The Federal Reserve Board (FRB) issued an Interim Rule on electronic Truth in Lending disclosures in March 2001, n1 and then lifted or postponed the mandatory effective date (originally set for October 1, 2001) for those rules in August. n2 As a result, the Interim Rule remains in place, but compliance is not mandatory until a future date yet to be announced by the FRB.
Under the Electronic Signatures in Global and National Commerce Act (ESIGN), n3 electronic documents and signatures have the same validity as paper documents and handwritten signatures. The requirements under ESIGN have been discussed in detail elsewhere and that general discussion is not repeated here. n4 ESIGN contains special rules for the use of electronic disclosures in consumer transactions. Consumer disclosures may be provided in electronic form only if the consumer affirmatively consents after receiving certain information specified in the statute. The FRB and other government agencies are permitted to interpret the consumer consent requirements within prescribed limits, but may not impose additional requirements for consumer consent. It is generally assumed that the FRB delayed the mandatory effective date of the Interim Rule, in part, because it recognized that it strayed beyond the authority granted by ESIGN to promulgate regulations implementing ESIGN.
The Interim Rule imposes significant requirements and restrictions on the use of electronic records to provide consumer disclosures otherwise required by the Truth in Lending Act (TILA). n5 Some of these requirements and restrictions exceed the authority that regulators have under ESIGN and impose additional burdens and significant costs on electronic commerce. Specifically, the required use of e-mail and the accompanying ninety-day retention requirement imposed by the Interim Rule raise significant concerns. These requirements are in addition to the requirements imposed by, and are not clearly authorized by, ESIGN. In addition, the required use of e-mail by the Interim Rule imposes a technology-specific requirement, which ESIGN prohibits.
Furthermore, the FRB has determined, in the adoption of the Interim Rule, that certain advertising, application, and solicitation disclosures are not subject to the electronic consumer disclosure consent provisions of ESIGN. By doing so, the FRB suggests that these types of disclosures are not subject to the federal preemptive authority of ESIGN. Such a position invites state regulators and other federal agencies to impose restrictions and requirements with respect to other similar state and federal disclosures. The result could be an unworkable patch-work of limitations and restrictions on electronic commerce. The Interim Rule imposes the following requirements in connection with open-end credit.
An electronic communication is defined in the Interim Rule to include a message transmitted electronically, between a creditor and a consumer, where the message is in a format that allows visual text to be displayed on equipment, such as a personal computer. n6 Audio and voice-response equipment are not included because they do not allow visual text. n7 Note, however, that systems designed to accommodate vision-impaired consumers may be required to provide disclosures using visual text and would then be covered. n8
General Rule
The general principle of the Interim Rule is that ESIGN authorizes the use of electronic disclosures, but that the disclosures themselves are otherwise subject to all of the requirements under the TILA and Regulation Z. n9 Prior to providing electronic disclosures, the creditor must disclose the requirements for accessing and retaining disclosures in that format, the consumer must demonstrate the ability to access the information electronically and affirmatively consent to electronic delivery, and the creditor must provide the disclosures in accordance with the specified requirements. n10
With certain exceptions, identified below, a creditor must either send the applicable disclosures to the consumer's e-mail address, or post them to a Web site. n11 If the disclosures are posted to a Web site, the creditor must send a notice to the consumer that tells the consumer the disclosures are available. The creditor can deliver this notice to the consumer's e-mail address or postal address. The notice must identify the account involved and the address of the Web site or other location where the disclosure is available. n12 The e-mail address used for this purpose must be one that can receive messages from persons other than the creditor. n13 If the disclosure is posted to a Web site, the disclosure must remain available at that Web site for a period of not less than ninety days, measured from the later of the day when the disclosures are posted and the day the creditor sends notice to the consumer that the disclosures are available. n14 If an e-mail is returned to the creditor as undeliverable, the creditor must take certain additional reasonable steps to complete delivery, n15 including reviewing its files to determine whether the address it is using matches the address on file, as well as attempting delivery at any alternate e-mail address for the consumer that may be contained in the creditor's file. n16
Transactions that are not subject to these rules include: advertisements, credit and charge card applications and solicitations, Home Equity Line of Credit (HELOC) and Adjustable Rate Mortgage (ARM) application disclosures, and the up-front disclosures. n17
Timing and Effective Delivery
When a creditor permits the consumer to consummate a closed-end transaction on-line, the creditor must require the consumer to access the disclosures required under Regulation Z section 226.18 before consummation. n18 A creditor may satisfy this requirement with a link to the disclosures provided that the consumer cannot bypass the disclosures. n19 Alternatively, the disclosures must automatically appear on the screen, even if multiple screens are required to view the entire disclosure. n20 The creditor is not required to confirm that the consumer has read the disclosures. n21
For disclosures that are not required to be segregated and thus may be interspersed into the text of another document, the creditor may satisfy the requirement to provide the disclosures if the document appears automatically or via a link, as described above. For example, when a creditor permits the consumer to open a credit card account and make a purchase immediately thereafter, disclosures required under Regulation Z section 226.6 must be provided before the first transaction. n22 The creditor must require the consumer to access the disclosures (or the document containing the disclosures, such as a credit card agreement) before the consumer consummates the agreement. n23 The creditor is not required to confirm that the consumer has read the disclosures. n24
Timing and Effective Delivery: Periodic Disclosures
Regulation Z has a number of disclosures that must be provided periodically. Among these are periodic statements for open-end credit, annual statements of billing rights for open-end credit, change in terms notice for open-end credit, notice of suspension/termination of HELOC advances, credit card renewal notices, notices in connection with credit card account insurance, responses to billing error notices, rescission notices, section 32 notices (Regulation Z section 226.32), and ARM adjustment notices. n25 Any periodic disclosure may be delivered to the consumer via e-mail or by posting to an Internet site. n26 E-mail disclosures are timely based on when the disclosures are sent. Disclosures posted at an Internet site are timely based on when the creditor posts the disclosures as well as sends a notice alerting the consumer of the posting. n27
Consumer Consent to Receive the Disclosure Electronically
The Rule provides that a creditor must receive the consumer's consent to receive disclosures electronically, except in connection with disclosures provided under the following sections: advertisements, credit and charge card applications and solicitations, HELOC and ARM application disclosures, and the up-front disclosures. n28
Form that May Be Kept
Disclosures Provided on Creditor's Equipment
If a creditor owns or controls the equipment used by the consumer to engage in a transaction (e.g., a computer terminal in a creditor's lobby or an automated teller machine at a public kiosk), the creditor must ensure that the equipment satisfies the regulation's requirements to provide timely disclosures in a clear and conspicuous format and in a form that the consumer may keep. n32 For example, if disclosures are required at the time of an on-line transaction, the disclosures must be sent to the consumer's e-mail address or must be made available at another location, such as the creditor's Web site, unless the creditor provides a printer that automatically prints the disclosures. n33
Credit Cards
The Interim Rule addresses three issues in connection with credit card applications and solicitations: (i) the timing/location of the electronic disclosures; (ii) the timeliness of annual percentage rate (APR) disclosures; and (iii) whether the applicable disclosures must be presented in a tabular format.
Location
The Interim Rule provides that the consumer must be able to access the applicable disclosures at the time a blank credit card application or reply form is made available to the consumer on an Internet site or by e-mail. n34 There are at least two alternate methods to accomplish this requirement. First, the creditor can place a link to the disclosures on the site or in the e-mail, provided that consumers cannot bypass the link before submitting the application or reply form. n35 Second, the creditor can place the applicable disclosures on the site or in the e-mail, or the disclosures must automatically appear on the screen when the application or reply form appears. n36 In this case, the creditor must clearly and conspicuously state that rate, fee, and other cost information either precedes or follows the application or reply form. The creditor does not have to confirm that the consumer has read the disclosures. n37
Timeliness of APR Disclosures
Historically, Regulation Z section 226.5a(b)(1) has required that creditors disclose the current APR if the plan is a variable rate plan and a rate that was actually in use within sixty days before mailing a direct mail solicitation or within thirty days before printing a "take-one" solicitation. n38 The Interim Rule provides that the APR is accurate in an e-mail solicitation if it is one that was in effect within thirty days before the e-mail delivery date. n39 The APR is accurate on a Web site if the rate was in effect within the preceding thirty days. n40
Tabular Format
Historically, Regulation Z required a creditor to provide the primary credit card disclosures in a tabular format in connection with direct mail solicitations. n41 On a take-one solicitation, however, creditors had the option of disclosing the information in a tabular format or including a statement that costs are involved and a toll-free telephone number and mailing address to contact for further information. n42 Under the Interim Rule, the tabular format requirement applies to all electronic disclosures. n43 Note that the FRB relied on its exception authority under sections 105(a) and 127(c)(5) to promulgate this requirement. n44
HELOCs
The rule addresses two issues in connection with HELOC disclosures: (i) the timeliness of the disclosures, and (ii) the ability of third parties to make electronic disclosures.
Timeliness of HELOC Disclosures
Creditors are required to provide a home equity brochure and a home equity program disclosure to consumers at the time a HELOC application is provided to the consumer. n45 The Interim Rule provides that the consumer must be able to access the applicable disclosures at the time a HELOC application or reply form is made available to the consumer on an Internet site or by e-mail. n46 There are at least three alternate methods to accomplish this requirement. First, the creditor can place a link to the disclosures on the site or in the e-mail, provided that consumers cannot bypass the link before submitting the application or reply form. n47 Second, the creditor can place the applicable disclosures on the site or in the e-mail, or the disclosures must automatically appear on the screen when the application or reply form appears. n48 In this case, the creditor must clearly and conspicuously state that rate, fee, and other cost information either precedes or follows the application or reply form. n49 The creditor does not have to confirm that the consumer has read the disclosures. n50
If a third party is required to provide HELOC disclosures, the third party may use electronic disclosures, provided that the third party satisfies the same requirements that apply to creditors. n51
Open-End Credit Rescission
As a general rule, a creditor must supply two copies of the notice of right to rescind to each consumer who owns the right to cancel a credit transaction. n52 That way, if a consumer mails one copy to the creditor to rescind the transaction, the consumer can retain one copy as an explanation of his or her rights during the rescission process. The Interim Rule provides that a creditor need only deliver one copy if delivery occurs by electronic communication. n53 The Interim Rule also requires that each co-owner must agree to receive disclosures electronically and must designate an electronic address for receiving the rescission notice. n54
Regulation Z requires a creditor to provide certain additional information to consumers if an advertisement contains certain "triggering terms." n55 If the advertisement is contained in a catalog or contains multiple pages, a creditor is permitted to place all of the required disclosures in a single table, provided that the consumer was referred to the table each time a trigger term appeared in the document. n56 The table must include all required disclosures for a representative scale of credit amounts, up to the level of the more commonly sold higher-priced items. n57
Under the Interim Rule, creditors are permitted to apply the catalog rules in connection with advertisements delivered electronically. n58 The FRB Official Staff Commentary has been amended to suggest that a creditor may use a link as one method to refer the consumer from the trigger term page to the page that contains the table. n59
Closed-End Credit: Deferred Disclosures
Regulation Z permits a creditor to make the usual pre-consummation disclosures after consummation under certain limited conditions. n60 Specifically, if a creditor receives a purchase order or a request for credit from a consumer by mail, telephone or facsimile, without face-to-face or telephone solicitation, the creditor may delay the disclosures until the due date of the first payment, provided that the creditor has made certain information available to the consumer or the public before the order is received. n61 The Interim Rule provides that this exception does not apply where a creditor offers its products by electronic communication. n62
Creditors are required to provide the Consumer Handbook on Adjustable Rate Mortgages and a loan program disclosure to consumers at the time an application for an ARM loan is provided to the consumer or before the consumer pays a non-refundable fee, whichever is earlier. n63 The Interim Rule provides that the consumer must be able to access the applicable disclosures at the time the application is made available to the consumer on an Internet site or by e-mail. n64 There are at least three alternate methods to accomplish this requirement. First, the creditor can place a link to the disclosures on the site or in the e-mail, provided that consumers cannot bypass the link before submitting the application or reply form. n65 Second, the creditor can place the applicable disclosures on the site or in the e-mail, or the disclosures must automatically appear on the screen when the application or reply form appears. n66 In this case, the creditor must clearly and conspicuously state that rate, fee, and other cost information either precedes or follows the application or reply form. n67 The creditor does not have to confirm that the consumer has read the disclosures. n68
Closed-End Credit Rescission
As a general rule, a creditor must supply two copies of the notice of right to rescind to each consumer who owns the right to cancel a credit transaction. n69 That way if a consumer mails one copy to the creditor to rescind the transaction, the consumer will retain one copy as an explanation of his or her rights during the rescission process. The Interim Rule provides that a creditor need only deliver one copy if delivery occurs by electronic communication. n70 The Interim Rule also requires that each co-owner must agree to receive disclosures electronically and must designate an electronic address for receiving the rescission notice. n71
Closed-End Credit Advertising
Regulation Z requires a creditor to provide certain additional information to consumers if an advertisement contains certain "triggering terms." n72 If the advertisement is contained in a catalog or contains multiple pages, a creditor is permitted to place all of the required disclosures in a single table, provided that the consumer was referred to the table each time a trigger term appeared in the document. n73 The table must include all required disclosures for a representative scale of credit amounts, up to the level of the more commonly sold higher-priced items. n74
Under the Interim Rule, creditors are permitted to apply the catalog rules in connection with advertisements delivered electronically. n75 The FRB Official Staff Commentary has been amended to suggest that a creditor may use a link as one method to refer the consumer from the trigger term page to the page that contains the table. n76
When Does New Commentary Apply to Old Facts?
Ree Clay and Ruby Chivers executed three retail installment contracts and a mortgage to finance the purchase of home improvements from Davenport Construction Company. Davenport assigned the contracts to Iver Johnson. Each of the retail installment contracts contained a disclosure statement as required under the TILA. One of the disclosures required by the TILA is the debtor's payment schedule, which includes the date on which the debtor must begin making payments. n78 In this case, the contracts provided that the monthly payments would begin thirty days from completion of the construction work. As the time for completing the construction work approached, the parties were able to determine the stated date of the monthly payments more precisely, so they typed the specific date on which the debtor's first payment was due onto the contracts. After the work was complete, Clay and Chivers defaulted on the contracts and attempted to rescind the transaction on grounds that the creditors failed to properly disclose the payment schedule under the TILA.
The U.S. District Court for the Northern District of Illinois granted summary judgment to Clay and Chivers and held that the TILA requires creditors to provide an exact date on which the debtors' payments will be due or to provide an estimate of the due date if they cannot determine a precise calendar date. n79 The district court denied the creditors' motion for reconsideration, which was based on a new Comment 18(g)-4 to Regulation Z. The creditors argued that Comment 18(g)-4 specifically states that a creditor can satisfy the TILA by defining the beginning payment date by reference to the occurrence of a particular event rather than by disclosing a precise calendar date. The district court rejected the creditors' argument because Comment 18(g)-4 had not been issued at the time the creditors had made their disclosures to the debtors and because the court did not believe the comment could be applied retroactively to validate the creditors' disclosure in this case. n80
The U.S. Court of Appeals for the Seventh Circuit reversed the judgment of the district court and found that even though a proposed form of the Comment required payments to start on a specific date, the final comment was a clarification of the rule permitting a creditor to refer to a date set with reference to a future event. n81 As a result, the court of appeals concluded that the payment schedule disclosure complied with the TILA. n82
The court also noted that the FRB, via the final version of Comment 18(g)-4, intended to interpret and clarify a creditor's existing obligations under the TILA and Regulation Z. n83 The court then noted: "If an agency promulgates a new rule that changes the substantive state of existing law, that rule is not retroactive unless Congress expressly authorized retroactive rulemaking and the agency clearly intended the rule to be retroactive." n84 The court of appeals, however, stated that a new FRB commentary provision that clarifies an unsettled or confusing area of the law without changing the law can be applied retroactively. n85
When Does A Mortgage Rider Create a Personal Property Security Interest?
Teofilo Leon obtained a mortgage loan from Washington Mutual Bank to finance the purchase of his home. In connection with the transaction, Leon signed and received a copy of: a note, a mortgage, a one-to-four Family Rider/Assignment of Rents, a Truth in Lending Statement, and an Owner Occupancy Agreement. Under the Rider, the borrower granted a security interest in additional property, such as building materials, appliances and goods of every nature found in, on, or used in connection with the property. Items specifically mentioned included, among others, refrigerators, dishwashers, ranges, stoves, and fire extinguishers. The TILA disclosure, which was based on an FRB model form, stated that Leon gave Washington Mutual a security interest in "the goods or property being purchased." n86 This covered the new home purchase. When Leon later brought suit against the bank, he argued that the TILA disclosure was inadequate because it failed to reflect the extensive security interest that the Rider created in Leon's personal property.
Leon contended that the language in the Rider created a security interest beyond the real property and its fixtures, and that this violated the Truth in Lending Act and Regulation Z. The U.S. District Court for the Northern District of Illinois identified the central issue as whether the Rider created a "security interest" or an "incidental interest" in the personal property, as defined by the TILA and Regulation Z. n87 After examining the Rider, the court noted "that the rider created a security interest in the consumer's personal property that extended beyond incidental interests to the real property." n88 The court, therefore, could not conclude as a matter of law that Washington Mutual complied with TILA.
Recission Period Cannont Extend Beyond Three Years
On February 1, 1990, Gerald Garrett obtained a home improvement loan secured by a second mortgage on his residence. Don Akers, a mortgage broker, assisted Garrett in obtaining the loan. Garrett executed various documents, including an acknowledgment of receiving a notice of the right to rescind. The notice of right to rescind provided that rescission had to be in writing and made by February 5, 1990. Garrett suffered from severe dyslexia and had difficulty reading and understanding what he read; however, he never told Baggarly, the closing lawyer, or Akers about his condition or asked them to read the documents to him or explain the documents.
Garrett attempted to make an oral rescission by telephone on February 5. The loan was assigned to Fleet Finance, Inc. on February 6, 1990. On February 5, 7, and 8, Akers contacted Garrett to ask him to pick up the loan proceeds. In each instance, Garrett verbally indicated that he did not want the loan. On February 7, 1990, an escrow account check was made payable to Gerald Garrett, and on February 9, Baggarly allowed Frances Garrett, Gerald Garrett's ex-wife, to forge Garrett's name to a modification agreement to the loan. Baggarly notarized Frances's signature on the modification agreement as Gerald's and gave Frances the check although there was no oral or written authorization by Gerald Garrett for his ex-wife to receive the check. Frances Garrett then forged Gerald Garrett's name to the check and deposited the check in the savings account of her mother, Myrtle Manas. Gerald Garrett learned that Frances Garrett had received the check on February 20, 1990; Gerald did nothing until October 31, 1994, when he sued Fleet Finance, Akers, Baggarly, Frances Garrett, and Myrtle Manas for fraud and to set aside the deed that secured the debt. Garrett argued that because the transaction was tainted with fraud, the running of the statute of limitations was tolled under Beach v. Ocwen Federal Bank, n90 and he should be able to rescind the loan.
The Georgia Court of Appeals held that Garrett's right to rescind the loan was time-barred by the TILA. n91 The court explained that under the TILA, any deed to secure debt or mortgage had to be rescinded in writing within three days and that "any claim based upon rescission under [TILA] is extinguished three years after the closing of the loan." n92 The court quoted extensively from Beach to support its conclusion that section 1635(f) of the TILA governs the underlying right and not just the time for bringing a suit. n93
Endnotes
n1 Truth in Lending, 66 Fed. Reg. 17,329 (Mar. 30, 2001) (to be codified at 12 C.F.R. pt. 226).
n2 Equal Credit Opportunity; Electronic Fund Transfers; Consumer Leasing; Truth in Lending; Truth in Savings, 66 Fed. Reg. 41,439 (Aug. 8, 2001) (to be codified at 12 C.F.R. pts. 202, 205, 213, 226, 230).
n3 15 U.S.C. || 7001-7031 (2000).
n4 See, e.g., Jeremiah S. Buckley & Margo H.K. Tank, Electronic Signatures--Changing the Financial Landscape, 54 CONSUMER FIN. L.Q. REP. 116 (2000); Robert A. Cook, Timothy P. Meredith, & Elizabeth C. Yen, The Electronic Signatures in Global and National Commerce Act--A Review of the Act's Consumer Disclosure Requirements, 54 CONSUMER FIN. L.Q. REP. 315 (2000).
n5 15 U.S.C. || 1601-1666j (2000).
n6 Truth in Lending, 66 Fed. Reg. at 17,339.
n7 Id. at 17,334.
n8 This requirement is not contained in the Interim Rule. It is contained in the supplementary information to the Interim Rule. See id.
n9 12 C.F.R. pt. 226 (2001) (implementing the TILA).
n10 Truth in Lending, 66 Fed. Reg. at 17,341.
n11 Id. at 17,339.
n12 Id.
n13 Id. at 17,341.
n14 Id. at 17,339.
n15 Id.
n16 Id. at 17,341.
n17 Id. at 17,335; see also 12 C.F.R. || 226.16, 226.24 (2001) (advertisements); id. | 226.5a (credit and charge card applications and solicitations); id. || 226.5b, 226.19(b) (HELOC and ARM application disclosures); id. | 226.17(g) (up front disclosures).
n19 Truth in Lending, 66 Fed. Reg. at 17,340.
n20 Id.
n21 Id.
n22 Id. at 17,341; see also 12 C.F.R. | 226.6.
n23 Truth in Lending, 66 Fed. Reg. at 17,341.
n24 Id.
Under the Electronic Signatures in Global and National Commerce Act (ESIGN), n3 electronic documents and signatures have the same validity as paper documents and handwritten signatures. The requirements under ESIGN have been discussed in detail elsewhere and that general discussion is not repeated here. n4 ESIGN contains special rules for the use of electronic disclosures in consumer transactions. Consumer disclosures may be provided in electronic form only if the consumer affirmatively consents after receiving certain information specified in the statute. The FRB and other government agencies are permitted to interpret the consumer consent requirements within prescribed limits, but may not impose additional requirements for consumer consent. It is generally assumed that the FRB delayed the mandatory effective date of the Interim Rule, in part, because it recognized that it strayed beyond the authority granted by ESIGN to promulgate regulations implementing ESIGN.
The Interim Rule imposes significant requirements and restrictions on the use of electronic records to provide consumer disclosures otherwise required by the Truth in Lending Act (TILA). n5 Some of these requirements and restrictions exceed the authority that regulators have under ESIGN and impose additional burdens and significant costs on electronic commerce. Specifically, the required use of e-mail and the accompanying ninety-day retention requirement imposed by the Interim Rule raise significant concerns. These requirements are in addition to the requirements imposed by, and are not clearly authorized by, ESIGN. In addition, the required use of e-mail by the Interim Rule imposes a technology-specific requirement, which ESIGN prohibits.
Furthermore, the FRB has determined, in the adoption of the Interim Rule, that certain advertising, application, and solicitation disclosures are not subject to the electronic consumer disclosure consent provisions of ESIGN. By doing so, the FRB suggests that these types of disclosures are not subject to the federal preemptive authority of ESIGN. Such a position invites state regulators and other federal agencies to impose restrictions and requirements with respect to other similar state and federal disclosures. The result could be an unworkable patch-work of limitations and restrictions on electronic commerce. The Interim Rule imposes the following requirements in connection with open-end credit.
Definition
An electronic communication is defined in the Interim Rule to include a message transmitted electronically, between a creditor and a consumer, where the message is in a format that allows visual text to be displayed on equipment, such as a personal computer. n6 Audio and voice-response equipment are not included because they do not allow visual text. n7 Note, however, that systems designed to accommodate vision-impaired consumers may be required to provide disclosures using visual text and would then be covered. n8
General Rule
The general principle of the Interim Rule is that ESIGN authorizes the use of electronic disclosures, but that the disclosures themselves are otherwise subject to all of the requirements under the TILA and Regulation Z. n9 Prior to providing electronic disclosures, the creditor must disclose the requirements for accessing and retaining disclosures in that format, the consumer must demonstrate the ability to access the information electronically and affirmatively consent to electronic delivery, and the creditor must provide the disclosures in accordance with the specified requirements. n10
With certain exceptions, identified below, a creditor must either send the applicable disclosures to the consumer's e-mail address, or post them to a Web site. n11 If the disclosures are posted to a Web site, the creditor must send a notice to the consumer that tells the consumer the disclosures are available. The creditor can deliver this notice to the consumer's e-mail address or postal address. The notice must identify the account involved and the address of the Web site or other location where the disclosure is available. n12 The e-mail address used for this purpose must be one that can receive messages from persons other than the creditor. n13 If the disclosure is posted to a Web site, the disclosure must remain available at that Web site for a period of not less than ninety days, measured from the later of the day when the disclosures are posted and the day the creditor sends notice to the consumer that the disclosures are available. n14 If an e-mail is returned to the creditor as undeliverable, the creditor must take certain additional reasonable steps to complete delivery, n15 including reviewing its files to determine whether the address it is using matches the address on file, as well as attempting delivery at any alternate e-mail address for the consumer that may be contained in the creditor's file. n16
Transactions that are not subject to these rules include: advertisements, credit and charge card applications and solicitations, Home Equity Line of Credit (HELOC) and Adjustable Rate Mortgage (ARM) application disclosures, and the up-front disclosures. n17
Timing and Effective Delivery
When a creditor permits the consumer to consummate a closed-end transaction on-line, the creditor must require the consumer to access the disclosures required under Regulation Z section 226.18 before consummation. n18 A creditor may satisfy this requirement with a link to the disclosures provided that the consumer cannot bypass the disclosures. n19 Alternatively, the disclosures must automatically appear on the screen, even if multiple screens are required to view the entire disclosure. n20 The creditor is not required to confirm that the consumer has read the disclosures. n21
For disclosures that are not required to be segregated and thus may be interspersed into the text of another document, the creditor may satisfy the requirement to provide the disclosures if the document appears automatically or via a link, as described above. For example, when a creditor permits the consumer to open a credit card account and make a purchase immediately thereafter, disclosures required under Regulation Z section 226.6 must be provided before the first transaction. n22 The creditor must require the consumer to access the disclosures (or the document containing the disclosures, such as a credit card agreement) before the consumer consummates the agreement. n23 The creditor is not required to confirm that the consumer has read the disclosures. n24
Timing and Effective Delivery: Periodic Disclosures
Regulation Z has a number of disclosures that must be provided periodically. Among these are periodic statements for open-end credit, annual statements of billing rights for open-end credit, change in terms notice for open-end credit, notice of suspension/termination of HELOC advances, credit card renewal notices, notices in connection with credit card account insurance, responses to billing error notices, rescission notices, section 32 notices (Regulation Z section 226.32), and ARM adjustment notices. n25 Any periodic disclosure may be delivered to the consumer via e-mail or by posting to an Internet site. n26 E-mail disclosures are timely based on when the disclosures are sent. Disclosures posted at an Internet site are timely based on when the creditor posts the disclosures as well as sends a notice alerting the consumer of the posting. n27
Consumer Consent to Receive the Disclosure Electronically
The Rule provides that a creditor must receive the consumer's consent to receive disclosures electronically, except in connection with disclosures provided under the following sections: advertisements, credit and charge card applications and solicitations, HELOC and ARM application disclosures, and the up-front disclosures. n28
Form that May Be Kept
If the regulation requires the creditor to deliver a disclosure in a form that the consumer may keep, the creditor can comply by delivering the electronic disclosures in a format that is capable of being retained (such as by printing or electronic storage). n29 The format must also be consistent with the hardware and software requirement provided under ESIGN section 101(c)(1)(C)(i), n30 for accessing and retaining electronic disclosures. n31
Disclosures Provided on Creditor's Equipment
If a creditor owns or controls the equipment used by the consumer to engage in a transaction (e.g., a computer terminal in a creditor's lobby or an automated teller machine at a public kiosk), the creditor must ensure that the equipment satisfies the regulation's requirements to provide timely disclosures in a clear and conspicuous format and in a form that the consumer may keep. n32 For example, if disclosures are required at the time of an on-line transaction, the disclosures must be sent to the consumer's e-mail address or must be made available at another location, such as the creditor's Web site, unless the creditor provides a printer that automatically prints the disclosures. n33
Credit Cards
The Interim Rule addresses three issues in connection with credit card applications and solicitations: (i) the timing/location of the electronic disclosures; (ii) the timeliness of annual percentage rate (APR) disclosures; and (iii) whether the applicable disclosures must be presented in a tabular format.
Location
The Interim Rule provides that the consumer must be able to access the applicable disclosures at the time a blank credit card application or reply form is made available to the consumer on an Internet site or by e-mail. n34 There are at least two alternate methods to accomplish this requirement. First, the creditor can place a link to the disclosures on the site or in the e-mail, provided that consumers cannot bypass the link before submitting the application or reply form. n35 Second, the creditor can place the applicable disclosures on the site or in the e-mail, or the disclosures must automatically appear on the screen when the application or reply form appears. n36 In this case, the creditor must clearly and conspicuously state that rate, fee, and other cost information either precedes or follows the application or reply form. The creditor does not have to confirm that the consumer has read the disclosures. n37
Timeliness of APR Disclosures
Historically, Regulation Z section 226.5a(b)(1) has required that creditors disclose the current APR if the plan is a variable rate plan and a rate that was actually in use within sixty days before mailing a direct mail solicitation or within thirty days before printing a "take-one" solicitation. n38 The Interim Rule provides that the APR is accurate in an e-mail solicitation if it is one that was in effect within thirty days before the e-mail delivery date. n39 The APR is accurate on a Web site if the rate was in effect within the preceding thirty days. n40
Tabular Format
Historically, Regulation Z required a creditor to provide the primary credit card disclosures in a tabular format in connection with direct mail solicitations. n41 On a take-one solicitation, however, creditors had the option of disclosing the information in a tabular format or including a statement that costs are involved and a toll-free telephone number and mailing address to contact for further information. n42 Under the Interim Rule, the tabular format requirement applies to all electronic disclosures. n43 Note that the FRB relied on its exception authority under sections 105(a) and 127(c)(5) to promulgate this requirement. n44
HELOCs
The rule addresses two issues in connection with HELOC disclosures: (i) the timeliness of the disclosures, and (ii) the ability of third parties to make electronic disclosures.
Timeliness of HELOC Disclosures
Creditors are required to provide a home equity brochure and a home equity program disclosure to consumers at the time a HELOC application is provided to the consumer. n45 The Interim Rule provides that the consumer must be able to access the applicable disclosures at the time a HELOC application or reply form is made available to the consumer on an Internet site or by e-mail. n46 There are at least three alternate methods to accomplish this requirement. First, the creditor can place a link to the disclosures on the site or in the e-mail, provided that consumers cannot bypass the link before submitting the application or reply form. n47 Second, the creditor can place the applicable disclosures on the site or in the e-mail, or the disclosures must automatically appear on the screen when the application or reply form appears. n48 In this case, the creditor must clearly and conspicuously state that rate, fee, and other cost information either precedes or follows the application or reply form. n49 The creditor does not have to confirm that the consumer has read the disclosures. n50
Third Party Disclosures
If a third party is required to provide HELOC disclosures, the third party may use electronic disclosures, provided that the third party satisfies the same requirements that apply to creditors. n51
Open-End Credit Rescission
As a general rule, a creditor must supply two copies of the notice of right to rescind to each consumer who owns the right to cancel a credit transaction. n52 That way, if a consumer mails one copy to the creditor to rescind the transaction, the consumer can retain one copy as an explanation of his or her rights during the rescission process. The Interim Rule provides that a creditor need only deliver one copy if delivery occurs by electronic communication. n53 The Interim Rule also requires that each co-owner must agree to receive disclosures electronically and must designate an electronic address for receiving the rescission notice. n54
Open-End Credit Advertising
Regulation Z requires a creditor to provide certain additional information to consumers if an advertisement contains certain "triggering terms." n55 If the advertisement is contained in a catalog or contains multiple pages, a creditor is permitted to place all of the required disclosures in a single table, provided that the consumer was referred to the table each time a trigger term appeared in the document. n56 The table must include all required disclosures for a representative scale of credit amounts, up to the level of the more commonly sold higher-priced items. n57
Under the Interim Rule, creditors are permitted to apply the catalog rules in connection with advertisements delivered electronically. n58 The FRB Official Staff Commentary has been amended to suggest that a creditor may use a link as one method to refer the consumer from the trigger term page to the page that contains the table. n59
Closed-End Credit: Deferred Disclosures
Regulation Z permits a creditor to make the usual pre-consummation disclosures after consummation under certain limited conditions. n60 Specifically, if a creditor receives a purchase order or a request for credit from a consumer by mail, telephone or facsimile, without face-to-face or telephone solicitation, the creditor may delay the disclosures until the due date of the first payment, provided that the creditor has made certain information available to the consumer or the public before the order is received. n61 The Interim Rule provides that this exception does not apply where a creditor offers its products by electronic communication. n62
Creditors are required to provide the Consumer Handbook on Adjustable Rate Mortgages and a loan program disclosure to consumers at the time an application for an ARM loan is provided to the consumer or before the consumer pays a non-refundable fee, whichever is earlier. n63 The Interim Rule provides that the consumer must be able to access the applicable disclosures at the time the application is made available to the consumer on an Internet site or by e-mail. n64 There are at least three alternate methods to accomplish this requirement. First, the creditor can place a link to the disclosures on the site or in the e-mail, provided that consumers cannot bypass the link before submitting the application or reply form. n65 Second, the creditor can place the applicable disclosures on the site or in the e-mail, or the disclosures must automatically appear on the screen when the application or reply form appears. n66 In this case, the creditor must clearly and conspicuously state that rate, fee, and other cost information either precedes or follows the application or reply form. n67 The creditor does not have to confirm that the consumer has read the disclosures. n68
Closed-End Credit Rescission
As a general rule, a creditor must supply two copies of the notice of right to rescind to each consumer who owns the right to cancel a credit transaction. n69 That way if a consumer mails one copy to the creditor to rescind the transaction, the consumer will retain one copy as an explanation of his or her rights during the rescission process. The Interim Rule provides that a creditor need only deliver one copy if delivery occurs by electronic communication. n70 The Interim Rule also requires that each co-owner must agree to receive disclosures electronically and must designate an electronic address for receiving the rescission notice. n71
Closed-End Credit Advertising
Regulation Z requires a creditor to provide certain additional information to consumers if an advertisement contains certain "triggering terms." n72 If the advertisement is contained in a catalog or contains multiple pages, a creditor is permitted to place all of the required disclosures in a single table, provided that the consumer was referred to the table each time a trigger term appeared in the document. n73 The table must include all required disclosures for a representative scale of credit amounts, up to the level of the more commonly sold higher-priced items. n74
Under the Interim Rule, creditors are permitted to apply the catalog rules in connection with advertisements delivered electronically. n75 The FRB Official Staff Commentary has been amended to suggest that a creditor may use a link as one method to refer the consumer from the trigger term page to the page that contains the table. n76
Finally, the Interim Rule provides that in an advertisement delivered electronically, any time the creditor states a periodic rate, the consumer must be able to see the corresponding or equivalent APR. In this case, a link may not be used. The rates must appear side by side. n77
Cases
The following cases are among the many interesting cases on TILA delivered in 2001.
When Does New Commentary Apply to Old Facts?
Ree Clay and Ruby Chivers executed three retail installment contracts and a mortgage to finance the purchase of home improvements from Davenport Construction Company. Davenport assigned the contracts to Iver Johnson. Each of the retail installment contracts contained a disclosure statement as required under the TILA. One of the disclosures required by the TILA is the debtor's payment schedule, which includes the date on which the debtor must begin making payments. n78 In this case, the contracts provided that the monthly payments would begin thirty days from completion of the construction work. As the time for completing the construction work approached, the parties were able to determine the stated date of the monthly payments more precisely, so they typed the specific date on which the debtor's first payment was due onto the contracts. After the work was complete, Clay and Chivers defaulted on the contracts and attempted to rescind the transaction on grounds that the creditors failed to properly disclose the payment schedule under the TILA.
The U.S. District Court for the Northern District of Illinois granted summary judgment to Clay and Chivers and held that the TILA requires creditors to provide an exact date on which the debtors' payments will be due or to provide an estimate of the due date if they cannot determine a precise calendar date. n79 The district court denied the creditors' motion for reconsideration, which was based on a new Comment 18(g)-4 to Regulation Z. The creditors argued that Comment 18(g)-4 specifically states that a creditor can satisfy the TILA by defining the beginning payment date by reference to the occurrence of a particular event rather than by disclosing a precise calendar date. The district court rejected the creditors' argument because Comment 18(g)-4 had not been issued at the time the creditors had made their disclosures to the debtors and because the court did not believe the comment could be applied retroactively to validate the creditors' disclosure in this case. n80
The U.S. Court of Appeals for the Seventh Circuit reversed the judgment of the district court and found that even though a proposed form of the Comment required payments to start on a specific date, the final comment was a clarification of the rule permitting a creditor to refer to a date set with reference to a future event. n81 As a result, the court of appeals concluded that the payment schedule disclosure complied with the TILA. n82
The court also noted that the FRB, via the final version of Comment 18(g)-4, intended to interpret and clarify a creditor's existing obligations under the TILA and Regulation Z. n83 The court then noted: "If an agency promulgates a new rule that changes the substantive state of existing law, that rule is not retroactive unless Congress expressly authorized retroactive rulemaking and the agency clearly intended the rule to be retroactive." n84 The court of appeals, however, stated that a new FRB commentary provision that clarifies an unsettled or confusing area of the law without changing the law can be applied retroactively. n85
When Does A Mortgage Rider Create a Personal Property Security Interest?
Teofilo Leon obtained a mortgage loan from Washington Mutual Bank to finance the purchase of his home. In connection with the transaction, Leon signed and received a copy of: a note, a mortgage, a one-to-four Family Rider/Assignment of Rents, a Truth in Lending Statement, and an Owner Occupancy Agreement. Under the Rider, the borrower granted a security interest in additional property, such as building materials, appliances and goods of every nature found in, on, or used in connection with the property. Items specifically mentioned included, among others, refrigerators, dishwashers, ranges, stoves, and fire extinguishers. The TILA disclosure, which was based on an FRB model form, stated that Leon gave Washington Mutual a security interest in "the goods or property being purchased." n86 This covered the new home purchase. When Leon later brought suit against the bank, he argued that the TILA disclosure was inadequate because it failed to reflect the extensive security interest that the Rider created in Leon's personal property.
Leon contended that the language in the Rider created a security interest beyond the real property and its fixtures, and that this violated the Truth in Lending Act and Regulation Z. The U.S. District Court for the Northern District of Illinois identified the central issue as whether the Rider created a "security interest" or an "incidental interest" in the personal property, as defined by the TILA and Regulation Z. n87 After examining the Rider, the court noted "that the rider created a security interest in the consumer's personal property that extended beyond incidental interests to the real property." n88 The court, therefore, could not conclude as a matter of law that Washington Mutual complied with TILA.
Recission Period Cannont Extend Beyond Three Years
On February 1, 1990, Gerald Garrett obtained a home improvement loan secured by a second mortgage on his residence. Don Akers, a mortgage broker, assisted Garrett in obtaining the loan. Garrett executed various documents, including an acknowledgment of receiving a notice of the right to rescind. The notice of right to rescind provided that rescission had to be in writing and made by February 5, 1990. Garrett suffered from severe dyslexia and had difficulty reading and understanding what he read; however, he never told Baggarly, the closing lawyer, or Akers about his condition or asked them to read the documents to him or explain the documents.
Garrett attempted to make an oral rescission by telephone on February 5. The loan was assigned to Fleet Finance, Inc. on February 6, 1990. On February 5, 7, and 8, Akers contacted Garrett to ask him to pick up the loan proceeds. In each instance, Garrett verbally indicated that he did not want the loan. On February 7, 1990, an escrow account check was made payable to Gerald Garrett, and on February 9, Baggarly allowed Frances Garrett, Gerald Garrett's ex-wife, to forge Garrett's name to a modification agreement to the loan. Baggarly notarized Frances's signature on the modification agreement as Gerald's and gave Frances the check although there was no oral or written authorization by Gerald Garrett for his ex-wife to receive the check. Frances Garrett then forged Gerald Garrett's name to the check and deposited the check in the savings account of her mother, Myrtle Manas. Gerald Garrett learned that Frances Garrett had received the check on February 20, 1990; Gerald did nothing until October 31, 1994, when he sued Fleet Finance, Akers, Baggarly, Frances Garrett, and Myrtle Manas for fraud and to set aside the deed that secured the debt. Garrett argued that because the transaction was tainted with fraud, the running of the statute of limitations was tolled under Beach v. Ocwen Federal Bank, n90 and he should be able to rescind the loan.
The Georgia Court of Appeals held that Garrett's right to rescind the loan was time-barred by the TILA. n91 The court explained that under the TILA, any deed to secure debt or mortgage had to be rescinded in writing within three days and that "any claim based upon rescission under [TILA] is extinguished three years after the closing of the loan." n92 The court quoted extensively from Beach to support its conclusion that section 1635(f) of the TILA governs the underlying right and not just the time for bringing a suit. n93
Endnotes
n1 Truth in Lending, 66 Fed. Reg. 17,329 (Mar. 30, 2001) (to be codified at 12 C.F.R. pt. 226).
n2 Equal Credit Opportunity; Electronic Fund Transfers; Consumer Leasing; Truth in Lending; Truth in Savings, 66 Fed. Reg. 41,439 (Aug. 8, 2001) (to be codified at 12 C.F.R. pts. 202, 205, 213, 226, 230).
n3 15 U.S.C. || 7001-7031 (2000).
n4 See, e.g., Jeremiah S. Buckley & Margo H.K. Tank, Electronic Signatures--Changing the Financial Landscape, 54 CONSUMER FIN. L.Q. REP. 116 (2000); Robert A. Cook, Timothy P. Meredith, & Elizabeth C. Yen, The Electronic Signatures in Global and National Commerce Act--A Review of the Act's Consumer Disclosure Requirements, 54 CONSUMER FIN. L.Q. REP. 315 (2000).
n5 15 U.S.C. || 1601-1666j (2000).
n6 Truth in Lending, 66 Fed. Reg. at 17,339.
n7 Id. at 17,334.
n8 This requirement is not contained in the Interim Rule. It is contained in the supplementary information to the Interim Rule. See id.
n9 12 C.F.R. pt. 226 (2001) (implementing the TILA).
n10 Truth in Lending, 66 Fed. Reg. at 17,341.
n11 Id. at 17,339.
n12 Id.
n13 Id. at 17,341.
n14 Id. at 17,339.
n15 Id.
n16 Id. at 17,341.
n17 Id. at 17,335; see also 12 C.F.R. || 226.16, 226.24 (2001) (advertisements); id. | 226.5a (credit and charge card applications and solicitations); id. || 226.5b, 226.19(b) (HELOC and ARM application disclosures); id. | 226.17(g) (up front disclosures).
n18 Truth in Lending, 66 Fed. Reg. at 17,340; see also 12 C.F.R. | 226.18.
n19 Truth in Lending, 66 Fed. Reg. at 17,340.
n20 Id.
n21 Id.
n22 Id. at 17,341; see also 12 C.F.R. | 226.6.
n23 Truth in Lending, 66 Fed. Reg. at 17,341.
n24 Id.
n25 S