Amicus Curiae Brief — Green Tree Financial Corp.-Ala. v. Randolph

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FOR ARGUMENT tat

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No. 99-1245

IN THE :

SUPREME COURT OF THE UNITED STATES ~~~

GREEN TREE FINANCIAL CORP. -- ALABAMA

and GREEN TREE FINANCIAL CORPORATION,

Petitioners,

LARKETTA RANDOLPH,

Respondent.

ON WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT

BRIEF AMICI CURIAE OF AARP

AND THE NATIONAL CONSUMER LAW CENTER

IN SUPPORT OF RESPONDENT

ELIZABETH RENUART STACY CANAN

THE NATIONAL CONSUMER JEAN CONSTANTINE-DAVIS

LAW CENTER NINA F. SIMON*_

18 Tremont Street, #400 DEBORAH ZUCKERMAN

Boston, MA 02108 AARP FOUNDATION LITIGATION

(617) 523-8010

. MICHAEL R. SCHUSTER

Counsel for Amicus Curiae AARP

THE NATIONAL CONSUMER

LAW CENTER 601 E Street NW

Washington, DC 20049

(202) 434-2060

Counsel for Amicus Curiae

AARP

*Counsel of Record

BEST AVAILABLE COPY [ame

TABLE OF CONTENTS

I. CONGRESS ENACTED THE TRUTH IN

LENDING ACT TO REGULATE CREDIT

INDUSTRY PRACTICES AND PROTECT

PE 8 e 0 80S ate chats cys ensss ics bere

A. TILA’s Text, Purpose, and Legislative

History Reflect the Pivotal Role of Private

Attorney General Enforcement ................. 6

1. TILA Damages Effectuate Private

Attorney General Enforcement ............ 7

2. TILA’s Fee-shifting Provisions

Effectuate Private Attorney

General Enforcement .................... 9

3. TILA’s Class Action Provision

Effectuates Private Attorney

General Enforcement ................... 10

fl, ARBITRATION AGREEMENTS SUCH AS

GREEN TREE’S THAT PREVENT CONSUMERS

FROM EFFECTIVELY VINDICATING THEIR

STATUTORY RIGHTS UNDERMINE THE

TRUTH IN LENDING ACT’S REMEDIAL

WE CAS oy HE ya hha sane unc eonuGeeesaes 15

A. Arbitration Contracts That Require

Claimants to Pay Fees Undermine TILA

EmfOrCememt 2... ccccccccosccsccssssnsenees 15

B. Arbitration Contracts That Preclude Class

Actions Undermine TILA Enforcement ......--- 19

1. Arbitration Is Not Suitable for

Class-wide Adjudication .......---+-+++> ye |

2. The Demise of Class Actions

Would Create a Void In TILA

ee rr erat rer cy 23

C. Unwritten Arbitration Decisions Undermine

TILA Enforcement ........----eeecceerecees 24

D. Green Tree’s Arbitration Clause is Typical of

Those Designed to Prevent Consumers From

Acting as Private Attorneys General Under

5 © rr 27

CONCLUSION 2.2... ccc c ccc ccc ccccccccsnsensnssse 28

Appendix 1.2.2... eee e cece rece cece dace cceescceeee Al-l

Appendix 2.......- Perr rer ee A2-1

ili

TABLE OF AUTHORITIES

CASES

Adams v. Plaza Fin. Co., 168 F.3d 932 (7th Cir. 1999) ..... 14

Amchem Products, Inc. v. Windsor, 521 U.S. 591 (1997) ..... 19

American Centennial Ins. Co. v. National Cas. Co.,

Se Oe EE ED iw 6 co 0 bas dc cua easce sees 20

Aquino v. Public Fin. Consumer Discount Co.,

Ge. ome. See (EDD. PA: 19GS) 2. ccc ewe nissesccvss 6,7

Baesler v. Continental Grain Co., 900 F.2d 1193

Cr. 244 Ol Sag <b AXRS ENA o wowed anes os’ 20

Balderos v. City Chevrolet, 214 F.3d 849 (7th Cir. 2000) ..... 14

Bantolina v. Aloha Motors, Inc., 419 F. Supp. 1116

Cac ude dia dine bab Ane NAN oe OO 14, 21

Barlow v. Quik Pawn Shop, 992 F. Supp. 1299

a tain ge WEG baal db kno sk S'4 M41 wi Ack 14

Baron v. Best Buy Co., Inc., 75 F. Supp. 2d 1368

(S.D. Fla. 1999), appeal stayed, No. 99-14028-E

eg ae, dai ab aa bw eWd dé ees 60% 15

Begala v. PNC Bank, 163 F.3d 948 (6th Cir. 1998) .......... 8

Bizier v. Globe Fin. Services, Inc., 654 F.2d 1

ET SER AES ar ENRE ROR ae oe ee ae 6, 8

Blue Cross v. Superior Court, 78 Cal. Rptr. 2d 779

(Ct. App. 1998), cert. denied, 527 U.S. 1003 (1999) ... 21,22

Champ v. Siegel Trading Co., 55 F.3d 269 (7th Cir. 1995) .... 20

Cole v. Burns International Security Services,

poe ae Bee Cae. CO. TFET) 2. ween ccns 15, 16, 17, 18

Del E. Webb Constr. v. Richardson Hosp. Auth.,

823 F.2d 145 (Sth Cir. 1987) ....------ eee eer rrerte 20

Dickler v. Shearson Lehman Hutton, Inc., 596 A.2d 860

(Pa. Super. 1991) .....- cc scccecrcccccecrcorercesers 22

Dortman v. Cash, Inc., CA No. 96-CV-18% (R)

COE Oh Si, TOD «aia sos 5 haa ows Venn s oaene so east nne es 13

Dzadovsky v. Lyons Ford Sales, Inc., 593 F.2d 538

COB WOT a os ic danas ho ERR E ES BES e ete S ee 8

Edwards v. Your Credit, Inc., 148 F.3d 427

CSC: TOTE) a. «oc vss once ees cnesasvenrregy es 6,7,8

Eisen v. Carlisle & Jacquelin, 417 U.S. 156 (1974) ....%: 19, 22

Fairley v. Turan-Foley Imports, Inc., 65 F.3d 475

(ie, TODD: 5 oon fo aves aspen ences neesesesse* 2" 6

Farrar v. Hobby, 506 U.S. 103 (1992) ...---+-+-+errrrree 10

French v. Wilson, 446 F. Supp. 216 (D.R.I. 1978) ....------- 7

Gammaro v. Thorp Consumer Discount Co.,

828 F. Supp. 673 (D. Minn. CEE a rincavecscenen es 20, 21

Gilmer v. Interstate/Johnson Lane Corp.,

SOO U.S. 20 (1991)... cc cccccccccccsceccccesss passim

Goins v. Creditcorp, V-96-175 (Cir. Ct. Bradley Cty.,

Tae, POPE) .. oo coca ba vn evens eseaw ese is esse 5s 85% 13

Green Tree Fin. Corp. v. Holt, 171 F.R.D. 313

OED. Bia TOIT) oases cones nav wen sev ases ee esnee rs 27

Hamilton v. York d/b/a/HLT Check Exchange,

987 F. Supp. 953 (E.D. Ky. 1997) ..-.------+errerrrr ee 13

Harris v. Green Tree Fin. Corp., 183 F.3d 173

CRC, TID ono os vac daics oan bge ieee cutee toes 27, 28

Harris v. Tower Loan, Inc., 609 F.2d 120

os a na Me Mer At ned Gem eB. s 10

Herrara w. First Northern Sav. & Loan Ass'n,

805 fame SoG OS, EO io siivcccas ihe bescceek tent 8

Izzi v. Mesquite Country Club, 231 Cal. Rptr. 315

Gk TD. THe oo vn bs cb eaundereseweretececeteen 22

Jackson v. Check’ N Go, Inc., No. 99-C-7319,

2000 WL 782927 (N.D. Ill. June 13,2000) ............. 19

Jenkins v. Landmark Mortgage Corp., 696 F. Supp. 1089

CRMs Ge BOD on Ke ewe Retenws bh ado h ey elaweeee 7

Johnson v. Tele-Cash, Inc., 82 F. Supp. 2d 264

Ge a UE os eS aks ae eee 1. i. BZ

Keating v. Superior Court, 645 P.2d 1192 (Cal. 1982),

rev'd sub nom. on other grounds, Southland Corp.

v. Zoning, AGS U.S: TCR ook & icGoean bee eke 21

Kessler v. Associates Fin. Servs. Co., 639 F.2d 498

GEG. BOGS) vs ies ose es eee 10

In re Knepp, 229 B.R. 821 ( Bankr. N.D. Ala. 1999) ........ 22

Lackey v. Green Tree Fin. Corp., 498 S.E.2d 898

GRA GR: De i nes FER er ae 27, 28

In re Lannice Fryer, 183 B.R. 322 (Bankr. S.D.

Gi SOE 6 des ccc ee Fee Bae eee ewer een 14

McCarthy v. Providential Corp., No. C-94-0627 FMS,

1994 WL 387852 (N.D. Cal. July 19, 1994) ............. 20

McGowan v. King, Inc., 569 F.2d 845 (Sth Cir. 1978) ...... 6,9

In re Miller, 215 B.R. 970 (Bankr. S.D. Ky. 1997) .......... 13

Mills v. Home Equity Group, Inc., 871 F. Supp. 1482

PIE. CE): «occ d ccnnsns ves aeseerne eee 6

Minnesota v. First Alliance Mortgage Co., C9-98-11416

(Dist. Ct., 2d Judicial Dist. Minn. Mar. 10, ne cg EE 14

Mitsubishi Motors Corp. v. Soler Chrysler-Piymouth,

Inc., 473 U.S. 614 (1985) ..----- errr 15, 18, 28

Mourning v. Family Publications Serv., Inc.,

Pv We hs en a dala 5

Mumford v. McKenzie Check Advance, Z-220-96

(Cir. Ct. Knox Cty., Tenn. 1996) .....--cceeccsessecee 13

Ortiz v. Fibreboard Corp., 527 U.S. 817 (1999) .....------ 22

Paladino v. Avnet Computer Techs., Inc., 134 F.3d 1054

(1 ith Cle. 1998)... 0 oes cn veckns senses views coneces 15

Parker v. DeKalb Chrysler Plymouth, 673 F.2d 1178

(hte Cie. IRE) os cs x ov encase eee serene ees 4,6

Payne v. Tennessee, 501 U.S. 808, 827 (1991) ..------+---- 26

Phillips Fetroleum v. Shutts Co., 472 U.S. 797 (1985) ..----- 22

Planned Parenthood v. Casey, 505 U.S. 833, 854 (1992) ..... 26

Pridgen v. Green Tree Fin. Servicing Corp.,

88 F. Supp. 2d 655 (S.D. Miss. - eer 27

Protective Life Ins. Corp. v. Lincoln Nat'l Life Ins.

Corp., 873 F.2d 281 (11th Cir. EPO er TT eee 20

Ramadan v. Chase Manhattan Corp., 156 F.3d 499

(98 Cie. 1998) oon eee ever cecoadpes chemo eepecrees 6, 8

Randolph v. Green Tree Fin. Corp., 178 F.3d 1149

(Lith Cir. 1999) ........ceeccceecccsecrorcche 17, 18, 21

Vii

Ratner v. Chemical Bank N.Y. Trust Co., 54 F.R.D. 412

GeO R Es SUES Wie cd dccencanedkdaees ketene ences 11

Rodash v. AIB Mortgage Co., 16 F.3d 1142

a Or ee er ee ne oF mare 6,8

Rogers v. Coburn Fin. Corp. of DeKalb, 54 F.R.D. 417

SPR SUES 6c WkGRG SOAR cake oe ski ka Koes 11

Semar v. Platt Valley Fed. Sav. & Loan Ass'n,

791 F.2d 699 (9th Cir. 1986) Pee eee ee ETT Tee ree 6

Shankle v. B-G Maintenance Management, Inc.,

163 F.3d 1230 (10th Cir) 1999) ................. 15, 16, 17

Shearson/American Express, Inc. v. McMahon,

pe SRE KUNE Sco nd eee case a eek des deww ith 15

Shields v. First Nat'l Bank of Arizona, 56 F.R.D. 442

oF ee re et errr 1 ae re an 11

Smith v. Chapman, 614 F.2d 968 (Sth Cir. 1980) .......... 6,8

Turner v. E-Z Check Cashing, 35 F. Supp. 2d 1042

I: NUT es hae ee es ae 13

In re Underwood, 66 B.R. 656 (Bankr. W.D. Va. 1986) ....... 6

Walker v. Wallace Auto Sales, Inc., 155 F.3d 927

Ce DE 5 dink eae a Rk baa ey ae wld vo a wk 14

Weyerhaeuser Co. v. Western Seas Shipping Co.,

POD Fae re CO, POE 6 6.86 ds vive ee édaNWiw eee 20

White v. Cash Emporium, CA No. 98-269

ee Is 0 0 ks ek US WEKNEMEN 84a ba ewes 13

Wilcox v. Commerce Bank, 55 F.R.D. 134

Se: GPE ie RGA chu esG kt ko ck ee ee 11

Vill

Zagorski v. Midwest Billing Servs., Inc.,

128 F.3d 1164 (7th Cir. 1997) ......---- eee eee rere eres 10

Zamarippa v. Cy’s Car Sales, Inc., 674 F.2d 877

(Vid Car. 1982)... 5. cece cctv ccccescncnseses 8

STATUTES

15 U.S.C. § 45(a) ........--. ARe ahaa aap A OAT RET AES 23

Truth in Lending Act, 15 U.S.C. § 1601 et seq. ....--------- 4

15 U.S.C. § 1GO1(O) .. 2. - cece cece ccc envccevescons 5

15 U.S.C. § 1602faa) .. 00. c ccc eee e cr cecccceccecces 9

15 U.S.C. $ 1605 0.0. eke ccc ccc eneccccccccsnccccves 5

15 U.S.C. § 1GOS(f) ... 00 occ c cece crc cc cc ceveccces 7

Let Sol Go Serre rere oe 5

fi lo 2: Serer ees sk 23

15 U.S.C. § 1631(@) .... 2 ccc cece wees cc cence cceces 6

iit ia Sener Cite ees 7

Cts fot ; Se nei Se ete hao 6

TELE Cid 5 Serer is Seer 9

tilt oat . 2 re eee 5, 6

CLE Taq & [one re et er eS 2 6,9

SUIS BID circ vscceccacdnssxicssice. Ve iidiaks 8

15 U.S.C. § 1640(a) .... 2-22 - nce c cece ec cece cceecess 7,9

15 U.S.C. § 1640(a)(1) . 0.22. e eee reer eee cree: 9

15 U.S.C. § 1640(a)(2)(B) ....--- eee eee eee eee ere 8

15 U.S.C. § 1640(a)(3) ...---- eee eee ee eee ere reece 10

15 U.S.C. § 1640(a)(4) .... 22 e eee eee eee eee eee neces 9

15 U.S.C. § 1640(€) ... 2. cece cece cece reece eee eeeeee 9

Age Discrimination in Employment Act,

29 U.S.C. §§ 626(b), (Cc), (d) ..-- eee eee eee reer 21

LEGISLATIVE HISTORY

Inaccurate and Unfair Billing Practices: Hearings

on S. 1630 and S. 914 Before the Subcomm. on

Consumer Credit of the Senate Comm. on Banking,

Housing and Urban Affairs, 93d Cong. 188 (1973)

(statement of Robert Norris, General Counsel,

National Consumer Finance Association)............... 12

Predatory Lending Practices in the Subprime

Industry: Hearings before the House Comm.

on Banking and Fin. Servs. (May 24, A peer at. 23

S. Rep. No. 94-590 (1976), reprinted in

EPP SPMD OE baka bie e bck scdecudcdccuwcsac 12

S. Rep. No. 93-278 (1973), quoting 1972 F.R.B.

Ann. Rep. on Truth in Lending ....................... ‘2

H.R. Rep. No. 90-1040 (1968), reprinted in

Pee Chane. BU oo sv 6ob ck ooo obs bows oes neek 4

146 Cong. Rec. S930 (daily ed. Feb. 29, 2000)

(statement of Sen. Feingold) ......................... 26

109 Cong. Rec. 2027 (1963) (statement of Sen. Douglas) ..... 5

REGULATIONS AND RELATED AUTHORITY

Regulation Z, 12 C.F.R. § 226.18 (1997) .................. 6

Federal Reserve Board, Official Staff Commentary

on Regulation Z § 226.2(a)(14)-2,

a ae ee ae ea 13

Federal Reserve Board, Official Staff Commentary

on Regulation Z § 226.17(c)(1)-18,

OE ee MU POPE, ie nic nace vkecucelacecccen 14

RULE

Ree & : Pe Tere Ty Cre ir ee eer ee 23

MISCELLANEOUS

AAA, Commercial Dispute Resolution Procedures

(visited July 20, 2000 <http://www.adr.org/rules/

Cc rcial/ co rcial rules. CRU PO, Paras 17

Amici Chamber of Commerce Brief .........-.-.---+e0255 23

Edward Brunet, Questioning the Quality of Alternative

Dispute Resolution, 62 Tul. L. Rev. 1 (1987) .....-.---- 24

Mark E. Budnitz, Arbitration of Disputes Between

Consumers and Financial Institutions: A Serious

Threat to Consumer Protection, Ohio St. J. on Disp.

Rescl. 267 (19DS). 0 nce wes cccccerceessneescbovess 24

Federal Reserve Board, 1972 Ann. Rep. on Truth

in Lending ........ 2. cece cece cece eee eecceebes 11, 12

Federal Reserve Board, 1973 Ann. Rep. on Truth

Se” Pere gC RE LGR A ARE CREME SOO ORS 11

Jean Ann Fox, Consumer Fed'n of Am., Safe Harbor

for Usury: Recent Developments in Payday

Lending (1999), www.consumerfed.org ...-.-------++>- 13

Jean Ann Fox, Consumer Fed'n of Am., The Growth

of Legal Loan Sharking: A Report on the Payday

Loan Industry (1998) ... 6... 6c ee cee eee eee eee 13

Alan Kaplinsky & Mark Levin, Excuse me, but who's the

predator? Banks can use arbitration clauses as a

defense, 7 Bus. L. Today 24 (May/June ee 25, 27

John V. O'Hara, The New Jersey Alternative Procedure

For Dispute Resolution Act: Vanguard of a ‘Better

Way'?, 136 U. Pa. L. Rev. 1723 (1988) .....---------++ 26

Justice Lewis F. Powell, Stare Decisis and Judicial

Restraint, 47 Wash. & Lee L. Rev. 281 (1990) .......... 26

Ralph I. Rohner and Fred H. Miller, Truth in Lending

(Robert A. Cook, et al. eds., 2d ed. 2000). ........... 11, 20

David S. Schwartz, Enforcing Smail Print to Protect

Big Business: Employee and Consumer Rights

Claims in an Age of Compelled Arbitration, 1997

be L,I aaa i tae ere 25, 26

Stewart E. Sterk, Enforceability of Agreements to

Arbitrate: An Examination of the Public Policy Defense,

MD a, CW, SL CIDE nk nk vas va sive wacdcucns 24

John Vail, Defeating Mandatory Arbitration Clauses,

Se Ce PT Weak a wk i en ok eh ec 17

No. 99-1235

IN THE

Supreme Court of the United States

GREEN TREE FINANCIAL CORP. -- ALABAMA

and GREEN TREE FINANCIAL CORPORATION,

Petitioners,

Vv.

LARKETTA RANDOLPH,

Respondent.

ON WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT

BRIEF AMICI CURIAE OF AARP AND THE

NATIONAL CONSUMER LAW CENTER

IN SUPPORT OF RESPONDENT

INTEREST OF AMICI CURIAE!

AARP is dedicated to addressing the needs and interests of

people aged 50 and older. As the largest membership

organization serving older Americans, AARP is alarmed by the

rampant fraud and deceptive practices perpetrated in a broad

range of marketplace transactions, because these acts

“ The parties’ consents have been filed with the Clerk of the Court. In

compliance with Rule 37.6 of this Court, amici curiae AARP and the

National Consumer Law Center state that no counsel for any party authored

this brief in whole or in part and that no party or entity other than these

amici curiae, their members or counsel made a monetary contribution to the

preparation or submission of this brief.

disproportionately affect older consumers. AARP supports

laws and public policies designed to protect their rights and to

preserve the legal means to enforce them. AARP played an

active role in the passage of recent amendments to the Truth in

Lending Act (“TILA”), and participated in negotiations with

industry and government representatives to improve disclosures

and enhance substantive protections against abusive lending

practices. AARP advocates for im proved access to the civil

justice system and supports the availability of the full range of

enforcement tools, including class actions.

In recent years, AARP Foundation attorneys have

represented countless older homeowners who have been

victimized by abusive mortgage refinancings. These cases

challenged: lender compliance with TILA disclosure

obligations, including hiding a sixteen-point broker fee;

charging a premium for credit life insurance of no value to the

consumer; failing to provide the homeowner with a Notice of

Right to Cancel; and failing to provide the three-day advance

warning disclosure to a borrower with a high cost loan. Each

of these loans was destined to go into default because the

borrowers’ mortgage payments ranged from 52 to 100 percent

of their monthly incomes. The abusive lending practices

described above are not diminishing but are becoming more

widespread.

The effect of an arbitration agreement such as Green Tree’s

on these cases would have been devastating to the borrowers’

ability to vindicate their TILA rights. Regardless of the fact

that their arbitration costs ultimately might have been

reimbursed, the initial outlay of fees would have barred these

claimants from seeking redress.

The National Consumer Law Center (“NCLC’”) is a non-

profit corporation established in 1969. One of its primary

objectives is the provision of assistance to legal services

attorneys, governmental agencies, and private attorneys in

advancing the interests of their low-income and elderly clients

in the area of consumer law. NCLLC staff write and publish

over thirteen legal treatises on various federal and state statutes

that affect consumer law. In particular, Truth In Lending (4th

ed. 1999) and its earlier editions have provided insight and

analysis of TILA for over two decades. This text was most

recently relied upon by Chief Judge Posner in Adams v. Plaza

Fin. Co., 168 F.3d 932, 935 (7th Cir. 1999). For over twenty

years, NCLC staff have provided oral and written testimony to

Congress and the Federal Reserve Board on the propriety of

Statutory and regulatory changes to TILA and Regulation Z.

NCLC staff also have been members of the Federal Reserve

Board’s Consumer Advisory Council.

Amici are filing this brief because mandatory arbitration

agreements, such as Green Tree’s, conflict with the public

purpose of TILA and its private enforcement mechanism.

SUMMARY OF ARGUMENT

An arbitration clause that is silent regarding payment of

arbitration fees and costs undermines the Congressional

purpose of the Truth in Lending Act (“TILA”), if it imposes fee

barriers that prevent claimants from vindicating their statutory

rights. While companies that impose binding arbitration

frequently tout it as a low-cost alternative to litigation,

arbitration can be prohibitively expensive. When arbitration

prevents a claimant from vindicating statutory ri ghts conferred

by a public interest statute like TILA, it impermissibly conflicts

with TILA and its Congressional purpose.

Congress enacted TILA to provide consumers with

information about the essential terms of their credit transactions

and to deter deception and fraud in the credit marketplace. It

has been acornerstone of federal consumer protection law since

its passage in 1968. TILA relies upon consumers acting as

private attorneys general to police creditor compliance by

providing individual and class remedies. The enforcement of

TILA through damages provisions is made feasible by the Act’s

fee-shifting provision, which mandates the award of costs and

reasonable attorneys’ fees to a prevailing consumer.

The class action remedy is an essential component to

enforcing TILA’s protections and is a powerful deterrent to

wrongful conduct. Indeed, class actions remain the only

realistic way for consumers with small monetary claims to

vindicate their rights under, and to promote compliance with,

TILA. Without class relief and mandatory fee-shifting, TILA

would be reduced to nothing more than a mere nuisance to

creditors, thus diminishing the Act’s deterrent and remedial

functions.

The Court has held that parties in arbitration are entitled to

all substantive rights guaranteed by a statute such as TILA. The

Eleventh Circuit’s conclusion that an arbitration clause that

imposes steep arbitrator or filing fees violates TILA’s fee-

shifting mandate is consistent with the Court’s holdings and

should be upheld.

ARGUMENT

I. CONGRESS ENACTED THE TRUTH IN LENDING

ACT TO REGULATE CREDIT INDUSTRY

PRACTICES AND PROTECT CONSUMERS.

The Truth in Lending Act # (“TILA” or “Act’”) has been a

cornerstone of federal consumer protection law since its

passage in 1968. TILA was enacted in response to the growing

complexity in consumer credit in which many consumers were

unable to discover the essential terms of their credit

transactions, and in recognition that many unwitting consumers

were routinely victimized by misrepresentations and fraudulent

practices in the credit marketplace.”

Prior to 1968, consumers had no easy way to determine how

much credit would cost or how to compare various loan

products. Creditors did not calculate or advertise interest in a

uniform way, nor was there a single system for defining what

additional charges would be included in the interest rate. These

15 U.S.C. § 1601 et seq.

¥ See H.R. Rep. No. 90-1040, at 2 (1968), reprinted in 1968

U.S.C.C.AN. 1962; Parker v. DeKalb Chrysler Plymouth, 673 F.2d 1178,

1181-82 (11th Cir. 1982).

differences in computation significantly affected the cost to the

consumer. For example, a three-year $6,000 car loan at 6%

interest cost the consumer: $1,080 in interest if computed as an

add-on rate; $1,317 in interest computed at a discount rate; and

$570 in interest at a simple or actuarial rate. Consumers

confronted with seemingly similar interest charges simply had

no way to decipher which quoted rate of interest was the most

expensive and could not compare terms and shop for credit.%

Congress responded to this marketplace confusion, and

sometimes outright deception, by enacting TILA. The statute

represented au effort by Congress to strengthen competition

among financial institutions and enhance the economic

stabilization of the marketplace by the informed use of credit 2

This overarching public purpose was furthered by mandating

the accurate, uniform, and meaningful disclosure of the costs of

consumer credit.#

The Act took a major step toward eliminating the interest

rate deception noted above by prescribing a uniform calculation

of interest as an annualized rate, by defining what kinds of

credit-related charges should be included when calculating the

annual percentage rate (“APR”),” and by requiring that the total

cost of these charges be disclosed as a dollar amount in the

“finance charge.”"” In Ms. Randolph’s case, the creditor

included a vendor’s single interest 1surance premium in the

amount financed which should L. — been, but was not,

included in the finance charge. This had the effect of

artificially lowering the APR, making the loan look more

See 109 Cong. Rec. 2027 (1963) (statement of Sen. Douglas).

¥ 15 U.S.C. § 1601(a).

(1973).

Y 15 U.S.C. § 1606.

¥ 15 U.S.C. §§ 1605, 1638.

attractive to Ms. Randolph than it actually was.

TILA confers statutorily-created private rights affecting the

public interest,” creates a system of disclosure that improves

the bargaining posture of all borrowers, and requires strict

technical compliance.” Green Tree violated TILA’s mandatory

disclosure scheme by failing to accurately provide Ms.

Randolph with the essential terms of her credit transaction.’

TILA’s enforcement mechanism was designed precisely to

empower consumers like Ms. Randolph to challenge creditors’

wrongful conduct. Because of the importance of its remedial

purpose, courts throughout the country have liberally construed

TILA in favor of borrowers.

A. TILA’s Text, Purpose, and Legislative History

Reflect the Pivotal Role of Private Attorney General

Enforcement.

Congress intended that TILA’s protections be enforced by

consumers acting as private attorneys general” Simply

Y See Parker, 673 F.2d at 1181; Mills v. Home Equity Group, Inc., 871 F.

Supp. 1482, 1486 (D.D.C. 1994).

1 See Parker, 673 F.2d at 1181; Smith v. Chapman, 614 F.2d 968, 971

(5th Cir. 1980).

W See 15 U.S.C. §§ 1631(a), 1637-39; Regulation Z, 12C.FR. § 226.18

(1997). See also In re Underwood, 66 B.R. 656, 660 (Bankr. W.D. Va.

1986).

1” See Ramadan v. Chase Manhattan Corp., 156 F.3d 499, 502 (3d Cir.

1998); Fairley v. Turan-Foley Imports, Inc., 65 F.3d 475, 479 (Sth Cir.

1995); Rodash v. AIB Mortgage Co., 16 F.3d 1 142, 1144 (11th Cir. 1994);

Semar v. Platte Valley Fed. Sav. & Loan Ass'n, 791 F.2d 699, 704 (9th Cir.

1986); Bizier v. Globe Fin. Servs., Inc., 654 F.2d 1, 3 (1st Cir. 1981).

1Y See Edwards v. Your Credit, Inc., 148 F.3d 427 (Sth Cir. 1998);

McGowan v. King, Inc., 569 F.2d 845, 848 (Sth Cir. 1978); Aquino v.

(continued...)

legislating required disclosures could not, by itself, compensate

for the vast disparity in bargaining positions between

consumers and lenders. The Act protects all consumers by

deterring improper and deceptive behavior by all creditors.1¢

This private attorney general scheme includes the right to

obtain actual damages, individual statutory damages, enhanced

Statutory damages for high-cost mortgages, class action

damages, rescission, and an award of costs and attorneys’

fees. TILA represents a carefully constructed balance

between the borrower’s right to receive accurate and timely

information about the cost of credit and the creditor’s

obligation to provide those disclosures without significant

liability for small disclosure errors.” Petitioners and their

amici advocate upsetting this statutory balance by allowing

creditors to impose an arbitration scheme that thwarts

consumers’ ability to vindicate their rights as prescribed by

TILA.

1. TILA Damages Effectuate Private Attorney

General Enforcement.

From the outset, Congress primarily focused on the

enforcement of the public interest in accurate disclosure

through private attorney general lawsuits seeking statutory

¥ (...continued)

Public Fin. Consumer Discount Co., 606 F. Supp. 504, 508 (E.D. Pa.

1985); French v. Wilson, 446 F. Supp. 216 (D.R.I. 1978).

“See Edwards, 148 F.3d at 432; Jenkins v. Landmark Mortgage Corp.,

696 F. Supp. 1089, 1092 (W.D. Va. 1988); French, 446 F. Supp. at 220.

See 15 U.S.C. §§ 1640(a), 1635.

i See 15 U.S.C. § 1605(f).

damages.” Over the years, courts have uniformly held that

TILA is primarily enforced through these private attorney

general lawsuits which are expressly fostered by the statutory

damages, mandatory attorneys’ fees and cost shifting

provisions.

Several aspects of these provisions are significant. First,

damages are mandatory even for technical violations. Second,

to obtain statutory damages, the consumer need not show that

he or she was deceived by the violation or suffered any actual

damages;/” this evidences the Congressional goal of furthering

the public purpose of the Act through private enforcement.

Finally, the consumer need not exhaust any administrative

remedies or provide advance notice to a creditor or agency

before instituting a lawsuit.

In the thirty two years since the Act’s passage, Congress

has consistently reaffirmed its commitment that private attorney

general enforcement is critical to creditor compliance with the

Act. In 1974, Congress specifically endorsed class actions by

adopting class statutory damages” and added an actual

1” Actual damages were not included in the original damages provision.

Consumer Credit Protection Act., Pub. L. No. 90-321, § 130, 82 Stat. 146

(1968) (codified as amended in 15 U.S.C. § 1640).

8 See Begala v. PNC Bank, 163 F.3d 948, 950 (6th Cir. 1998); Ramadan,

156 F.3d at 502; Edwards, 148 F.3d at 432; Rodash, 16 F.3d at 1144;

Herrara v. First Northern Sav. & Loan Ass'n, 805 F.2d 896, 902 (10th Cir.

1986); Bizier, 654 F.2d at 2.

1% See Zamarippa v. Cy’s Car Sales, Inc., 674 F.2d 877, 879 (11th Cir.

1982); Smith, 614 F.2d at 968; Dzadovsky v. Lyons Ford Sales, Inc., 593

F.2d 538, 539 (3d Cir. 1979).

2 Act of Oct. 28, 1974, Pub. L. No. 93-495, 88 Stat. 1500 (codified as

amended at 15 U.S.C.§ 1640(a)(2)(B)).

damages subsection.” In 1988, Congress imposed statutory

damages for failing to provide consumers important

information about home equity lines of credit.2¥

- In 1994, Congress sought to curtail the rampant growth of

predatory mortgage lending targeted at vulnerable consumers

by offering special protections on “high cost” loans.2

Congress deemed the new “high cost” disclosures and

protections so important that it expanded the private attorney

general scheme by creating mandatory enhanced Statutory

damages.’ Finally, in 1995 Congress rejected industry efforts

to undermine class actions, and doubled individual statutory

damages in mortgage transactions.2/

2. TILA’s Fee-shifting Provisions Effectuate Private

Attorney General Enforcement.

The mandatory award of costs and attorneys’ fees to a

prevailing borrower is one of the lynchpins of TILA’s Statutory

enforcement. Fee-shifting gives an aggrieved borrower not

only the right, but the ability, to act as a private attorney

general .2”

2 Id. at § 407(a) (codified as amended at 15 U.S.C. § 1640(a)(1)).

= Home Equity Loan Consumer Protection Act of 1988, Pub. L. No. 100-

709, 102 Stat. 4725 (codified as amended at 15 U.S.C. § 1637a).

2 15 U.S.C. §§ 1602(aa), 1639.

*/ Enhanced damages under The Home Ownership Equity Protection Act

(“HOEPA”) are in addition to other statutory and actual damages. 15

U.S.C. §§ 1640(a), 1640(a)(4).

= Truth in Lending Act Amendments of 1995, Pub. L. No. 104-29, 109

Stat. 271 (codified as amended at 15 U.S.C. § 1640(a)).

2! See McGowan, 569 F.2d at 848.

The consumer can afford to contemplate acting as a private

attorney general because, if successful, costs and reasonable

attorneys’ fees must be awarded regardless of the size of the

statutory damages recovery.” In contrast, unsuccessful

plaintiffs are not penalized with an assessment of attorneys’

fees and costs.” As Justice O’Connor observed, private

attorney general actions “ensure the vindication of important

rights, even when large sums of money are not at stake, by

making attorney’s fees available.” Farrar v. Hobby, 506 U.S.

103, 122 (1992) (concurring). “Success must be measured not

only in the amount of money damages but also in terms of the

significance of the legal issues . . . and the public purpose

served by the litigation.” Zagorski v. Midwest Billing Servs.,

Inc., 128 F.3d at 1165. Under TILA’s fee-shifting statutory

scheme, the enforcement costs that might otherwise be borne by

a government bureaucracy are instead imposed on the creditor

which has acted improperly.”

3. TILA’s Class Action Provision Effectuates Private

Attorney General Enforcement.

Congress consistently has recognized that class actions are

essential to TILA’s self-enforcement scheme. The debate over

the importance of class actions emerged almost immediately

after passage of this landmark consumer credit legislation. In

the early years of TILA litigation, most courts were unwilling

to certify a class because of the massive potential liability that

would have resulted from aggregating the mandatory minimum

2 See, e.g., Zagorski v. Midwest Billing Servs., Inc., 128 F.3d 1164 (7th

Cir. 1997).

BW See 15 U.S.C. § 1640(a)(3).

2 See, e.g., Kessler v. Associates Fin. Servs. Co., 639 F.2d 498 (9th Cir.

1981); Harris v. Tower Loan, Inc., 609 F.2d 120 (Sth Cir. 1980).

$100 statutory damages for all class members. 2 The

inflexibility of minimum Statutory damages, coupled with the

Act’s silence regarding class actions, created uncertainty as to

Congress’s intent regarding the use of class actions. As a

result, courts imposed numerous procedural restrictions to

prevent class liability for TILA violations.2!/

In its Annual Reports to Congress, the Federal Reserve

Board expressed concern about the trend to disapprove TILA

class actions. The Board stated that “if this trend were to

continue, the deterrent of potential class action liability which

helps to ensure creditor compliance with the Act would be

effectively lost.”*” The Board focused on the “prophylactic

effect of the threat of class action exposure [which] elevates a

possible Truth in Lending law suit from the ineffective

‘nuisance’ category to the type of suit which has enough sting

in it to insure that management will strive with diligence to

achieve compliance.” Congress agreed that “*potential class

action liability is an important encouragement to the voluntary

compliance which is so necessary to insure nationwide

” See Ralph I. Rohner and Fred H. Miller, Truth in Lending 865-6 (Robert

A. Cook, et al. eds., 2d ed. 2000).

2 Id. at 866. See, e.g., Shields v. First Nat’! Bank, 56 F.R.D. 442, 446 (D.

Ariz. 1972); Wilcox v. Commerce Bank, 55 F.R.D. 134, 138 (D. Kan.

1972); Rogers v. Coburn Fin. Corp., 54 F.R.D. 417, 419 (N.D. Ga. 1972);

Ratner v. Chemical Bank N.Y. Trust ACB: -D.N-Y. .

see also Johnson v. Tete-Cash, 82 F. Supp. 2d 264, 269 (D. Del. 1999).

Y See 1972 F.R.B. Ann. Rep. on Truth in Lending 13-14; 1973 FRB.

Ann. Rep. on Truth in Lending 9.

* 1973 F.R.B. Ann. Rep. on Truth in Lending 9.

*/ 1972 F.R.B. Ann. Rep. on Truth in Lending 13-14.

adherence to uniform disclosure.’ At the same time,

Congress expressly rejected the finance industry’s proposal that

TILA class actions be limited to those seeking actual damages

or injunctive relief.

Congress created a class action damages provision that

carefully balanced TILA’s purpose “to provide creditors with

a meaningful incentive to comply with the law without relying

upon an extensive new bureaucracy” with its concern that

creditors not be subjected to enormous penalties for technical

violations. This provision specifically authorized class

actions but limited the maximum damages awards. Far from

indicating Congressional disapproval of the class action

remedy, the limitation on statutory damages was the only

mechanism that Congress deemed viable to express its manifest

intent to promote class actions. Indeed, through numerous

amendments to TILA over the years, Congress has never

deviated from this position.

Class actions have and continue to be a critical element in

the enforcement of TILA. The right to aggregate claims for

statutory damages has proven a potent ally to government

efforts to prevent lenders from overstepping the bounds of

3! See S. Rep. No. 93-278, at 15 (1973), quoting 1972 F.R.B. Ann. Rep.

on Truth in Lending 13.

3%! Inaccurate and Unfair Billing Practices: Hearings on S. 1630 and S.

914 Before the Subcomm. on Consumer Credit of the Senate Comm. on

Banking, Housing and Urban Affairs, 93d Cong. 188 (1973) (statement of

Robert Norris, General Counsel, National Consumer Finance Association).

2! §. Rep. No. 93-278 to accompany S. 2101, Truth in Lending Act

Amendments 14-15 (June 28, 1973).

3@ See S. Rep. No. 94-590 at 7-8 (1976), reprinted in 1976 U.S.C.C.A.N.

431. (When Congress amended the class action provision to increase

available damages, it “wishe[d] to avoid any implication that the ceiling on

class action recovery is meant to discourage use of the class action device.”)

See also Johnson, 82 F. Supp. 2d at 269.

TILA and straying into deceptive practices. In recent years, the

payday loan industry has aggressively expanded from small

local businesses to major national financial organizations.

These companies, whose loans are characterized by exorbitant

rates, ranging from 261% to 782%, adamantly had refused to

provide TILA disclosures that would have revealed to

borrowers their astronomical rates of interest 4! Characterizing

these transactions as “deferred presentments” or “cash leasing,”

these banks and finance companies sought to disguise the true

nature of payday loans, asserting that TILA disclosures were

unnecessary. Class action lawsuits propelled this issue to the

foreground and ultimately resulted in the Federal Reserve

Board’s issuing new Commentary* that stated the obvious —

payday loans are consumer credit transactions and consumers

2 See Jean Ann Fox, Consumer Fed’n of Am., The Growth of Legal Loan

Sharking: A Report on the Payday Loan Industry 2-3 (1998); Jean Ann

Fox, Consumer Fed’n of Am, Safe Harbor for Usury: Recent

Developments in Payday Lending 4 (1999), www.consumerfed.org.

~ Jean Ann Fox, The Growth of Legal Loan Sharking, supra, at 7; see

also Hamilton v. York d/b/a/HLT Check Exchange, 987 F. Supp. 953 (E.D.

Ky . 1997); In re Miller, 215 B.R. 970 (Bankr. S.D. Ky. 1997).

See, e.g., Turner v. E-Z Check Cashing, 35 F. Supp. 2d 1042 (M.D.

Tenn. 1999); Hamilton, 987 F. Supp. 953.

See, e.g., White v. Cash Emporium, CA No. 98-269 (E.D. Ky. 1998);

Dortman v. Cash, Inc.,CA No. 96-CV-188(R) (W.D. Ky. 1996); Mumford

v. McKenzie Check Advance, Z-220-96 (Cir. Ct. Knox Cty., Tenn. 1996);

Goins v. Creditcorp, V-96-175 (Cir. Ct. Bradley Cty., Tenn. 1996); see also

Johnson, 82 F. Supp. 2d at 264.

Official Staff Commentary on Regulation Z § 226.2(a)14)-2, 65 Fed.

Reg. 17129, 17130 (2000). The Board clearly stated that this commentary

was not a change in the law.

are entitled to TILA disclosures that inform them of the true

cost of that very expensive form of credit“

The public enforcement purpose of the class action remedy

has been apparent from the outset. The class representative

under TILA, who shepherds a case through complex litigation

while receiving a smaller damages amount than in an individual

case,*” cannot be said to be acting other than in the public’s

interest. Consistent with this notion, many TILA class action

lawsuits effectively have raised and challenged abusive industry

practices such as charging consumers for a deceptive insurance

product, manipulating TILA disclosures to hide credit costs

instead of disclosing them” and burying grossly inflated

charges in the price of the goods sold. In the absence of class

action lawsuits, many of these abusive practices would continue

unabated.

~ Similarly in the arena of automobile “title pawn” loans, consumer

lawsuits highlighted that industry’s unwillingness to comply with TILA’s

disclosure scheme. See, e.g., Barlow v. Quik Pawn Shop, 992 F. Supp.

1299 (M.D. Ala. 1997); In re Lannice Fryer, 183 B.R. 322 (Bankr. S.D.

Ga. 1995). The Federal Reserve Board amended its Commentary to

emphasize that pawns loans are consumer credit transactions under TILA.

Official Staff Commentary on Regulation Z § 226.17(c1)-18, 61 Fed.

Reg. 14956 (1996).

*¥ See Bantolina v. Aloha Motors, Inc., 419 F. Supp. 1116, 1121 (D. Haw.

1976).

“ See Adams v. Plaza Fin. Co., 168 F.3d 932 (7th Cir. 1999); Edwards,

148 F.3d 427.

2! See Minnesota v. First Alliance Mortgage Co., C9-98-11416 (Dist. Ct.,

2d Judicial Dist. Minn. Mar. 10, 1999) (order for final judgment);

* See Balderos v. City Chevrolet, 214 F.3d 849 (7th Cir. 2000); Walker

v. Wallace Auto Sales, Inc., 155 F.3d 927 (7th Cir. 1998).

STATUTORY RIGHTS UNDERMINE THE TRUTH

IN LENDING ACT’S REMEDIAL PURPOSE.

The Court has recognized that “[b]y agreeing to arbitrate a

Statutory claim, a party does not forgo the substantive rights

afforded by the siatute: it only submits to their resolution in an

arbitral, rather than a judicial forum.” Mitsubishi Motors Corp.

v. Soler Chrysler-Plymouth, Inc.,473 U.S. 614, 628 (1985); see

also Gilmer v. Inierstate/Johnson Lane Corp., 500 U.S. 20, 26

(1991). Congressional intent that a statute not be subject to a

waiver of the right to a judicial forum can be gleaned from a

Statute’s text or its legislative history, or from “an inherent

conflict between arbitration and the Statute’s underlying

purposes.” Shearson/American Express, Inc. v. McMahon, 482

U.S. 220, 227 (1987).

Following thisCourt’s direction, several federal courts have

found arbitration provisions unenforceable when they

undermined important statutory rights 2”

A. Arbitration Contracts That Require Claimants to

Pay Fees Undermine TILA Enforcement.

An arbitration clause, like the one in the instant case, that is

Silent regarding payment of arbitration fees and costs

undermines the Congressional purpose of TILA if it imposes

fee barriers that prevent claimants from vindicating their

Statutory rights. While companies that impose binding

arbitration frequently cite it as a low-cost alternative to

litigation, many courts have recognized the real costs of

= See, ¢.g., Shankle v. B-G Maintenance Management, Inc., 163 F.3d

1230, 1234 (10th Cir. 1999); Paladino v. Avnet Computer Techs., Inc., 134

F.3d 1054, 1062 (11thCir. 1998); Baron v. Best Buy Co., Inc., 75 F. Supp.

2d 1368, 1370-71 (S.D. Fla. 1999), appeal stayed, No. 99-14028-E (11th

Cir. June 2, 2000). Gf Cole v. Burns Int'l Sec. Servs., 105 F.3d 1465,

1484-85 (D.C. Cir. 1997).

arbitration and how the imposition of those costs and fees can

prevent claimants from vindicating rights under statutes

protecting public interests.

Cole v. Burns International Security Services, 105 F.3d

1465, 1480 (D.C. Cir. 1997), involved an arbitration agreement

like Green Tree’s which was silent as to costs. The parties in

that Title VII civil rights case stipulated that arbitrators’ fees are

commonly $500 to $1,000 per day. The court found that an

employee facing expensive filing and administrative fees,

which are substantially in excess of the fees paid in federal

court, is unlikely to pursue his or her statutory claims in an

arbitral forum. /d. at 1484. In fact, the Court was:

unaware of any _ situation in American

jurisprudence in which a beneficiary of a federal

statute has been required to pay for the services of

the judge assigned to hear her or his case. Under

Gilmer, arbitration is supposed to be a reasonable

substitute for a judicial forum. Therefore, it

would undermine Congress’s intent to prevent

employees who are seeking to vindicate statutory

rights from gaining access to a judicial forum and

then require them to pay for the services of an

arbitrator when they would never be required to

pay for a judge in court.

Id. (footnotes & citations omitted). To effectuate the liberal

policy favoring arbitration agreements without impairing the

claimant’s statutory nghts, the D.C. Circuit Court interpreted

the arbitration agreement to require the employer to bear the

full expense of the arbitral fees and costs. Jd. at 1485.

The Tenth Circuit confronted a similar, but more intractable

problem in Shankle v. B-G Maintenance Management, Inc., 163

F.3d 1230 (10th Cir. 1999), where it found that an arbitration

agreement requiring an employee to pay half of an arbitrator’s

fees, which included a $6,000 deposit, $250 per hour of

arbitrator time, $125 per hour for arbitrator travel time, and $45

per hour for paralegal time, placed him:

between the proverbial rock and a hard place — it

prohibited use of the judicial forum, where a

litigant is not required to pay for a judge’s

Services, and the prohibitive cost substantially

limited use of the arbitral forum... . B-G

Maintenance required Mr. Shankle to agree to

mandatory arbitration as a term of continued

employment, yet failed to provide an accessible

forum in which he could resolve his Statutory

rights. Such a result Clearly undermines the

remedial and deterrent functions of the federal

anti-discrimination laws.

Id. at 1235. Because the fee-splitting provisions of the

arbitration agreement explicitly conflicted with the Statutory

fee-shifting provisions, the Shankle court, unlike the court in

Cole, was unable to craft a Saving interpretation.

High up-front costs create a formidable barrier to a

consumer's ability to vindicate Statutory rights. These costs

present a particular problem for the many consumers whose

relatively small claims are substantially less than the cost of

TILA) will not be undone by steep filing fees, steep arbitrators’

fees, or other high costs of arbitration.” Randolph v. Green

Tree Fin. Corp., 178 F.3d 1149, 1158 (11th Cir. 1999). In the

a For example, the American Arbitration Association (AAA) requires that

claimants who request an in-person hearing for a small claim pay all fees

and costs. In disputes valued at between $10,000 and $100,000, a

consumer must pay a filing fee of $500 to $1,250, a daily hearing fee of

$150, a daily room rental fee of $150, and & portion of the arbitrator’s fee

of $100 to $350 per hour. AAA, Commercial Dispute Resolution

Procedures (visited July 20, 2000) :

i . See also John Vail, Defeating Mandatory

Arbitration Clauses, 36 Trial 70, 71 (Jan. 2000); Cole, 105 F.3d at 1484

n.13.

absence of such a ruling from this Court, the Eleventh Circuit

was not persuaded by Green Tree’s statement at oral argument

that the arbitration award might ultimately apportion the fees as

directed by TILA. There is “no guarantee that a consumer

successfully arbitrating under this clause willl not be saddled

with a prohibitive costs order, despite the small sum that is

likely to be the object of the dispute in arbitrations of this

kind.” Id. Moreover, even an allocation of fees in accordance

with TILA at the end of arbitration does not remove the entry

barriers which ensue when a claimant must advance costs as a

condition precedent to initiating the case.

Allowing Petitioners to impose such costs on consumers

renders null the Court’s statement in Gilme:r that arbitration

must not effect a loss of the “‘substantive righits afforded by the

statute... .’” 500 U.S. at 26 (quoting Mitsubishi, 473 U.S. at

614). In Gilmer, the standard practice was for: employers to pay

all the arbitration costs and fees under the NYSE and NASD

rules’ The Court, therefore, was not comfronted with the

chilling effect upon a complainant being: forced into an

unreasonably expensive arbitration proceedimg.

Petitioners and their amici simply dodge this issue. They

fail to acknowledge the hardship — indeed tine impossibility —

for the average consumer to advance the fiees that often far

exceed the amount of the claim. Instead, the:y fast-forward the

discussion down the time line and postulate a rosy scenario for

the successful borrower in arbitration. They incorrectly argue

that the right to costs and attorneys’ fees is assured by the

language of the arbitration agreement that “ tthe arbitrator shall

have all powers provided by the law amd the Contract.”

Randolph, 178 F.3d at 1151. On the contrary, this language

suggests that a great deal of discretion is accorded the arbitrator

who need not follow the law. This slight of hand ignores the

impact of up-front costs on borrowers. Arbitration that fails to

clearly adopt the mandatory fee-shifting gwarantees of TILA

seriously undermines the statute’s primnary enforcement

mechanism.

3” See Cole, 105 F.3d at 1483.

B. Arbitration Contracts That Preclude Class Actions

Undermine TILA Enforcement. .

The Court has endorsed the important role of class actions:

The policy at the very core of the class action

mechanism is to overcome the problem that small

recoveries do not provide the incentive for any

individual to bring a solo action prosecuting his or

her rights. A class action solves this problem by

aggregating the relatively paltry potential

recoveries into something worth someone’s

(usually an attorney’s) labor.

Amchem Products, Inc. v. Windsor, 521 U.S. 591, 617 (1997)

(citation omitted) =

TILA claims often are brought for small dollar amounts, to

remedy deceptive practices aimed at the most vulnerable

members of our society. Class actions were designed for this

very Situation, cases brought by “impecunious plaintiffs who

allege similar mistreatment by a comparatively powerful

defendant, one that . . . otherwise might get away with

piecemeal highway robbery by committing small violations that

were . . . beyond [the] ability or resources {of individual

plaintiffs] to remedy.” Jackson v. Check’ N Go, Inc., No. 99-C-

7319, 2000 WL 782927, at *3 (N.D. Il. June 13, 2000).

The class action remedy is not merely a procedural device;

it is an important substantive right under TILA.

Whether or not a class action is available as a»

remedy is a substantive issue relating to

congressional intent... . It is hard to believe that

2 Accord Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 161 (1974) (“A

critical fact . . . is that petitioner’s individual stake . . . is only $70. No

competent attorney would undertake this complex antitrust action to recover

SO inconsequential an amount. Economic reality dictates that petitioner’s

suit proceed as a class action or not at all.”’.

the question of whether TIL damages should be

collected en masse is no more than a procedural

issue. ... Any uncertainty on this score should be

resolved by the specific class action recovery

provisions in section 130(a)(2) of the TIL Act.

Ralph I. Rohner and Fred H. Miller, Truth in Lending 871

(Robert A. Cook, et al. eds., 2d ed. 2000). As a substantive

right under TILA, class actions must be available to consumers

either in the judicial or arbitral forum.’

The TILA class action right is threatened by the

interpretation of federal courts that have held that class

arbitration may proceed only if specifically authorized by the

agreement or its applicable rules. Even when the agreement

is silent on the issue, like the Green Tree agreement, federal

courts have enforced the agreement but disallowed class

arbitration®’ notwithstanding that enforcement may result in

nullifying important statutory rights.“ Failing to heed the

2 Gilmer is distinguishable because, unlike TILA, the ADEA imposes

barriers to class actions. The ADEA allows only opt-in class actions

preceded by 60-day notice to the EEOC. The EEOC then “shall promptly

seek . . . informal methods of conciliation, conference, and persuasion” and

EEOC commencement of an action terminates the private class action. 29

U.S.C. §§ 626(b), (c), (d).

“ See Baesler v. Continental Grain Co., 900 F.2d 1193,1195 (8th Cir.

1990); Protective Life Ins. Corp. v. Lincoln Nat'l Life Ins. Corp., 873 F.2d

281, 282 (11th Cir. 1989) (per curiam), Del E. Webb Constr. v. Richardson

Hosp. Auth., 823 F.2d 145, 150 (Sth Cir. 1987); Weyerhaeuser Co. v.

Western Seas Shipping Co., 743 F.2d 635, 637 (9th Cir. 1984).

8 See Champ v. Siegel Trading Co., 55 F.3d 269, 275 (7th Cir. 1995);

American Centennial Ins. Co. v. National Cas. Co., 951 F.2d 107, 108 (6th

Cir. 1991).

# See, e.g., McCarthy v. Providential Corp., No. C-94-0627 FMS, 1994

WL 387852 (N.D. Cal. July 19, 1994); Gammaro v. Thorp Consumer

(continued...)

Court’s warning that parties to an arbitration agreement should

not be forced to forgo substantive Statutory rights and that “all

Statutory claims may not be appropriate for arbitration,”

Gilmer, 500 U.S. at 26, many courts have misconstrued the

liberal federal policy favoring enforcement of arbitration

agreements

Only a few federal courts, including the Eleventh Circuit in

Randolph, have taken care to balance the federal policy

favoring arbitration while upholding statutory integrity. In

Johnson v. Tele-Cash, Inc., 82 F. Supp. 2d 264 (D. Del. 1999),

a putative class action alleging the failure to disclose

excessively high interest rates, the court carefully reviewed

TILA’s legislative history and damages provisions when

considering the enforceability of an arbitration agreement that

prohibited class action relief. While mindful of the liberal

policy favoring enforcement of arbitration agreements, the

court appropriately found that the agreement “would contravene

the express congressional intent to ‘encourage the use of class

actions as an important tool for enforcing Truth in Lending.’”

Id. at 267, quoting Bantolina v. Aloha Motors, Inc., 419 F.

Supp. 1116, 1120 (D. Haw. 1976). Without class relief, TILA

would be stripped of its “sting” and reduced to nothing more

than a mere nuisance to creditors, thus diminishing the Act’s

deterrent and remedial functions. See Johnson, 82 F 2d at 270.

The reluctance of many federal courts to recognize the key

role of class actions in vindicating important statutory rights

that affect the public interest will have a devastating effect upon

consumers. If consumers are forced into the arbitral forum

# (...continued)

Discount Co., 828 F. Supp. 673, 674 (D. Minn. 1993).

2’ Unlike some federal courts, many state courts have found that class

action arbitration is allowed under the FAA. See, e.g., Keating v. Superior

Court, 645 P.2d 1192, 1209 (Cal. 1982), rev’d sub nom. on other grounds,

Southland Corp. v. Keating, 465 U.S. 1 ( 1984); Blue Cross v. Superior

Court, 78 Cal. Rptr. 2d 779, 790 (Ct. App. 1998), cert. denied, 527 U.S.

(continued...)

without the right to seek class-wide relief, creditors will be able

to avoid TILA compliance with impunity.

1. Arbitration Is Not Suitable for Class-wide

Adjudication.

Class-wide adjudication is not suitable for arbitration as

long as the due process rights of absent class members are not

protected. Unless arbitrators guarantee these rights and follow

Fed. R. Civ. P. 23, claims under TILA and other statutes

imbued with a public purpose cannot, consistent with the

Constitution and Congressional intent, be forced into

arbitration.

The representative nature of class actions creates particular

due process concerns. Special steps must be taken to protect

the interests of individuals who will be bound by the outcome

of a suit to which they were not a party. These steps include

notice, an opportunity to opt out, and assurance that the named

plaintiff(s) adequately represent the interests of absent class

members at all stages of the litigation. See, ¢.g., Ortiz v.

Fibreboard Corp., 527 U.S. 817, 846 (1999); Phillips

Petroleum v. Shutts Co., 472 U.S. 797, 811-12 (1985); Eisen,

417 US. at 173-74. Unless arbitrators can fulfill this role, class

actions cannot be forced into arbitration.

2” (...continued)

1003 (1999); Izzi v. Mesquite Country Club, 231 Cal. Rptr. 315, 320-22 (Ct.

App. 1986); Dickler v. Shearson Lehman Hutton, Inc., 596 A.2d 860, 867

(Pa. Super. Ct. 1991).

SY See In re Knepp, 229 B.R. 821, 842 ( Bankr. N.D. Ala. 1999) (“The

pervasive use of arbitration agreements in consumer contracts could have

the effect of eliminating class actions. If class actions are no longer an

option, the vast majority of consumer claims involving relatively small sums

of money on an individual basis will be left without a remedy.”).

2. The Demise of Class Actions Would Create a Void

In TILA Enforcement.

Petitioners’ amici have asserted that regulatory enforcement

of TILA eliminates the need for class actions. See, e.g., Brief

of the Chamber of Commerce of the U.S. at 18-19. These

assurances simply do not ring true. The Federal Trade

Commission (“FTC”), which has primary enforcement

authority over many thousands of consumer finance

companies, such as Green Tree, has had few resources

allocated for enforcement. As aresult, its Division of Financial

Practices was able to bring only twenty cight TILA cases

between January 1998 and December 1999.

The suggestion that the regulatory agencies are covering the

field in enforcing TILA is contradicted by industry testimony

before Congress. “First and foremost, these laws, and related

regulations, need to be enforced more vigorously. Most abuses

could be handled quite effectively by better enforcement,”&/

Indeed, the one recommendation on which all industry

representatives agreed was that greatly enhanced enforcement

is needed, not new legislation. In the face of this testimony,

2 15 U.S.C. §§ 45(a), 1607.

of the FTC to the Director of the Federal Reserve Board’s Division of

Consumer and Community Affairs (signatures on originals).

{/ Predatory Lending Practices in the Subprime Industry: Hearings

before the House Comm. on Banking and Fin. Servs. (May 24, 2000)

{hereinafter Predatory Lending Practices) (testimony of Laura Borelli,

Nat’! Home Equity Ass’n).

@ Predatory Lending Practices, supra (testimony of Ralph Rohner,

Consumer Bankers Ass’n; David Bochnowski, America’s Community

Bankers; Neill Fendly, National Ass’n of Mortgage Brokers).

the contention of amici that class actions are no longer

necessary cannot be taken seriously.

C. Unwritten Arbitration Decisions Undermine TILA

Enforcement.

TILA cases are intended to protect the public at large,

focusing primarily on interpreting the Act and regulations, and

only secondarily on the facts.“ When, however, arbitration is

conducted in private and written decisions are not required, it

is difficult, if not impossible, to determine whether an

aggrieved party's substantive rights have been upheld in the

arbitral forum.

“[PJublished [TILA] case law is necessary to provide

guidance to banks,” and __ private, unpublished decisions

“eliminate[ ] that source of guidance.” Budnitz, supra, at

326. The public resolution of cases involving laws that

uphold the public’s interest help to guide our society.

“[W]ritten opinions . . /apply necessarily vague positive law to

concrete fact situations.” Brunet, supra, at 20. The

development of law “has a significant purpose to ‘channel

&¥ State attorneys general enforcement authority under TILA is limited to

redressing violations in connection with “high cost” mortgage loans. See

15 U.S.C. § 1640(e).

& See Mark E. Budnitz, Arbitration of Disputes Between Consumers and

Financial Institutions: A Serious Threat to Consumer Protection, Ohio St.

J. on Disp. Resol. 267, 325 (1995). Cf Stewart E. Sterk, Enforceability of

Agreements to Arbitrate: An Examination of the Public Policy Defense, 2

Cardozo L. Rev. 481, 492 (1981).

$ See Budnitz, supra, at 319.

& See also Edward Brunet, Questioning the Quality of Alternative Dispute

Resolution, 62 Tul. L. Rev. 1, 17 (1987).

See Brunet, supra, at 20.

behavior in such manner as to prevent or avoid conflict.’” Jd.

(citation omitted).

In Gilmer, the Court was not confronted with an arbitral

forum that failed to provide written public decisions. 500 U.S.

at 31-32. Unlike the Green Tree arbitration agreement, the

Gilmer arbitration was to be conducted pursuant to the NYSE

rules requiring that all arbitration awards be in writing, contain

sufficient information describing the nature and resolution of

the case, and be made public. /d. Moreover, the Court found

that “judicial decisions addressing ADEA claims will continue

to be issued because it is unlikely that all or even most ADEA

claimants will be subject to arbitration agreements.” Jd. at 32.

Gilmer stands in sharp contrast to the present case where

pre-dispute arbitration clauses have become commonplace in

consumer transactions. “It is anticipated that virtually all major

banks and lending institutions will implement consumer

arbitration procedures within the next five years.” Asa result,

consumers are no longer able to avoid arbitration by taking their

business elsewhere.

The widespread use of consumer arbitration agreements

could remove the judiciary’s influence from entire industries or

economic relationships.” The courts have been instrumental

* Alan S. Kaplinsky & Mark J. Levin, Excuse me, but who's the

predator? Banks can use arbitration clauses as a defense, 7 Bus. L. Today

24, 28 (May/June 1998).

@’ Senator Feingold stated that “consumer credit lenders are increasingly

requiring their customers to use binding arbitration when a dispute arises.

. . . [T]he practice is becoming so pervasive that consumers may soon no

longer have an alternative, unless they forego use of a credit card or a

consumer loan entirely.” 146 Cong. Rec. $930, 933-34 (daily ed. Feb. 29,

2000) (statement of Sen. Feingold).

® David S. Schwartz, Enforcing Small Print to Protect Big Business:

Employee and Consumer Rights Claims in an Age of Compelled

(continued...)

in defining TILA provisions that serve to protect consumers

and guide creditors. If the development of TILA law ceases,

the purpose of TILA to provide uniform rules may also cease.

A statute is a legislative policy choice, but without

subsequent judicial development through the

public resolution of disputes, that policy will

remain stagnant, or perhaps wither entirely. . . .

Even if initial principles are established through

adjudication, permitting the arbitration of an

entire category of claims restricts further

evolution in that area of the law by reducing the

number and variety of claims presented to the

courts.

John V. O’Hara, The New Jersey Alternative Procedure For

Dispute Resolution Act: Vanguard of a ‘Better Way’?, 136 U.

Pa. L. Rev. 1723, 1746 (1988). Indeed, arbitration resolution,

without written public decisions, undermines the principle of

stare decisis, which preserves our body of law. Stare decisis

“promotes evenhanded, predictable and consistent development

of legal principles . . . and contributes to the actual and

perceived integrity of the judicial process.” Payne v.

Tennessee, 501 U.S. 808, 827 (1991); see also Planned

Parenthood v. Casey, 505 U.S. 833, 854 (1992). As Justice

Powell noted, “/SJtare decisis is necessary to have a

predictable set of rules on which citizens may rely in shaping

their behavior.” Justice Lewis F. Powell, Stare Decisis and

Judicial Restraint, 47 Wash. & Lee L. Rev. 281, 286 (1990).

In order to preserve the public policy foundation of TILA

and provide compliance guidance for creditors, arbitrators

resolving cases must apply the statutory.law and issue written

opinions that are publicly available.

2 (...continued)

Arbitration, 1997 Wis. L. Rev. 33, 59 (1997).

D. Green Tree’s Arbitration Clause is Typical of Those

Designed to Prevent Consumers From Acting as

Private Attorneys General Under TILA. |

The current trend of lenders and other businesses to impose

binding arbitration on their customers in order to prevent

litigation is indisputable.

Consumers have been ganging up on banks. But

now the institutions have found a way to defend

themselves. . . . Arbitration is a powerful

deterrent to class action lawsuits against lenders

because the great weight of authority holds that

arbitrations cannot be conducted on a class basis

unless the parties have agreed to do so... .

Lenders that have not yet implemented arbitration

programs should promptly consider doing so,

since each day that passes brings with it the risk of

additional multimillion-dollar class action

lawsuits that might have been avoided had

arbitration procedures been in place.

Kaplinsky & Levin, supra, at 24-26, 28.

Green Tree’s success in adopting this approach to avoid

legal consequences for its lending practices cannot be

overlooked. Arbitration agreements have enabled Green Tree

to avoid scrutiny of its alleged widespread deceptive practices

in the financing of home improvement contracts and mobile

home sales throughout the nation.2/ Having successfully forced

many lawsuits into the arbitral forum, Green Tree is now

actively seeking to deprive claimants of their substantive right

to pursue these claims as class actions. Green Tree has

1 See, e.g., Harris v. Green Tree Fin, Corp., 183 F.3d 173 (3d Cir. 1999)

(home improvement); Pridgen v. Green Tree Fin. Servicing Corp., 88 F.

Supp. 2d 655 (S.D. Miss. 2000) (mobile home); Green Tree Fin. Corp. v.

Holt, 171 F.R.D. 313 (N.D. Ala. 1997) (class mobile home); Lackey v.

Green Tree Fin. Corp., 498 S.E.2d 898 (S.C. Ct. App. 1998) (class mobile

home).

vigorously opposed the prosecution of these claims through

class arbitration”

Green Tree’s use of the arbitral forum to compel consumers

to “forego the substantive rights afforded by the statute” is in

direct conflict with the Court’s decisions in Mitsubsishi, 473

U.S. at 628, and Gilmer, 500 U.S. at 26. Green Tree’s

improper use of arbitration undermines the very essence of

TILA’s private attorney general scheme. Green Tree has, in

effect, bypassed the legislative and judicial processes to alter

the legal system to meet its own goals az to protect its “bottom

line” regardless of — or precisely because of — the merits of

numerous customers’ claims. This behavior must not be

countenanced by the Court.

CONCLUSION

Consumers’ statutory rights under TILA cannot be defeated

through the mechanism of the arbitral forum. Consumers who

are required to pursue their TILA claims in arbitration must be

accorded their full rights and remedies under the statute,

including fee-shifting and the pursuit of class claims, and

protection of their due process rights in class arbitrations. As

long as these rights, remedies, and protections are not afforded

2 Subsequent to the Third Circuit's decision in Harris, 183 F.3d 173 (3d

Cir. 1999), Green Tree has opposed allowing these arbitrations to proceed

on aclass-wide basis. There are no citations to these proceedings because

arbitration is not public. See also Lackey v. Green Tree Fin. Corp., 498

S.E.2d 898 (S.C. Ct. App. 1998) (a class action proceeded to class

arbitration over Green Tree’s objection). See App. 2: Green Tree’s Mem.

Opp. to Class Arbitration (signature on originals).

under arbitration agreements, consumers must be permitted

their day in court.

July 24, 2000

Elizabeth Renuart

The National Consumer

Law Center

18 Tremont Street

Boston, MA 02108

(617) 523-8010

Counsel for Amicus Curiae

The National Consumer

Law Center ,

Respectfully submitted,

Nina F. Simon*

Stacy Canan

Jean Constantine-Davis

Deborah Zuckerman __

AARP Foundation 3

Litigation

Michael R. Schuster

AARP

601 E Street, N.W.

Washington, DC 20049

(202) 434-2060 .

Counsel for Amicus

Curiae AARP

*Counsel of Record

APPENDIX 1

UNITED STATES OF AMERICA

FEDERAL TRADE COMMISSION

WASHINGTON, D.C. 20580

Office of the Chairman

January 15, 1999

Dolores S. Smith, Director

Division of Consumer and Community Affairs

Board of Governors of the Federal Reserve System

Washington, D.C. 20551 7

Dear Ms. Smith:

This letter responds to your request for information

regarding the enforcement activities of the Federal Trade

Commission under the Truth in Lending, Consumer Leasing,

Equal Credit Opportunity, and Electronic Fund Transfer Acts

(“Acts”) during the past year for use in preparing the Federal

Reserve Board’s (“Board”) Annual Report to Congress. You

have asked for information regarding the Commission’s

enforcement activities pursuant to those Acts, including

methods of enforcement and significant enforcement actions

and the extent to which compliance is achieved by entities

subject to the Commission’s enforcement authority. Also, you

have asked whether the Commission recommends any changes

to these laws or their implementing regulations or wishes to

provide any other comments or observations.

I. A DESCRIPTION OF THE COMMISSION’S

ENFORCEMENT ACTIVITIES UNDER THE ACTS

DURING THE PAST YEAR

Since January 1998 up to the present, the Commission

filed a complaint in federal district court charging a

Washington, D.C. mortgage lender and its owner, inter alia,

with violating the Truth In Lending Act (“TILA”) and

Regulation Z and the Federal Trade Commission Act ( “FTC

Act”), in connection with alleged deceptive and unfair

practices in home mortgage lending. The Commission also

issued final decisions and orders in thirteen administrative

cases concerning alleged deceptive lease and/or credit

advertising in violation of the FTC Act, and failure to clearly

and conspicuously disclose and/or failure to make available

advertised lease and/or credit terms, in violation of the

Consumer Leasing Act (“CLA”) and Regulation M and/or the

TILA and Regulation Z. The above cases are discussed

below. Other investigations of possible TILA and/or CLA

violations are ongoing.

In Federal Trade Commission _v. Capital City

Mortgage Corp. (“Capital City Mortgage”),”’ the Commission

filed a complaint in United States District Court for the

District of Columbia against a Washington, D.C. area

mortgage company and its owner, Thomas K. Nash, alleging

numerous violations of federal laws, inter alia, the TILA and

Y No. 98CV00237 (D.D.C. filed Jan. 29, 1998).

Al-2

Regulation Z and the FTC Act.” The complaint alleges that

defendants’ borrowers, in many instances, are minority and/or

elderly persons living on fixed or low incomes and that

defendants’ loans include interest rates that generally ranged

between 20-24 percent, for loans secured by home equity, and

9-12 percent, for purchase money loans. According to the

complaint, in many instances, defendants’ transactions involve

interest-only balloon, rather than amortizing, loans. The

complaint alleges, inter alia, that defendants, in many

instances, violated the TILA and Regulation Z, and engaged

in unfair or deceptive acts or practices in violation of the FTC

Act, by: 1) understating the annual percentage rate and

finance charge; 2) overstating the amount financed: 3) failing

to disclose or accurately disclose the payment schedule or the

total of payments (including but not limited to failing to

disclose a balloon payment); 4) failing to provide disclosures

before consummating the transaction and in the required

format; 5) failing to provide disclosures that accurately reflect

the legal obligation; and 6) failing to provide or correct

certain “good faith” disclosures.

The complaint also alleges that defendants engaged in

other deceptive or unfair practices in offering and extending

credit and throughout the duration of the loans, in violation of

the FTC Act, with the result that a number of borrowers were

overcharged on their loans, were defaulted, and had title to

their homes or other property impaired or completely lost

(along with the equity). These alleged deceptive or unfair

practices include: 1) representing a loan as an amortizing

~ The complaint in this matter also alleges, inter

alia, violations of the Equal Credit Opportunity Act. See

infra p. 7.

Al-3

loan when, in fact, it was an interest-only balloon loan; 2)

representing that loan payments were higher than they should

have been under the loan instruments by demanding that

borrowers pay for services not provided, for charges imposed

by the government or related entities on defendants prior to

the borrowers’ purchase of the property, and for no-insurance

penalties when defendants were to provide the insurance or

the borrower had timely purchased insurance; 3) collecting

real estate tax escrow payments, failing to pay the taxes and

representing that the taxes had been paid; 4) refusing to

explain overcharges; 5) initiating foreclosure proceedings

after nonpayment of overcharges and obtaining title by

foreclosure or taking a deed in lieu thereof; 6) adding charges

to arrears or loan principal and accruing compound interest

and increasing the pay-off amount; 7) receiving sufficient

pay-off amounts but refusing to release the lien without

further payment; and 8) refusing to reinstate a borrower after

the borrower paid the reinstatement fee.

The complaint asks the court to award, inter alia, the

amount necessary to prevent unjust enrichment and consumer

redress (including refunds of monies paid, disgorgement of

ill-gotten gains, and rescission of contracts) and to

permanently restrain defendants from future law violations.

The case is now in the discovery phase; a trial date has not yet

been set.”

¥ The case has been joined, for purposes of

discovery, with a private lawsuit, Hargraves v. Capital City

Mortgage Corp., No. 98CV1021 (D.D.C. filed Apr. 24,

1998).

Al-4

In Chrysler Corporation, Inc. (“Chrysler”),4 Bozell

Worldwide, Inc. (“Bozell”),?’ and Martin Advertising, Inc.

(“Martin”),° the Commission issued final decisions and

orders in three cases involving alleged deceptive lease and/or

credit advertising in the automobile industry, in violation of

the CLA and Regulation M and/or the TILA and Regulation

M and the FTC Act. The complaints charged that Chrysler

and Bozell, its national advertising agency, and Martin, a

regional advertising agency for General Motors’s dealerships

and dealer associations, created and disseminated deceptive

lease and/or credit advertisements that promoted various

terms (including monthly payment amounts) and omitted key

cost terms or buried this information in fine, and at times

unreadable, print, in violation of the CLA and Regulation M

and the FTC Act. Chrysler and Bozell also were charged

with misrepresenting that the luxury vehicle model displayed

in ads was available at the prominent, low lease terms, in

violation of the FTC Act. In fact, according to the complaint,

the low monthly payments applied to Chrysler models of

lesser value than those featured in the ads, and information

about lease inception fees and other terms appeared only in

unreadable fine print and was not clear and conspicuous, in

violation of the CLA and Regulation M and the FTC Act.

The complaint against Martin also alleges that the

company violated the FTC Act, the CLA and Regulation M,

and the TILA and Regulation Z regarding its automobile lease

and credit advertising. The complaint charges that Martin’s

“ FTC Docket No. C-3847 (Jan. 13, 1999).

*” FTC Docket No. C-3845 (Jan. 13, 1999).

* FTC Docket No. C-3846 (Jan. 13, 1999).

Al-5

television and radio lease ads were deceptive by: 1)

misrepresenting that consumers could purchase a vehicle by

paying low monthly payments, when, in fact, the offers

involved leases and the ads omitted this fact or hid the

information in fine print or rapidly-stated audio disclosures;

2) misrepresenting the amount consumers were required to

pay at lease inception; and 3) omitting or hiding important

information about lease inception fees in unreadable fine print

or incomprehensible audio disclosures. The complaint also

alleges that Martin’s balloon payment credit ads were

deceptive and falsely represented that consumers could buy a

car by making only low monthly payments, inadequately

disclosing the existence and amount of a final balloon

payment, a substantial down payment, the annual percentage

rate, or other terms of repayment. The complaint further

alleges that Martin’s lease and credit ads violated the CLA

and Regulation M and TILA and Regulation Z by omitting

required disclosures or making disclosures that were not clear

and conspicuous and by failing to state a rate of finance

charge as an annual percentage rate or “APR.”

The orders with Chrysler, Bozell, and Martin prohibit

misrepresentations of the total amount due at lease signing or

delivery, the amount down and/or down payment, and the

capitalized cost reduction or other amount that reduces the

capitalized cost of the vehicle (or that no such amount is

required). The orders also prohibit the companies from

stating any charge that is part of the total due at lease signing

or delivery, or that no such charge is required (other than a

statement of the periodic payment) more prominently than a

statement of the total amount due at lease signing or delivery.

The orders also prohibit the companies from stating the

amount of any payment unless the ad also states, clearly and

conspicuously, all of the terms required by the CLA and

Al-6

Regulation M. In addition, the orders in Chrysler and Bozell

prohibit these companies from misrepresenting the vehicle

model available to consumers in connection with any

advertised lease offer. In Martin, the order also prohibits the

company from misrepresenting that any motor vehicle lease

advertisement pertains to a cash or credit offer. This order

also prohibits the company from misrepresenting the existence

and amount of any balloon payment or the annual percentage

rate. In addition, the order prohibits Martin from stating the

monthly payment or other credit terms without, clearly and

conspicuously, stating all of the terms required by the TILA

and Regulation Z. Under all three orders, the disclosures

required by the CLA or TILA for lease and/or credit

advertising must be made “clearly and conspicuously”-- that

is, in a manner that is readable (or audible) and

understandable to a reasonable consumer.

In Grey Advertising, Inc. (“Grey”),”’ Rubin Postaer

and Associates, Inc. (“Rubin Postaer”),” and Foote, Cone

and Belding, Inc. (“FCB”),” the Commission issued final

decisions and orders with three national advertising agencies

resolving charges that they violated the CLA and Regulation

M and/or the TILA and Regulation Z and the FTC Act by

misrepresenting, hiding, and failing to disclose adequately

the true terms of their advertised automobile lease and credit

deals. The orders settled charges that these companies

developed and disseminated deceptive advertisements for

“zero down,” “penny down,” or other low amounts due at

' FTC Docket No. 3793 (Apr. 6, 1998).

FTC Docket No. 3794 (Apr. 6, 1998).

’ FTC Docket No. 3792 (Apr. 6, 1998).

Al-7

inception in lease advertisements for Mitsubishi Motor Sales

of America, Inc., American Honda Motor Corporation, and

Mazda Motor of America, Inc., respectively. In Grey, Rubin

Postaer, and FCB, the Commission alleged that the lease ads

misrepresented the true amounts that consumers were required

to pay at inception and did not adequately provide material

cost information necessary to prevent misleading consumers

who had to pay significant fees. According to the allegations,

the ads presented information about these additional fees only

in unreadable print that appeared: 1) in type too small; 2) for

too short a duration; 3) in quick “scrolling”text; 4) against

moving or distracting backgrounds; and/or 5) in a location far

removed from the more prominent representations. The

complaint against Grey also alleged that this company created

and disseminated deceptive automobile balloon payment credit

advertisements. The Commission alleged that these credit ads

misrepresented that consumers could buy a car by making low

monthly payments and paying low amounts “down” and did

not adequately disclose the existence and amount of a several

thousand dollar final balloon payment, the APR, and other

terms of repayment. Instead, as alleged, the credit ads placed

this critical cost information in unreadable fine print

disclosures.

Under all three final orders, the companies may not,

inter alia, misrepresent in any motor vehicle lease

advertisement the total amount due at lease signing or

delivery, the amount down, and/or the down payment, the

capitalized cost reduction, or any other amount that reduces

the capitalized cost of the vehicle (or that no such amount is

required). Also, any ad that highlights an amount “down” or

mentions certain other amounts due at lease inception (or

states that there is no such charge) would have to provide an

equally prominent statement of the total amount due at lease

Al-8

—————EEeEeEeEeEeEeEeEeEeEeEeEeEeEeEeEyEyyEEEEeeEeEeEeEeEeEOEeeeeeeeeeeeEeEeEeeEeee eee

inception. The final order with Grey also, among other

things, prohibits the company in any closed-end credit

advertisement involving motor vehicles from misrepresenting

the existence and amount of any balloon payment or the

annual percentage rate.

In Toyota Motor Sales, U.S.A.. Inc. (“Toyota”),1%

Volkswagen of America, Inc. (“Volkswagen) 12’ Suntrup

Ford., Inc. and Suntrup Buick-Pontiac-GMC_ Truck, Inc.

(“Suntrup”),’ Lou Fusz Automotive Network, Inc. (“Lou

Fusz”), Beuckman Ford, Inc. (“Beuckman”), and Frank

Bommarito __Oldsmobile, Inc. (“Bommarito”), the

1’ FTC Docket No. C-3776 (Jan. 5, 1998).

4 FTC Docket No. C-3778 (Jan. 5, 1998).

FTC Docket No. C-3779 (Jan. 5, 1998). As

indicated above, the final decision and order covered two

related companies: Suntrup Ford, Inc. and Suntrup

Buick-Pontiac-GMC- Truck, Inc. A separate consent

agreement was signed by each company, however. See

Suntrup Ford, Inc., FTC File No. 952 3200 (Oct. 7, 1997),

and Suntrup Buick-Pontiac-GMC Truck, Inc., FTC File

No. 952 3201 (Oct. 7, 1997).

FTC Docket No. C-3780 (Jan. 5, 1998).

’ FTC Docket No. C-3777 (Jan. 5, 1998).

©’ FTC Docket No. C-3774 (Jan. 5, 1998).

Al1-9

Commission issued final decisions and orders with two major

automobile manufacturers and five St. Louis, Missouri-area

dealerships and their Chief Executive Officers (“CEOs”)

pertaining to deceptive lease and/or credit advertisements.

As reported on last year when the orders were accepted for

public comment, these orders settled charges that the seven

companies violated the CLA and Regulation M and/or the

TILA and Regulation Z and the FTC Act by misrepresenting,

hiding, or failing to adequately disclose the cost and terms of

automobile lease and/or credit transactions. The orders in

Toyota and Volkswagen prohibit misrepresentations of the

total amount due at lease signing and require lease ads that

state any charge that is part of the amount due at lease signing

or that no such charge is required (excluding a statement of

the periodic payment) to state with equal prominence the total

amount due at lease signing. These manufacturers are also

required to comply with all requirements of the CLA and

Regulation M in lease ads. The orders in the St. Louis cases

prohibit the dealerships and their CEOs from misrepresenting

the costs of leasing, including the total amount due at lease

signing. The orders also require compliance with all aspects

of the CLA and Regulation M, including that mandatory

triggered terms in advertisements be stated clearly and

conspicuously. Also, the Lou Fusz order prohibits

misrepresentations of the type of transaction advertised,

including that the offer is for a one- payment lease. It enjoins

Lou Fusz from advertising that a specific offer is available,

unless the company usually and customarily offers to lease

vehicles at the advertised terms. The Beuckman order would

also prevent the company from stating the term “RCL”

without stating clearly and conspicuously that this term refers

to a lease. The Bommarito order also prohibits

misrepresentations of the terms of financing a vehicle,

including the amount of any balloon payment. In addition,

A1-10

Bommarito is required to include the amount of any final

balloon payment prominently, and in close proximity, to

certain advertised credit terms. The orders with the St. Louis

dealerships also prohibit violations of the TILA and

Regulation Z.

The Commission continues to view consumer and

business education efforts as important to its enforcement

activities. In 1998, in view of increasing issues concerning

possible home equity fraud, the Commission issued three

consumer publications to provide additional information to

consumers considering home equity loans and reverse

mortgages: “Home Equity Loans: The Three-Day

Cancellation Rule;” “Reverse Mortgages -- Cashing in on

Home Ownership;” and “Home Equity Scams: Borrowers

Beware.*” The Commission also issued a news release,

“Northwest, Air Canada Airlines Customers with Canceled

Tickets May Have Rights under Federal Credit Law,” to

assist consumers in using their rights under the Fair Credit

Billing Act, an amendment to the TILA. The Commission

staff also continued to participate in the Board-sponsored

“Leasing Education Program Team,” involving the Board,

Commission staff, and a coalition of entities (including

consumer groups, state attorneys general and industry

representatives) now developing online and other forms of

lease materials to enhance awareness and understanding of

i’ ” These publications were also designed to assist

consumers in Texas, where the state constitution was

amended to allow companies to offer general home equity

loans, starting in 1998, for the first time in that state’s

history. See, e.g., “FTC Release: FTC Education Effort

Focuses on Home Equity Loan Fraud” (May 20, 1998).

Al-11

leasing. All of the above consumer protection and business

education materials were also made available to the public

through the Commission’s Website at "www. ftc.gov. ny!

Equal Credit Opportunity Act

In 1998, the Commission filed a complaint in federal

district court charging a Washington, D.C. area mortgage

lender with, inter alia, violations of the Equal Credit

Opportunity Act (“ECOA”) and Regulation B and the FTC

Act. This case is discussed below. Other enforcement efforts

continue.

In January 1998, the Commission filed a complaint in

United States District Court for the District of Columbia in

Capital City Mortgage, alleging that this company and its

owner, Thomas K. Nash, violated the ECOA and Regulation

B and engaged in unfair or deceptive acts or practices in

violation of the FTC Act, in numerous manners. These

alleged ECOA violations included: 1) failing to take written

applications for mortgage loans; 2) failing to collect required

information about the race or national origin, sex, marital

status, and age of applicants; 3) failing to provide applicants

with written notice of adverse action; and 4) providing notice

of adverse action, but failing to provide applicants with: a) the

correct principal reason for the action taken or b) the correct

name and address of the Federal Trade Commission, the

17 ” Information regarding the Commission’s

enforcement actions and other activities discussed in this

report are also available at this Website.

18’ See supra note 1.

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federal agency that administers compliance with the ECOA

with respect to Capital City and Nash. As indicated above,

this case is now in the discovery phase, and it has been joined

for discovery purposes with a private lawsuit” The

Commission is seeking civil penalties and injunctive relief for

the alleged violations of the ECOA and Regulation B and the

FTC Act.

In May 1998, the Commission and other federal

agencies submitted a joint comment to the Board about

Regulation B.™ The comment was submitted in response to

the Board’s request for comment and advance notice of

proposed rulemaking. In their comment, the agencies urged

the Board to amend Regulation B to permit lenders voluntarily

to collect information about the race and gender of applicants

for non-mortgage credit. According to the comments, the

current prohibition of collecting such information “needlessly

inhibits the ability of financial service providers to learn about

and respond to market opportunities to better serve

underserved communities. The prohibition makes it difficult

for institutions to know whether products intended to expand

access to credit, including to minorities, reach their intended

customer base.”

1’ See supra note 3.

20’ Letter from Commission, Department of

Treasury, Department of Justice, Department of Housing

and Urban Development, Office of the Comptroller of the

Currency, Office of Thrift Supervision, and Small Business

Administration to William W. Wiles, Secretary, Board of

Governors of the Federal Reserve System dated May 28,

1998.

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The comments also urged the Board to clarify that

creditors may not discriminate on a prohibited basis in their

preapplication marketing practices 2”

The Commission continued its consumer and business

education efforts in this area. In September 1998,

Commissioner Thompson and Consumer Protection Bureau

Director Bernstein participated in credit-related seminars as

part of the Congressional Black Caucus Foundation’s

Legislative Weekend. Among other things, at this

conference, a new FTC credit publication was released. The

publication, “Bound for Good Credit,” combines in one

source for consumers many of the agency’s most popular

credit brochures (including information about the ECOA).

The Commission staff also worked with other

governmental agencies and with creditor and consumer

organizations to increase awareness of and compliance with

the ECOA. The Commission staff also continued to

participate actively in the Interagency Task Force on Fair

Lending.

2 The Commission voted 3-1 to file this comment

with the Board, with Commissioner Azcuenaga not

participating and Commissioner Swindle dissenting and \

issuing a statement concurring in part and dissenting in

part.

2” See “FTC Release: FTC Officials Discuss

Consumer Credit Issues and Highlight Consumer Education

Efforts” (Sept. 18, 1998).

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Electronic Fund Transfer Act

In March 1998, in the America Online, Inc.

(“AOL”), CompuServe, Inc. (“CompuServe”),2’ and

Prodigy Services Corporation (“Prodigy”),2°’ the Commission

issued final decisions and orders in three cases alleging

violations of the FTC Act and the Electronic Fund Transfer

Act (“EFTA”) and Regulation E. These cases resolved

Commission charges that the companies’ “free trial” offers

resulted in unexpected charges for many consumers. As

reported on last year when the orders were accepted for public

comment, the complaints alleged that these Internet service

providers failed to make clear that consumers had an

affirmative obligation to cancel before the trial period ended.

As a result, consumers who failed to cancel were

automatically enrolled as members and began incurring

monthly charges. The settlements, inter alia, prohibit AOL,

CompuServe and Prodigy from: misrepresenting the terms or

conditions of any online service trial offer; and representing

that an online service is free or otherwise representing that

consumers need not pay for the online service, unless they

disclose clearly and prominently in their instructional

materials any obligation to cancel or take other action to avoid

charges, and in all other advertisements include a statement

directing consumers to where this disclosure is available. The

=’ FTC Docket No. C-3787 (Mar. 24, 1998).

2 FTC Docket No. C-3789 (Mar. 24, 1998).

28’ FTC Docket No. C-3788 (Mar. 24, 1998).

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AOL settlement also requires the company to disclose the

manner in which fees or charges are assessed or calculated

and bars misrepresentations about the terms or conditions of

any electronic fund transfer from a consumer account.

Il. AN ASSESSMENT OF THE EXTENT TO WHICH

COMPLIANCE IS BEING ACHIEVED BY

CREDITORS SUBJECT TO THE COMMISSION’S

ENFORCEMENT AUTHORITY”

Truth in Lending Act and Consumer Leasing Act

This year, the Commission received various inquiries

regarding home equity lending, including, for example, those

concerning credit insurance and loan “flipping.” Many

mortgage brokers requested information about the disclosure

requirements of Regulation Z, including copies of the

regulation and the Board’s Official Staff Commentary. Many

businesses continued to request information about the lease

advertising requirements of Regulation M, including copies of

the Commission’s brochure, “Advertising Consumer Leases.”

Some consumers requested information about lease

transactions, including copies of the FRB-FTC Lease

26’ Among other things, the Commission is charged

with enforcement of the FTC Act and various federal

consumer credit laws and regulations, including the TILA,

ECOA and EFTA, with respect to most nonbank entities in

the nation. It does not have data regarding the extent of

compliance by these numerous entities with these

requirements. In lieu thereof, the Commission is providing

information regarding certain issues raised by consumers

and/or business entities pertaining to these mandates.

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Education Program Team’s “Keys to Vehicle Leasing.”

Equal Credit Opportunity Act

The Commission received some inquiries about fair

lending matters. The Commission continued to receive

requests for information about ECOA requirements from

mortgage lenders and mortgage brokers.

Electronic Fund Transfer Act

The Commission received some inquiries from

consumers regarding EFTA protections for point-of-sale

debit transactions, including those regarding unauthorized

transactions and error resolution procedures. The

Commission receives 2 smal! number of inquiries about

these rules in comparison to those under the credit and lease

requirements.

Il. |. ANY SUGGESTIONS FOR CHANGES IN THE

ACTS OR THEIR IMPLEMENTING

REGULATIONS

The Commission supports the Board’s regulatory

review, now under way, of Regulation B. The Commission

also understands that the Board expects to undertake a

review of Regulation Z, after conclusion of its Regulation B

review. Because Regulation Z affects many diverse types of

transactions and issues, the Commission would support any.

such effort to update and clarify these requirements as well.

The Commission hopes that the information

contained in this letter responds to your inquiry and will

assist in preparation of the Board’s Annual Report to

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Congress. If any other information would be useful or if

you request additional assistance, please contact David

Medine, Associate Director, Division of Financial

Practices, at (202) 326-3025.

By direction of the Commission.

Robert Pitofsky

Chairman

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UNITED STATES OF AMERICA

FEDERAL TRADE COMMISSION

WASHINGTON, D.C. 20580

January 6, 2000

Dolores S. Smith, Director

Division of Consumer and Community Affairs

Board of Governors of the Federal Reserve System

Washington, D.C. 20551

Dear Ms. Smith:

This letter responds to your request for information regarding

the enforcement activities of the Federal Trade Commission

("Commission" or "FTC") under the Truth in Lending,

Consumer Leasing, Equal Credit Opportunity, and Electronic

Fund Transfer Acts ("Acts") during the past year for use in

preparing the Federal Reserve Board's ("Board") Annual

Report to Congress. You have asked for information

regarding the Commission's enforcement activities pursuant

to those Acts, including methods of enforcement and

significant enforcement actions and the extent to which

compliance is achieved by entities subject to the

Commission's enforcement authority. Also, you have asked

whether the Commission recommends any changes to these

laws or their implementing regulations or wishes to provide

any other comments or observations.

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I. A DESCRIPTION OF THE COMMISSION'S

ENFORCEMENT ACTIVITIES UNDER THE ACTS

DURING THE PAST YEAR

Truth in Lending Act and Consumer Leasing Act

Since January 1999 up to the present, the Commission

obtained consent judgments against seven subprime mortgage

lenders and their owners for alleged violations of the Home

Ownership and Equity Protection Act ("HOEPA"),(1) the

Truth in Lending Act ("TILA"), Regulation Z, and/or the

Federal Trade Commission Act ("FTC Act"). The

Commission also issued a final decision and order against a

nationwide mortgage company (and its successor entities) in

connection with the company's alleged deceptive cost

information and deceptive practices, in violation of the TILA

and Regulation Z and the FTC Act. Litigation is also

continuing in federal district court regarding a complaint

charging a Washington, D.C. mortgage lender and its owner,

inter alia, with violating the Truth in Lending Act ("TILA")

and Regulation Z and the FTC Act, in connection with alleged

deceptive and unfair practices in home mortgage lending. The

Commission also issued one consent decree against a vehicle

manufacturer, and one consent decree against two related

vehicle dealerships and their owner, providing for civil

penalties and other relief for alleged lease and/or credit

advertising violations of defendants’ prior FTC orders settling

charges that the entities failed to disclose and/or failed to

disclose clearly and conspicuously required lease and/or credit

advertising cost information, in violation of the Consumer

Leasing Act ("CLA") and Regulation M and/or the TILA and

Regulation Z and the FTC Act. The Commission also issued

two final decisions and orders, and accepted for public

comment consent agreements in five other cases, involving

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lease and/or credit advertising. These cases alleged deceptive

lease and/or credit advertising claims in violation of the FTC

Act and failure to disclose and/or failure to disclose clearly

and conspicuously important lease and/or credit cost terms, in

violation of the CLA and Regulation M and/or the TILA and

Regulation Z, in computer leases or vehicle leases. These

cases are discussed below. Other investigations of potential

TILA and/or CLA violations are ongoing.

A. Mortgage Cases Alleging HOEPA Violations

In 1999, consent judgments were entered in seven cases

against subprime mortgage lenders around the country for

alleged violations of the HOEPA, TILA and Regulation Z,

and the FTC Act:(2) Federal Trade Commission v. Cooper

("Cooper"),(3) Federal Trade Commission v. Capitol

Mortgage Corp. ("Capitol Mortgage"),(4) Federal Trade

Commission v. CLS Financial Services, Inc. ("CLS

Financial"),(5) Federal Trade Commission v. Granite

Mortgage, LLC ("Granite Mortgage"),(6) Federal Trade

Commission v. Interstate Resource Corp. ("Interstate"),(7)

Federal Trade Commission v. LAP Financial Servs., Inc.

("LAP Financial"),(8) and Federal Trade Commission v.

Wasatch Credit Corp. ("Wasatch Credit").(9) These cases

were part of the Commission's "Operation Home Inequity ,"

a law enforcement and consumer education campaign seeking

to enforce HOEPA and curb abusive practices in subprime

mortgage lending. All seven cases involve injunctive relief

under HOEPA, the TILA, Regulation Z, and the FTC Act. In

six cases, the defendants agreed to pay consumer

redress totaling $572,500; in two cases, the companies must

obtain performance bonds before they offer or extend

specified credit in the future; and, in one case, defendants are

banned from any future involvement with high-cost loans

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secured by consumers’ homes.

In Cooper, the complaint alleged that Barry Cooper dba Barry

Cooper Properties violated HOEPA, Regulation Z, and the

FTC Act by including a prohibited prepayment penalty in its

mortgage loans and by engaging in asset-based lending

practices. As part of the settlement, Cooper agreed to pay

$25,000 in consumer redress. The consent judgment, inter

alia, also prohibits Cooper from offering or making any

HOEPA loan for five years, unless he first obtains a

$150,000 performance bond, and requires Cooper to reform

consumers’ contracts by nullifying the prohibited provisions.

In Capitol Mortgage, the complaint alleged that the company

and its principal violated HOEPA Regulation Z, and/or the

FTC Act by failing to give consumers the required HOEPA

notice and disclosure of terms and by improperly depriving

consumers of the three-day waiting period created by

HOEPA. The complaint also alleged that defendants included

prohibited balloon payments, increased interest rate

provisions, and prepayment penalties in loan documents. The

complaint further alleged that the company violated TILA and

Regulation Z, inter alia, by failing to make required

disclosures and by engaging in practices that deprived

consumers of the three-day right to rescind the loan. The

consent judgment, inter alia, bars defendants from

participating in any activity related to certain high-cost loans

secured by consumers' principal dwellings and requires

defendants to reform existing contracts to nullify prohibited

provisions.

In CLS Financial, the complaint charged the company and its

main principal with violating HOEPA, Regulation Z, and/or

the FTC Act by failing to provide required HOEPA notices

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and disclosures and by using prohibited balloon payment and

interest rate increase provisions. The complaint also charged

that the company made loans involving asset-based lending in

violation of HOEPA and that defendants allegedly falsely

labeled loans as "open-end" credit in an attempt to evade

HOEPA, in violation of the FTC Act. The consent judgment,

inter alia, requires defendants to pay $60,000 in consumer

redress and to reform open loans to nullify prohibited

provisions.

In Granite Mortgage, the complaint alleged that the company,

two other entities, and two principals violated HOEPA,

Regulation Z, and/or the FTC Act by failing to provide

required HOEPA notices and disclosures. The complaint also

alleged that defendants violated HOEPA,

Regulation Z, and/or the FTC Act by using prohibited

prepayment penalty provisions and engaging in asset-based

lending. The complaint also charged the company and other

entities with failing to provide required TILA disclosures.

The consent judgment, inter alia, requires defendants to pay

$132,500 in consumer redress and to reform open loans to

nullify prohibited provisions.

In Interstate, the complaint alleged that the company and two

principals violated HOEPA, Regulation Z, and/or the FTC

Act by failing to provide material credit information as

required by HOEPA. Under the consent judgment,

defendants are required, inter alia, to pay $50,000 in

consumer redress.

In LAP Financial, the complaint charged the company and its

principal with numerous violations of HOEPA, Regulation Z,

and/or the FTC Act, including failure to provide required

HOEPA notices and disclosures; asset-based lending; using

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prohibited prepayment penalties; and making direct payments

to home improvement contractors. The complaint also alleged

that the company violated TILA and Regulation Z by failing

to provide required disclosures and engaging in

rescission-related violations. The consent judgment, inter alia,

requires defendants to pay $250,000 in consumer redress and

to reform loans by nullifying prohibited provisions.

In Wasatch Credit, the complaint charged Wasatch Credit,

related entities, and two principals with violating HOEPA,

Regulation Z, and/or the FTC Act by failing to provide

HOEPA notices and disclosures and/or by improperly

depriving consumers of the three-day HOEPA waiting period.

The complaint also alleged that defendants used prohibited

balloon payment and increased interest rate provisions and

engaged in asset-based lending, in violation of HOEPA,

Regulation Z, and/or the FTC Act. It further alleged that

defendants violated TILA, Regulation Z, and/or the FTC Act

by failing to provide required disclosures and engaging in

practices that deprived consumers of their right to rescind the

loan. It also alleged that, in violation of the FTC Act,

defendants directed borrowers to falsely characterize

consumer loans as business loans (in an apparent attempt to

evade HOEPA and the TILA) and that one entity falsely

represented to consumers that the credit offered and extended

was open-end when, in fact, it was closed-end. Under the

consent judgment, defendants are required, inter alia, to pay

$55,000 in consumer redress and to reform existing contracts

to nullify prohibited provisions. Defendants are also

prohibited from offering or extending consumer credit, unless

they first obtain a $250,000 performance bond that would

remain in effect for five years.

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B. Other Mortgage Cases

In Fleet Finance, Inc. and Home Equity U.S.A., Inc. ("Fleet

Finance"),(10) the Commission issued a final decision and

order settling charges that Fleet Finance violated the TILA

and Regulation Z, and engaged in deceptive practices in

violation of the FTC Act, by failing to provide accurate,

timely disclosures of the costs and terms of home equity loans

(and other consumer credit transactions) to consumers and by

failing to provide or accurately provide consumers with

information about their home equity rescission rights. More

specifically, the complaint charged that Fleet Finance

extended consumer credit transactions or purchased consumer

credit transactions, in which Fleet Finance acquired or

retained a security interest in the consumers’ principal

dwellings, and failed to provide the consumers with the right

to rescind the credit transactions by, inter alia: 1) failing to

provide consumers with notices of the right to rescind; and 2)

waiving consumers' right to rescind, and disbursing funds,

pursuant to oral and other insufficient waivers. The complaint

also alleged that Fleet Finance in extending consumer credit

transactions: 1) failed to provide consumers with all

TILA-required disclosures of the costs and terms of credit

and/or provide these disclosures prior to consummation of

credit transactions; 2) failed to provide or accurately provide

certain TILA disclosures, including the annual percentage

rate. The complaint also alleged that Fleet Finance purchased

consumer credit transactions that failed to provide or

accurately provide required TILA disclosures. The complaint

also alleged that Fleet Finance failed to retain, inter alia,

TILA disclosures and rescission notices for two years, in

violation of Regulation Z. .

The order requires Fleet Finance and its successor companies,

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Home Equity U.S.A. (incorporated in Rhode Island and

Delaware), to pay $1.3 million for consumer redress and

administrative costs. The redress program applies to certain

consumers whose mortgage loans were originated or

purchased by Fleet Finance or a predecessor company (also

named "Fleet Finance") between January 1, 1990 and

December 31, 1993. The program covers certain consumers

whose mortgage loans, inter alia, were paid off to or written

off by Fleet Finance, the predecessor, or Fleet Financial

Group, Inc., a parent corporation. The program also covers

certain consumers who contact an 800-number set up under

the proposed order and provide information showing they are

eligible for consumer redress under the terms of the order.

The order also prohibits Fleet Finance and its successor

companies, inter alia, from future violations of the TILA and

Regulation Z and from various misrepresentations of credit

costs and terms.

In Federal Trade Commission v. Capital City Mortgage Corp.

("Capital City Mortgage"),(11) litigation continued against a

Washington, D.C. area mortgage company and its owner in

this case alleging numerous violations of federal laws, inter

alia, the TILA and Regulation Z and the FTC Act.(12) The

complaint alleges, inter alia, that defendants violated the

TILA and Regulation, and engaged in unfair or deceptive

acts or practices in violation of the FTC Act, by, inter alia: 1)

understating the annual percentage rate and finance charge; 2)

failing to disclose or accurately disclose the payment

schedule (including failing to disclose a balloon payment); and

3) failing to provide disclosures that accurately reflect the

legal obligation. The complaint also alleges that defendants

engaged in other deceptive or unfair practices in offering and

extending credit and throughout the loans, in violation of the

FTC Act, with the result that a number of borrowers were

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overcharged on their loans, were defaulted, and had title to

their homes or other property impaired or completely lost

(along with the equity). The complaint asks the court to

award, inter alia, the amount necessary to prevent unjust

enrichment and consumer redress (including refunds of

monies paid, disgorgement of ill-gotten gains, and rescission

of contracts) and to permanently restrain defendants from

future law violations. The discovery phase in the case ended

on December 20, 1999; a trial date has not yet been set.(13)

C. Lease and Credit Advertising Cases

In United States v. Mazda Motor of America, Inc.

("Mazda"),(14) a consent decree was entered against a

vehicle manufacturer settling charges that it violated a 1997

FTC order ("FTC order")(15) and various state orders in

connection with its televised lease advertisements. Under the

FTC order, Mazda was required, inter alia, to disclose

important lease terms in advertisements Clearly and

conspicuously and as required by the CLA and Regulation M.

According to the complaint, following issuance of the FTC

order, Mazda ran important lease terms in televised

advertisements in small and unreadable print, offset by

distracting images or sounds, or that appeared on the screen

for too short a time. Under the consent decree, Mazda is

required to pay $5.25 million -- the largest civil penalty ever

in a FTC consumer protection matter: $4.05 million in civil

penalties for alleged violations of the FTC order and $1.2

million in fines and costs to 24 states as part of the

settlement. Mazda is also required to provide its dealers with

consumer education brochures on vehicle leasing for

distribution to consumers for one year and to distribute, inter

alia, copies of lease and credit regulations to its dealers.

Under the consent decree, Mazda is also prohibited from

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violating the CLA and Regulation M.

In United States v. Suntrup Buick-Pontiac-GMC Truck, Inc.,

Suntrup Ford, and Thomas Suntrup ("Suntrup"), (16) a

consent decree was entered against two St. Louis vehicle

dealerships and their chief executive officer ("CEO") settling

charges that defendants violated a 1998 FTC order ("FTC

order")(17) in connection with their lease and credit

advertisements. Under the FTC order, Suntrup was required

to disclose important financial information in lease and credit

advertisements "clearly and conspicuously" and as required by

the CLA and Regulation M and the TILA and Regulation Z.

According to the complaint, following issuance of the FTC

order, Suntrup's vehicle leasing advertisements stated the

amount of any payment or that any or no initial payment was

required at lease inception but failed to disclose clearly and

conspicuously required financial information, including the

total amount due prior to lease inception, by, inter alia, using

small type, short durations or distracting sounds or images,

and also omitted certain required lease terms. In addition, the

complaint alleged that Suntrup's vehicle credit advertisements

offered just "$1 down" without disclosing required credit

terms. Under the consent decree, Suntrup is required to pay

a $40,000 civil penalty - the first ever collected by the

Commission for such an order violation by a vehicle

dealership or its CEO. Suntrup is also required for two years

to make the brochure, "Keys to Vehicle Leasing,"(18)

available to consumers who visit the dealerships.

In Dell Computer Corp. ("Dell")(19) and Micron Electronics,

Inc. ("Micron”),(20) the Commission issued final decisions

and orders against two computer leasing companies resolving

charges that they violated the CLA and Regulation M and the

FTC Act, by disseminating misleading advertisements for

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consumer leases primarily in Internet promotions. The

complaints in these cases charged, inter alia, that the

companies disseminated deceptive lease advertisements that

offered low monthly payment amounts and placed material

cost information in unreadable fine print or an inconspicuous

location or omitted such information altogether -- including,

inter alia, that the monthly payments are components of lease

offers, whether or not a security deposit is required, and/or

the number and timing of scheduled payments. Under the

orders in these cases, respondents must, inter alia, provide all

the disclosures required by the CLA and Regulation M for

lease advertisements "clearly and conspicuously," that is, in

a clear, readable (or audible), and understandable manner.

The orders also prohibit the companies from running

advertisements that highlight low monthly payments, unless

the promotions also state, inter alia, Clearly and

conspicuously, that: 1) the transaction is a lease; 2) the total

amount due at lease signing; 3) whether or not a security

deposit is required; and 4) the number, amount, and timing of

scheduled payments. The orders also prohibit the companies

from making any reference to a charge that is part of the total

amount due at lease signing or that no such amount is due,

unless the promotion also states with equal prominence the

total amount due at lease inception. In addition, the orders

require respondents to comply with all requirements of the

CLA and Regulation M.

The Commission also issued for public comment consent

agreements with six Philadelphia, Pennsylvania-area vehicle

dealerships and their CEOs for violations of the CLA and/or

TILA and FTC Act pertaining to deceptive lease and/or

credit advertisements:(21) Northeast Auto Outlet, Inc.

("Northeast"),(22) Norristown Automobile Co.

("Norristown"),(23) Dunphy Nissan, Inc. ("Dunphy"),(24)

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Marty Sussman Organization, Inc. ("Marty Sussman"),(25)

Pacifico Ford, Inc. ("Pacifico Ford"),(26) and Pacifico

Ardmore, Inc. ("Pacifico Ardmore").(27) These cases involve

actions for omitting or burying in fine print key cost

information in advertised lease and/or credit deals.

In all six cases, the complaints alleged deceptive vehicle lease

advertisements, in violation of the FTC Act, either by failing

to disclose and/or failing to disclose adequately essential lease

information. The six dealerships and their CEOs were charged

with hiding many costs associated with the lease in fine-print

disclosures located far from the more prominent claims of

low monthly payments or with omitting these costs. The

complaints also alleged, inter alia: 1) that Dunphy

misrepresented the amount due at lease inception by

promoting low down payments or "$0 down," when

additional fees were due at lease signing; 2) that Dunphy and

Northeast represented that consumers could buy the

advertised vehicle for a low monthly charge, while the offer

was for a lease; 3) that Northeast misrepresented that the

dealer's "double your down payment" offer was available for

the advertised vehicles when it was not. In all six cases, the

complaints also alleged that the lease advertisements used

triggering terms under the CLA and Regulation M, but failed

to disclose or failed to disclose clearly and conspicuously

other required information, such as the total amount due at

leasing signing, and that the promotions stated a down

payment amount more prominently than the disclosure of the

total amount due at lease signing.

In addition, the complaints charged that Dunphy, Norristown,

Northeast and Pacifico Ardmore ran deceptive credit

promotions in violation of the FTC Act, by failing to disclose

and/or failing to disclose adequately critical credit terms, by

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omitting required terms or placing this information in

fine-print disclosures located far from the more prominent low

down payment claims. The complaints against these four

dealers also alleged that the credit advertisements used

triggering under the TILA and Regulation Z, yet omitted or

failed to disclose clearly and conspicuously required

information. All six complaints also allege that the dealers’

credit advertisements stated a rate of finance charge without

Stating that rate as an "APR," in violation of the TILA and

Regulation Z.

The consent agreements in these six cases would require these

dealerships and their CEOs, inter alia, to make clear and

accurate cost disclosures in their lease and/or credit

advertisements. In all six cases, the proposed orders would

prohibit these entities from placing advertisements that state

the amount of any payment due at lease inception (excluding

the monthly payment) or the fact that any Or no inception

payment is due, without also disclosing with "equal

prominence” the total amount due at lease inception. The

proposed orders would also prohibit respondents from

disseminating lease promotions that state the amount of any

payment, or that any or no initial payment is required at lease

inception, unless the advertisements also Clearly and

conspicuously disclose other required lease information, such

as the total amount due at lease inception and whether or not

the consumer must pay a security deposit. All respondents

would also be required to comply with all provisions of the

CLA and Regulation M. In addition: 1) Dunphy would be

prohibited from misrepresenting the costs of leasing,

including the amount due at lease inception; 2) Dunphy and

Northeast would be prohibited from representing that the

advertised terms apply to a cash or credit offer when, in fact,

they apply only to lease a particular vehicle; and 3) Northeast

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would be prohibited from misrepresenting the availability of

any advertised offer. All respondents would also be required

to comply with all provisions of the TILA and Regulation Z.

D. Consumer and Business Education

The Commission continues to view consumer and business

education efforts as important to its enforcement activities. In

1999, in connection with continuing concerns about possible

home equity fraud, the Commission issued a consumer

publication to provide information to consumers considering

home equity loans, "Need a Loan? Think Twice About Using

Your Home as Collateral." In addition, the federal

Interagency Task Force on Fair Lending, of which the

Commission is a member, issued a consumer brochure to

facilitate shopping and negotiating for a home mortgage,

"Looking for the Best Mortgage: Shop, Compare,

Negotiate."(28) The Commission staff also continued to

participate in the Board-sponsored "Lease Education Program

Team," involving the Board, Commission staff, and a

coalition of entities (including consumer groups, state

attorneys general and industry representatives), which

developed various online educational materials and a

computer program to enhance awareness and understanding of

leasing. The Commission's above consumer protection

materials were also made available to the public through the

Commission's website at "www.ftc.gov."(29)

Equal Credit Opportunity Act

In 1999, the Commission obtained consent decrees against

two vehicle finance companies for violations of the Equal

Credit Opportunity Act ("ECOA") and its implementing

Regulation B. Litigation continues in a case involving a

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subprime mortgage lender. Those three cases are discussed

below. Other enforcement efforts continue.

In United States v. Franklin Acceptance Corporation

("Franklin"),(30) a consent decree was _ entered settling

allegations that a vehicle finance company discriminated

against applicants on the basis of sex, marital status and the

fact that an applicant's income derived from public assistance

sources, and when taking adverse action on an application,

failed to provide notice as required under the ECOA and the

Fair Credit Reporting Act ("FCRA"). The complaint alleged

that Franklin discriminated against applicants on the basis of

sex and marital status by discounting or excluding from

consideration the income of an applicant who received

payments of child support. The complaint alleged that

Franklin discriminated against applicants on the basis of

Marital status by failing to aggregate the incomes of

unmarried co-applicants while aggregating the income of

married co-applicants. The complaint alleged that Franklin

discriminated against applicants who derived their income

from public assistance by discounting or refusing to consider

such income. In addition, the complaint alleged that, when

taking adverse action on an application, Franklin failed to

provide the applicant with written notification of the action

taken, failed to disclose the specific reasons for the action

taken or to disclose the applicant's right to request such

reasons, and, when adverse action was based ona report from

a consumer reporting agency, failed to provide notice as

required under the FCRA. Under the consent decree,

defendants agreed to pay a civil penalty of $800,000 and to

the entry of a permanent injunction.

In United States v. Ford Motor Credit Co. ,(31) a consent

decree was entered resolving allegations that this vehicle

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finance company discriminated in the pricing of its credit

products against applicants on the basis of marital status. The

complaint alleged that the company failed to aggregate the

incomes of unmarried co-applicants while aggregating the

income of married co-applicants with the result that unmarried

co-applicants often paid more for credit. Under the consent

decree, defendants agreed to pay $650,000 to a consumer

redress program and to the entry of a permanent injunction.

Litigation continued in Capital City Mortgage,(32) alleging

that the company and its owner violated the ECOA and

Regulation B by: failing to take written applications for

mortgage loans; failing to collect required information about

the race or national origin, sex, marital status, and age of

applicants; failed to provide rejected applicants with written

notice of adverse action; and, when providing notice of

adverse action, failed to provide applicants with the correct

principal reason for the action taken or the correct name and

address of the Commission, the federal agency that

administers compliance with the ECOA with respect to

defendants. The complaint seeks civil penalties and injunctive

relief for the alleged violations of the ECOA and Regulation

In November 1999, the Commission and other federal

agencies submitted a joint comment to the Board about

Regulation B.(33) The comment was submitted in response to

the Board's notice of proposed rulemaking with respect to

Regulation B. In their comment, the agencies urged the Board -

to amend Regulation B to allow lenders voluntarily to collect

information about the race and gender of applicants for

non-mortgage credit. According to the comment, the current

prohibition of collecting such information "inhibits the ability

of financial service providers to learn about and respond to

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ee et

market opportunities to provide credit to underserved

communities. The prohibition makes it difficult for

institutions to know whether products intended to expand

access to credit, including to minorities, reach their intended

customer base." The comment also urged the board to clarify

that creditors may not discriminate on a prohibited basis in

their preapplication marketing practices and to Clarify how

creditors may determine the need for special purpose credit

programs.(34)

The Commission continued its consumer and business

education efforts. The staff worked with other governmental

agencies and with creditor and consumer organizations to

increase awareness of and compliance with the ECOA. The

Commission also continued its active participation in the

Interagency Task Force on Fair Lending.

Electronic Fund Transfer Act

In 1999, the Commission continued its censumer and business

education efforts in this area. The Commission issued a

brochure, "Guide to Online Payments," providing information

to consumers about different types of online payment systems

and security features. (35)

II. AN ASSESSMENT OF THE EXTENT TO WHICH

COMPLIANCE IS BEING ACHIEVED BY

ENTITIES SUBJECT TO THE COMMISSION'S

ENFORCEMENT AUTHORITY (36)

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Truth in Lending Act and Consumer Leasing Act

This year, the Commission received, inter alia, numerous

inquiries concerning home equity lending, including

concerning consumer rights under HOEPA. Many mortgage

brokers, and some online mortgage entities, requested

materials regarding the requirements of Regulation Z. Many

credit and lease advertisers requested information regarding

Regulations Z and M. Some consumers requested information

regarding their TILA rights concerning unauthorized

transactions and error resolution, including for online

transactions.

Equal Credit Opportunity Act

The Commission received various inquiries about fair lending

and predatory lending issues. The Commission also received

requests for information about ECOA from mortgage brokers.

Electronic Fund Transfer Act

The Commission received some requests from

consumers for information about EFTA protections pertaining

to point-of-sale debit transactions, including for unauthorized

use and error resolution. The Commission continues to

receive a small number of inquiries about these requirements

in comparison to those under the credit and lease area.

Ill. ANY SUGGESTIONS FOR CHANGES IN THE

ACTS OR THEIR IMPLEMENTING

REGULATIONS

The Commission supports the Board's regulatory review of

Regulation B. The Commission understands that the Board

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may undertake a review of Regulation Z, following

conclusion of its Regulation B review. In view of the diverse

transactions and issues affected by Regulation Z, the

Commission would also Support any such effort in the future

to update and clarify Regulation Z as_ well.

The Commission hopes that the information contained in this

letter responds to your inquiry and will assist in preparation

of the Board's Annual Report to Congress. If any other

information would be useful or if you request additional

assistance, please contact David Medine, Associate Director,

Division of Financial Practices, at (202) 326-3025.

By direction of the Commission.

Robert Pitofsky Chairman

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Endnotes:

1. In this report, HOEPA, which amends the TILA and is

implemented by Regulation Z, is referenced separately.

HOEPA provides special protections for consumers who

obtain high-rate or high-fee loans secured by their principal

dwellings by requiring creditors to provide certain material

information at least three days before the loan is

consummated, prohibiting the use of certain loan terms, and

barring specified practices.

2. The Commission voted 4-0 to approve the settlements, with

Commissioner Swindle concurring in part and dissenting in

part.

3. No. CV 99-07782 WDK (C.D.Cal. Aug. 2, 1999).

4. No. 2-99-CV580G (D. Utah Aug. 23, 1999).

5. No. C99-1215 Z (W.D. Wash. Jul. 30, 1999).

6. No. 99-289 (E.D. Ky. Aug. 12, 1999).

7. No. 99 Civ. 5988 (S.D. N.Y. Jul. 30, 1999).

8. No. 3:99 CV-496-H (W.D. Ky. Aug. 5, 1999).

9. No. 2-99CV579G (D. Utah Aug. 23, 1999).

10. FTC Docket No. C-3899 (Oct. 5, 1999).

11. No. 98CV00237 (D.D.C. filed Jan. 29, 1998).

12. The complaint in this matter also alleges, inter alia,

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violations of the Equal Credit Opportunity Act. See infra

p.11.

13. The case is joined, for purposes of discovery, with a

private lawsuit, Hargraves v. Capital City Mortgage Corp.,

No. 98CV1021 (D.D.C. filed Apr. 24, 1998).

14. No. SACV-99-1213 AHS (C.D. Cal. Oct. 7, 1999).

15. FTC Docket No. C-3714 (Feb. 6, 1997).

16. No. 4:99CV01746CEJ (E.D. Mo. Nov. 22, 1999).

17. FTC Docket No. C-3779 (Jan. 5, 1998).

18. This brochure was previously jointly developed by the

FTC staff, Federal Reserve Board staff, and various industry

representatives and consumer groups and explains, in simple

terms, vehicle leasing transactions and costs.

19. FTC Docket No. C-3888 (July 28, 1999).

20. FTC Docket No. C-3887 (July 28, 1999).

21. The consent agreements were placed on the public record

for public comment for sixty days, after which the

Commission will decide whether to make them final. See 64

Fed. Reg. 68687 (Dec. 8, 1999).

22. FTC File No. 992 3080 (Dec. 2, 1999).

23. FTC File No. 992 3081 (Dec. 2, 1999).

24. FTC File No. 992 3082 (Dec. 2, 1999).

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25. FTC File No. 992 3078 (Dec. 2, 1999).

26. FTC File No. 992 3079 (Dec. 2, 1999).

27. FTC File No. 992 3116 (Dec. 2, 1999).

28. The members of the Interagency Task Force include the:

Department of Housing and Urban Development, Department

of Justice, Department of the Treasury, Federal Deposit

Insurance Corporation, Federal Housing Finance Board,

Federal Reserve Board, Federal Trade Commission, National

Credit Union Administration, Office of Federal Housing

Enterprise Oversight, Office of the Comptroller of the

Currency, and Office of Thrift Supervision.

29. Information concerning the Commission's enforcement

actions and other activities discussed in this report are also

available at this website.

30. No. 99-CV-2435 (E.D. Penn. May 14, 1999).

31. No. 99-75887 GEW (E.D. Mich. filed Dec. 9, 1999).

32. See supra note 11.

33. Letter from Commission, Department of Treasury,

Department of Justice, Department of Housing and Urban

Development, Office of the Comptroller of the Currency,

Office of Thrift Supervision, Small Business Administration,

and Office of Federal Housing Enterprise Oversight to

Jennifer J. Johnson, Secretary, Board of Governors of the

Federal Reserve System dated November 15, 1999.

34. The Commission voted 3-1 to file this comment with the

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Board, with Commissioner Swindle dissenting and issuing a

separate statement.

35. This brochure was jointly developed by the Commission

and America Online, Inc. ("AOL"). AOL was required to

develop consumer education materials regarding online

payment systems, pursuant to a final decision and order

issued by the Commission (previously reported). See FTC

Docket No. C-3787 (Mar. 24, 1998).

36. Among other things, the Commission is Charged with

enforcement of the FTC Act and various federal consumer

financial laws and regulations, including the TILA, ECOA,

and EFTA, with respect to most nonbank entities in the

nation. It does not have data regarding the extent of

compliance by these numerous entities with these

requirements. In lieu thereof, the Commission is providing

information regarding certain issues raised by consumers

and/or business entities pertaining to these mandates.

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APPENDIX 2

cots:

STATE OF SOUTH CAROLINA _)

COUNTY OF BARNWELL )

Daniel B. Lackey, George Buggs, _)

Florine Buggs, Michael Highsmith, )

and Paula Johnson, )

Plaintiffs, )

) MEMORANDUM

v. ) OF GREEN TREE

) FINANCIAL

Green Tree Financial Corporation. ) CORPORATION

)

Defendant. )

)

INTRODUCTION

This memorandum is submitted on behalf of the

Defendant Green Tree Financial Corporation (hereinafter Green

Tree). The purpose of this memorandum is to address the single

issue of whether an arbitration may proceed as a class action in

the absence of specific language in the arbitration agreement

permitting class treatment arbitration. Additional issues

concerning Class certification under Rule 23 and questions of

the necessity for class treatment are reserved to be addressed at

a later time if necessary.

Arbitration was compelled in this case pursuant to the

Federal Arbitration Act (FAA) 9 USCA § 1 et. seq. Green Tree

submits That federal law interpreting the FAA controls this

issue and preempts stare law or regulation to the contrary.

Green Tree submits further that the principle has been well

established in the federal decisions dealing with or related to

the issue that the parties may not be subjected to state class

action procedures in arbitration unless the arbitration agreement

expressly permits class treatment in arbitration.

STATEMENT OF FACTS

Green Tree is a financial services company doing

business nationwide. From the complaint it appears that the

Plaintiffs Highsmith, Johnson and Buggs are all individuals

who financed the purchase of mobile homes. The Plaintiff

Lackey financed home improvements. The consumer financing

paper in each transaction was assigned to Green Tree. Each of

the transactions involved a mortgage an real property in South

Carolina. However, the Highsmith and Lackey transactions

took place in Georgia. The other Transactions took place in

South Carolina.

Each of the named Plaintiffs executed a Retail

Installment Sales Contract-which included an agreement to

submit all claims to arbitration. While the wording of the

agreements were not identical, they each required arbitration

and none of the arbitration agreements permit class treatment

in arbitration. Attached hereto for the arbitrators convenience

are affidavits filed with the Court in connection with previous

proceedings identifying the financing agreements.

Green Tree moved in the Circuit Court to stay the

litigation and compel arbitration. The motion to compel

arbitration was denied. On appeal The Circuit Court's order was

reversed by the Court of Appeals. The case was remanded to

the Circuit Court for further proceedings.

SUMMARY OF ARGUMENT

1. The FAA supersedes state law and procedure and

requires the enforcement of arbitration agreements according to

their terms and no more, notwithstanding state law or procedure

to the contrary.

- State class action procedures may not be

superimposed on an arbitration under the FAA unless the

arbitration clause specifically provides for class action

treatment.

ARGUMENT

The FAA reflects a "congressional declaration of a

liberal federal policy favoring arbitration agreements,

notwithstanding any state substantive or procedural policies to

the contrary." Moses H. Cone Mem. Hosp. V. Mercury Constr.

Corp., 460 U.S. 1, 24 (1983). The primary legislative purpose

of the FAA is to assure the enforcement of arbitration

agreements. Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213

(1985). While Congress recognized that enforcement of

arbitration agreements would normally promote efficient and

speedy dispute resolution, the cases are clear that promotion of

efficiency is secondary to the enforcement of the terms of the

arbitration agreement.

We therefore are not persuaded by the

argument that the conflict between two goals of

the arbitration act - - enforcement of private

agreements and encouragement of efficient and

speedy dispute resolution must be resolved in

favor of the latter in order to realize the intent

of the drafters. The preeminent concern in

passing the act was to enforce private

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agreements into which the parties had entered,

and that concern requires that we vigorously

enforce agreements to arbitrate even, if the

result is 4, piecemeal" litigation, at least absent

a countervailing policy manifested in another

federal statute. ***

Id., p.221

There is no discretionary right in a trial court to refuse

to enforce the arbitration agreement as written. Id. A court may

not substitute its notions of fairness or judicial economy in

place of the explicit terms of the agreement. As noted in

Champ v. Siegel Trading Company, 55 F. 3d 269, 275 (7th

Cy., Ia),

The underlying motivation for the

Federal Arbitration Act was to enforce the

agreement of parties to arbitrate. Because the

act was designed to overrule the historical

refusal of the judiciary to enforce agreements to

arbitrate, it follows that a court is not permitted

to interfere with private arbitration agreements

in order to impose its own view of speed and

economy. This is the case even where the result

would be the possibility of inefficient

maintenance of separate proceedings.

See American Centennial Insurance Company v. National

Casualty Company, 951 F.2d 107, 108 (6th Cir 1991). The

South Carolina Supreme Court has recognized that the FAA

preempts contrary state law. Soil Remediation Co. V. Nu-Wav

Environmental, 317 S.C. 274, 476 S.E. 2d 149 (1996). Federal

law therefore governs the enforcement of the FAA in both state

and federal courts. Moses H. Cone Mem. Hosp., 460 U.S. at 24.

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Section 4 of the FAA provides that when a court

determines that an agreement to arbitrate exists, the court must

order the parties to "proceed with the arbitration in accordance

with the terms of the agreement.” Parties to an arbitration

agreement are entitled to have their agreement enforced "as

they wrote it - and nothing more." Champ, 55 F.3d at 277. As

noted in Merrill Lynch, Pierce, Fenner & Smith. Inc. v.

Georgiadis, 903 F.2d 109 (2d Cir. 1990), Congress "surely did

not intend that the parties be able to disregard selected

contractual obligations willy-nilly in order to choose an arbitral

foram more convenient or more suited to a party's particular

needs."

Along these lines, the United States Supreme Court

noted that arbitration "is a matter of consent, not coercion, and

parties are generally free to structure their arbitration

agreements as they see fit. Just as they may limit by contract

the issues which they will arbitrate, so too may they specify by

contract the rules under which that arbitration will be

conducted." Volt Info. Sciences v. Bd. Of Trustees, 489 U.S.

468, 479 (1989). To hold otherwise would "fundamentally

modify the terms of the parties’ contract." Salvano v. Merrill

Lvnch, Pierce, Fenner & Smith. Inc., 85 N.Y. 2d 173, 647

N.E.2d 1298, 623 N.Y.S.2d 790 (1995) (refusing to order

expedited arbitration because arbitration agreement contained

no such provision). From the forgoing it is apparent that in

order to determine whether this case may proceed in arbitration

as a Class action, the Arbitrator must resort to federal law, and

State law and procedure contrary to federal law interpreting the

FAA has no application. Cohen v. Wedbush, Noble, Cooke,

Inc., 941 F.2d 282, 285 (9th Cir. 1985)

The decisions applying federal law have determined

without apparent exception that state class action procedures

may not be imposed on an arbitration under the FAA unless the

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arbitration agreement specifically provides for class treatment.

Champ, supra; Gammaro v. Thorp Discount, 828 F. Supp. 673

(D. Minn. 1993); McCarthy v. Providential Corp, 1994 WL

387852,1994 U.S. Dist. LEXIS 10122 (N.D. Cal. 1994);

Randolph _v. Green Tree Financial Corp. 991 F.Supp. 1410

(N.D. Ala. 1997).

Similarly, courts have held that other procedural devices

such as consolidation of cases under Federal Rule 42 must also

yield to the express language contained in an arbitration

agreement, and cannot be imposed unless specifically allowed.

American Centennial, 951 F.2d 107, In American Centennial,

the Sixth Circuit Court of Appeals dismissed a petition for

consolidation of arbitration proceedings on the ground that the

arbitration agreements did not provide for consolidation. See

also Government of United Kingdom v. Boling Co., 998 F.2d

68 (2d Cir., 1993) (reversing an order granting a motion for

consolidation); Protective Life Ins. Corp_v. Lincoln National

Life Ins. Corporation, 873 F.2d 281 (11th Cir. 1989). (holding

that parties may negotiate for and include provisions for

consolidation of arbitration proceedings in their arbitration

agreements, but if such provisions are absent, federal courts

may not read them in. Id., p. 282.); McCarthy v. Providential

Corporation, 1994 U.S. Dist. Lexis 10122 (D.C. Cal. 1994)

(holding that class arbitration may not be ordered in the

absence of a provision in an arbitration clause providing for

arbitration on aclass wide basis); see also Weverhaeuser Co. v.

Western Seas, Shipping Co., 743 F.2d 635 (9th Cir. 1984), cert.

denied, 469 U.S. 1061, 83 L. Ed, 2d 431, 105 S.Ct. 544 (1984)

(parties may negotiate for and include provisions for

consolidation of arbitration proceedings, but if they do not,

court’s cannot read such provisions into the agreement).

Fundamentally, arbitration agreements must be enforced

according to their specific terms and no others. Volt Info.

Sciences v. Bd. of Trustees, 489 U.S. 468 (1989); Del E. Webb

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Constr. v. Richardson Hosp. Auth., 823 F.2d 145 (Sth Cir.

1987); Baesler v. Continental,Grain Co., 900 F.2d 1193 (8th

Cir. 1990).

In Champ, the Seventh Circuit Court of Appeals

rejected the argument That class arbitration is appropriate

where the arbitration clause is silent on the issue- The Court

stated that its "chief concern under the FAA is to enforce the

parties arbitration (agreement) as they wrote it." To do

otherwise would be to substitute the judgment of the court for

the intent of the parries to the contract, contrary to the 46

overriding, goal' of the FAA to put arbitration agreements on

equal footing with other contracts between private parries.” 55

F.3d at 274, 275.

Cases allowing class arbitration under state law axe not

applicable to enforcement of arbitration provisions under the

FAA because of federal preemption over state law under the

FAA. Episcopal Housing Corp, v. Federal Insurance Co., 269

S.C, 63 ) 1,239 SE 2nd 647 (1977). Class action procedures

may not be imposed on, an arbitration under

the FAA unless the arbitration provision specifically pen-nits

class action treatment, and the arbitration provision in this case

does not so provide.

The cases holding that class action procedures may not

be superimposed on an arbitration clause enforceable under the

FAA are based on fundamental principles of substantive

contract law. Volt, 489 U.S. 468; Champ, 55 F. 3d 269. Class

action rules are procedural devices permitting consolidation of

matters properly before the court. Such procedural rules

Should not be allowed to thwart the substantive contractual

light of the parties to have individual disputes arbitrated, Nor

can the procedural rules of class action be used as a method for

the discovery of names and addresses of potential plaintiffs in

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an effort to generate additional claims, "Class actions are

provided only as a

means to enforce substantive law. Altering the substantive law

to accommodate procedure would be to confuse the means for

the ends - to sacrifice the goal for the going." Vernon v. Drexel,

Bumham & Co., 52 Cal. App. 3 rd 706 (1975); see also Moses

H. Cone Memorial Hosp. v. Mercury Construction Corp., 460

U.S. I (1982) (holding that an arbitration agreement must be

enforced as written even though arbitration would result in

bifurcated proceedings).

For a court to substitute its notions of fairness of

judicial economy in place of the explicit terms of the agreement

would "deprive them of the benefit of their bargain just as

surely as if we refused to enforce their decision to arbitrate."

Champ, 55 F.3d at 275. Reading such terms into an agreement

would "disrupt the negotiated risk/benefit allocation and direct

[the parties] to proceed with a different sort of arbitration,” Id.

CONCLUSION

Under the FAA, the arbitration agreements involved in

this case must be enforced according to their express terms, and

no others. The arbitration agreements are silent on the issue of

class treatment and no such procedure can therefore be imposed

upon the proposition that class action parties. The

overwhelming weight of authority stands for the treatment

should not be permitted in this arbitration and that an order

compelling class treatment is beyond the power of the

arbitrator. Green Tree respectfully submits that the Plaintiffs’

motion for class certification should be denied.

Herbert W. Hamilton

Daniel J. Ballou

KENNEDY COVINGTON LOBDELL

& HICKMAN, L.L.P.

P.O. Box 11429

Rock Hill, SC 29731

(803) 329-7600

ATTORNEYS FOR GREEN’ TREE

FINANCIAL CORPORATION

August 14, 1998

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This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.