What Payment Schedule Governs When the TILA Disclosure Statement Conflicts with the Note?

by Jeff Sovern

Over the last couple of days, I've blogged about how for adjustable loans, the Fed's Commentary directs lenders to state in the Truth in Lending disclosure statement monthly payment figures that assume that interest rates remain unchanged for decades. One consequence of that is that once the change date arrives the numbers in the disclosure statement will differ from the numbers dictated by the note. So which monthly payment is the borrower obliged to make? My intuitive answer was that the note governs: after all, it's more specific and the TILA statement is merely a required disclosure, not necessarily part of the contract. But on reflection, I'm not sure that's right. From the consumer's perspective, the disclosure statement probably looks to be just as much a part of the contract as any other document the consumer signs. It comes from the lender, and so the consumer wouldn't necessarily know that it's a government-mandated document (and even if the consumer did know that, I'm not sure it would make a difference). The disclosure statement purports to tell the consumer the consumer's payment obligations so it seems anomalous to say the consumer shouldn't be able to rely on it. That would also permit lenders to perform a sort of bait and switch, in that they could bait the consumer into borrowing with a disclosure statement that states one "price" (the monthly payments), but then switch the consumer to a higher monthly payment, as determined by the note. Moreover, the idea behind the disclosure statement is that it's intended to tell the borrower what the borrower needs to know, which permits the borrower to skip reading the note (which, in any event, is likely to be incomprehensible). It seems strange to say that the borrower can substitute reading the disclosure statement for reading the note, but that the note controls when the two conflict, so really the borrower should read the note anyway, but the note is unreadable so the borrower is out of luck. While it may seem unfair to lenders to bind them to the numbers in the disclosure statement, it's not as if those numbers are a surprise to the lenders; they are the ones to prepare the disclosure statement. If all this is right (and it kind of seems crazy that it could be, but it also seems crazy that it wouldn't be), we could see some big class actions brought against lenders using adjustable loans. To make matters worse for the lenders, if the corrrect figure is the one in the disclosure statement, debt collectors trying to collect the amount determined by the note against defaulting borrowers risk violating the Fair Debt Collection Practices Act for misrepresenting the amount of the debt.