology used to provide the disclosures, store the disclosures, and print out the disclosures for later use. Yet, the consumer will have the requirement to authenticate the disclosure received by the consumer in a court of law. This will be impossible for most, if not all consumers.

Proposed Remedy: The Proposed Regulation should only allow disclosures to be made electronically if they are provided via a technology that is certified -- by an independent third party -- to ensure that the document cannot be tampered with as to substance, date of receipt, and sending and receiving parties.

V. Providing confirming paper copies is essential to meeting the requirement to provided disclosures in a manner in which the consumer can keep.

Paper copies must always be provided for closed end credit disclosures and for the initial disclosures made for open end credit. Paper copies should also be provided if requested by the consumer for open-end credit disclosures after the initial disclosures.

There are so many issues which can arise to make it difficult for consumers to experience difficulties to actually receive disclosures made electronically:

• does the consumer have a computer?
• does the consumer have access to the Internet?
• does the consumer know how to retrieve information from a website, or download e-mail?
• does the consumer's computer have the software to read the transmission from the creditor? etc.

There are also many issues which might arise to make it difficult for consumers to retain disclosures made electronically, in a format which will be recognizable by a court as the disclosures that were received:

• is there room on the consumer's hard drive?
• does the consumer's printer work?
• is the printer compatible with the format for the disclosures used by the creditor?
• will the consumer be able to prove that what he downloaded and printed out was what the creditor provided?

Given all of these potentially serious problems, any one of which will impede consumers' ability to receive and retain TILA required disclosures, and given the minimal costs to creditors of providing disclosures on paper, there can be no good reason for not requiring confirming paper disclosures for all initial disclosures. Even if the creditor and the consumer choose to conduct their negotiations over the Internet, that does not mean that eventually there will not be some meeting of people face to face. At the least, if there will be no point in the transaction where human beings actually meet, the paper disclosures can be mailed to the consumer. The costs of delivering a confirming paper copy to the consumer is minimal.

In the preface to the proposed regulations, the Board says:

Providing a piece of paper to someone and not having to be sure that they read it, is a vastly different standard from making information available on website and allowing a consumer to take the following seven, separate and distinct steps in order to receive and retain his TILA disclosures:

1. turn on the computer
2. use a telephone line to connect to the Internet
3. type in the correct website address
4. find the spot on the website where the consumer's personal information is to be provided
5. click on that site and find the relevant disclosures
6. download the consumer's personal disclosure information and save it to his hard drive
7. and print it out in a readable and recognizable format.

Proposed Remedy. For all initial disclosures the creditor must provide a paper copy of the disclosures after they are made electronically.

Period Statements Required under Open End Credit. Were the Board to decide that periodic disclosures should be made only electronically, it is still essential that creditors have the obligation to ensure that consumers have the capacity to receive these disclosures, and that consumers be able to request and receive paper copies of the disclosures at a reasonable price. Further, consumers should always be able to change the ongoing method of disclosures from electronic to paper. Otherwise, a consumer whose computer has broken will not receive federally mandated disclosures.

The Board proposes to satisfy the Regulation Z requirement that the consumer be able to retain disclosures simply by requiring that creditors provide disclosures which can be printed or downloaded. Yet "creditors would not be required to monitor an individual consumer's ability to retain the information" and

What if after the consumer has agreed to receive disclosures electronically, he finds that he is unable to download or print the disclosures, despite extensive and explicit technical information on how to do so which is provided by the creditor. After all, the makers of VCRs all provide excellent information on how to program these ubiquitous machines. But how many members of the Board, and how many of their staff can truly claim to knowing how to program their VCR? Should the ability to retain essential TILA disclosures be limited to those for whom the instructions actually work?

How can the Board justify not requiring creditors to provide paper copies when requested to do so by the consumer? Reasonable fees could be allowed if the basis for the pricing of the account includes the less expensive provision of electronic disclosures. But, so long as the financial institution could recover their reasonable expenses, why not allow consumers to request their disclosures as paper copies?

It is the Board's mandate to encourage, facilitate and strengthen the ability of consumers to receive the disclosures required by these federal protection statutes. Providing a paper copy of essential disclosures seems a minor task to assure consumer receipt.

Proposed Remedy. Creditors should be required to provide paper copies of disclosures when requested to do so by the consumer within a reasonable time from the provision of the electronic disclosures of periodic statements required for open end credit. When the pricing of the account or extension of credit was based on the assumption that disclosures required on an ongoing basis would be provided electronically, reasonable fees equivalent to the actual, additional costs incurred for providing paper copies would be allowed.

Conclusion

Electronic disclosures should facilitate commerce; they should facilitate communication between consumers, merchants and creditors. Making disclosures electronically should not impede the ready access to the important information included in the TILA disclosures. Paper disclosures should be the method of complying with TILA's requirements in almost every situation that electronic disclosures are contemplated. Electronic disclosures can supplement the exchange of information, but they should not undermine the basic requirements of TILA for clear and conspicuous disclosures in a form that the consumer is able to retain. The Board's proposed regulations would allow electronic disclosures which do not meet these basic requirements.