Proposed Rules Promulgated By The Federal Reserve Board To Establish More Uniform Disclosure Standards Under The Consumer Protection Regulations

In November 2003, the Federal Reserve Board ("Board") issued proposed rules to establish more uniform standards for providing disclosures under five consumer protection regulations: B (Equal Credit Opportunity); M (Consumer Leasing); DD (Truth in Savings); E (Electronic Fund Transfers); and Z (Truth in Lending). Current consumer protection laws and Board regulations contain similar but not identical standards for providing disclosures. The proposed new rules are intended to promote consistency and provide more guidance in the standards for providing disclosures.

The proposed rules are available here. Comments on the proposed rules are due by January 30, 2004.

http://www.federalreserve.gov/BoardDocs/Press/bcreg/2003/20031126/default.htm

Regulation B (Equal Credit Opportunity). Regulation B currently requires creditors to disclose certain information provided in writing in a "clear and conspicuous" manner. This has been interpreted in the staff commentary to Regulation B to require disclosures to be "in a reasonably understandable form." The proposed rules will amend the current rules to provide that clear and conspicuous "means that a disclosure is reasonably understandable and designed to call attention to the nature and significance of the information in the disclosure." The staff commentary for Regulation B will also be revised to provide guidance on factors to be considered in meeting the clear and conspicuous standard.

Examples of disclosures that are "reasonably understandable" include disclosures that (1) present information in clear, concise sentences, (2) use short explanatory sentences or bullet lists when possible, (3) use definite, concrete, everyday words and active voice when possible, (4) avoid multiple negatives, (5) avoid legal or highly technical business terminology when possible, and (6) avoid explanations that are imprecise or subject to different interpretations.

Examples of disclosures "designed to call attention" to the nature and significance of the information include disclosures that (1) use plain-language headings to call attention to the disclosure, (2) use typeface and type sizes that are easy to read, such as 12-point type, (3) provide wide margins and ample line spacing, (4) use boldface or italics for key words, and (5) use distinctive type size, style or graphic devices to call attention to disclosures that are combined with other information. Generally, segregating federally mandated disclosures from other information is more likely to satisfy the clear and conspicuous standard.

• Regulation DD (Truth in Savings). Regulation DD requires depository institutions to provide disclosures in a "clear and conspicuous" manner. The proposed rules will amend Regulation DD in the same manner as Regulation B.

• Regulation E (Electronic Fund Transfers). Regulation E requires disclosures to be "clear and readily understandable." The proposed rules will amend Regulation E in the same manner as Regulation B.

• Regulation M (Leasing). Regulation M requires lessors to provide consumers with disclosures in a "clear and conspicuous" manner. The proposed rules will amend Regulation M in the same manner as Regulation B.

• Regulation Z (Truth in Lending). Regulation Z requires creditors to provide disclosures in a "clear and conspicuous" manner. The proposed rules will amend Regulation Z in the same manner as Regulation B.

Rules of construction. The proposed rules will also add an interpretative rule of construction that states that where the word "amount" is used throughout Regulation Z to describe a disclosure requirement it refers to a numerical amount (as opposed to narrative descriptions of amounts).

Consumer's right to rescind. Currently, consumers may rescind certain credit transactions where the consumer's principal dwelling secures an extension of credit as long as the consumer exercises the right to rescind by providing written notice to the creditor within a certain timeframe. The proposed rules provide that where the creditor fails to designate an address for sending the notice, a consumer's notice of rescission will be effective if, under applicable state law, delivery to that person would be deemed to constitute delivery to the creditor or assignee.

Effects of Rescission. When a consumer exercises the right to rescind a mortgage transaction, the consumer is not liable for any finance or other charges and any security interest in the consumer's home becomes void. See 15 U.S.C. § 1635(b); 12 C.F.R. § 216.15(d)(1). After the transaction is rescinded, the creditor must tender any money or property given to anyone in connection with the transaction within a specified time frame, which triggers the consumer's duty to return any money or property that the creditor delivered to the consumer, although a court may modify these procedures. See 12 C.F.R. § 226.15(d)(2)-(4). Under the proposed rules, the staff commentary would be revised to expressly state that a consumer's substantive right to rescission under section 226.15(a)(1) and section 226.15(d)(1) is not affected by the procedures referred to in section 226.15((d)(2) and (3), or the modification of those procedures by a court. As a result, where a consumer seeks rescission and the matter is contested by the creditor, a court will normally make a determination regarding the consumer's right to rescind before determining the amounts owed and establishing the procedures for the parties to tender any money or property. Further, under the proposed rules the sequence of procedures in section 226.15(d)(2) and (3) should not affect consumers' ability to establish their substantive right to rescind and to have the lien amount reduced, which may be necessary before consumers are able to establish how they will refinance or otherwise repay the loan.