Mourning v. Family Publications Service, Inc. Brief Amicus Curiae

    No. 71-829

J it  t o  dfottrt o f  t o  H t t i t d  S ta te s
October Teem, 1972

Leila Mourning,, petitioner,
v.

F amily P ublications Service, I nc.

ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF 
APPEALS FOR THE FIFTH CIRCUIT

BRIEF FOR THE UNITED STATES AS AMICUS CURIAE

E R W IN  N. GRISWOLD,
Solicitor General. 

HARLINGTON WOOD, Jr.,
Assistant A ttorney General,

A, RAYM OND RANDOLPH, Jr.,
Assistant to the Solicitor General,

A L A N  S. ROSENTHAL,
GREER S. GOLDMAN,

Attorneys,
Departmen t of Justice, 

Washington, D.C. 20580.





I N D E X

Page
Opinions below________________________________  1
Jurisdiction___________________________________  1
Questions presented____________________________  2
Constitutional provision, statutes and regulations

involved________________
Statement_________________
Interest of the United States___________________  5
Summary of Argument_________________________ 6
Argument_____________________________________ 12

I. The four installment rule is a valid exercise 
of the Federal Reserve Board’s rule- 
making authority under the Truth in 
Lending Act_________________________ 12

A. The legislative history of the Act
suggests that Congress intended 
that, even if sellers were not 
required to disclose finance 
charges hidden in the selling 
price, they nevertheless had to 
comply with the Act’s other 
disclosure requirements_______  13

B. The Board’s four installment rule,
which clarifies the scope of the 
Act, effectuates its purpose and 
is therefore valid under Section 
1604________________________  17

C. The Board also validly exercised
its rulemaking authority under 
Section 1604 because the four 
installment rule is necessary to
prevent evasion of the Act____  22

a)
472 - 022— 72------------1

to
 t

o



II

Argument— Continued Page
D. The Board’s regulation also is valid 

because it facilitates compliance 
with the A ct—another basis for 
rulemaking under Section 1604, _ 24

II. The four installment rule does not violate
due process__________________________ 28

Conclusion____________________________________  33
Appendix_____________________________________  35

CITATIONS
Cases:

Adkins v. Children’s Hospital, 261 U.S. 525__  29
American Telephone & Telegraph Co. v. United

States, 299 U.S. 232_____________________  27
American Trucking Association, Inc. v. United

States, 344 U.S. 298_____________________  27
City of New Port Richey v. Fidelity & Deposit

Co., 105 F. 2d 348_______________________  31
Edward’s Lessee v. Darby, 12 wheat 206_____  28
Ferguson v. Skrupa, 372 U.S. 726___________ 11, 29
Ferry v. Ramsey, 277 U.S. 88______________  31
Gemsco, Inc. v. Walling, 324 U.S. 244_______  24
Gratz v. Claughton, 187 F. 2d 46____________ 31
Hawkins v. Bleaky, 243 U.S. 210___________ 31
Heiner v. Donnan, 285 U.S. 312____________29, 31
Helvering v. City Bank Farmers Trust, 296 U.S.

85_____________________________________  31
Jensen v. United States, 326 F. 2d 891________ 31
Jones v. Brim,, 165 U.S. 180________________ 30, 31
Lametta v. New Jersey, 306 U.S. 451________ 28
Lochner v. New York, 198 U.S. 45__________ 29
Martin v. City of Struthers, 319 U.S. 141____  30
McBoyle v. United States, 283 U.S. 25_______ 28



I ll

Cases—Continued
Page

Metropolis Theatre Co. v. City of Chicago, 228
U.S. 61 —  ---------------------------------------------  30

National Broadcasting Co. v. United States,
319 U.S. 190____________________________  27

North American Co. v. Securities and Ex­
change Commission, 327 U.S. 686________  24

Norwegian Nitrogen Products Co. v. United
States, 288 U.S. 294_____________________  27

Power Reactor Development Co. v. International
Electricians, 367 U.S. 396________________  28

Schlesinger v. Wisconsin, 270 U.S. 230______ 31
Securities and Exchange Commission v. Joiner

Corp., 320 U.S. 344_____________________  28
Shanahan v. United States, 447 F. 2d 1082__  31
Stanley v. Illinois, No. 70-5014, decided

April 3, 1972____________________________ 32
Strompolos v. Premium Readers Service, 326 F.

Supp. 1100_____________________________  23
Thorpe v. Housing Authority, 393 U.S. 268___ 10, 27
Udall v. Tollman, 380 U.S. 1_______________  10, 28
United States v. Jones, 176 F. 2d 278________ 31
West Coast Hotel Co. v. Parrish, 300 U.S. 379_ 11;

29, 32
Westfall v. United States, 274 U.S. 256_____  24

Constitution, statutes and regulations:
United States Constitution:

Fifth Amendment_________  2, 11, 29, 30, 32, 35
Truth in Lending Act, 15 U.S.C. 1601-1665:

15 U.S.C. 1601^. 
15 U.S.C. 1602. 
15 U.S.C. 1602(e) 
15 U.S.C. 1602(f). 
15 U.S.C. 1602(g) 
15 U.S.C. 1602(h) 
15 U.S.C. 1604__

---------------------6,19,21
--------------------  4,7,36
----------------------  13,36
___ 2,9,13,19,22,36
---------------------  17,36
---------------------  13,36
3, 5, 8, 10, 12, 21,24, 36



IV

Constitution, statutes and regulations—Con
15 U.S.C. 
15 U.S.C. 
15 U.S.C. 
15 U.S.C. 
15 U.S.C. 
15 U.S.C. 
15 U.S.C. 
15 U.S.C. 
15 U.S.C. 
15 U.S.C. 
15 U.S.C. 
15 U.S.C. 
15 U.S.C. 
15 U.S.C. 
15 U.S.C. 
15 U.S.C. 
15 U.S.C.

1605(a)_________________ 7,13,20,37
1607(a)_____________________  5
1607(c)_____________________  5
1609_______________________  18
1611_______________________  28
1631_____________  7,9,13,20,22,37
1631(a)____________________  2-3,37
1635________________________ 22
1638_____________  4,9,21,22,26,38
1638(a)_____________________  3,38
1640________________________ 40
1640(a)-------------------------------- 4,40
1640(a)(1)-------------------------- 4,21,40
1640(e)_____________________  6
1662_______________________  22
1663 ______________________  25
1664 ______________________  25

Internal Revenue Code, 26 U.S.C. 483______ 31
12 C.F.R, 226.2(k)__________________3, 4, 8,18, 41
12 C.F.R. 226.2(m)_____________________ 8,18,41
12 C.F.R. 226.8__________________________3, 4, 41

Miscellaneous:
Caplovitz, The Poor Pay More 12-48 (1963)

34 Fed. Reg. 2002 (1969)________________  18
114 Cong. Rec. 1611 (1968)________________  22
Federal Reserve Board letter, No. 86, 

August 26, 1969, from J. L. Robertson, 
Vice-Chairman, Board of Governors, 
Federal Reserve Board, summarized 1 
C.C.H. Consumer Credit Guide f  30,457_-_ 3

Federal Reserve Board letter, July 24, 1969,
1 C.C.H. Consumer Credit Guide t1f 30,113,
30,114______________. __________________  3

Hearings on Consumer Credit Regulations before 
the Subcommittee on Consumer Affairs of the 
House Committee on Banking and Currency,
91st Cong., 1st Sess. (1969)______________  18, 19



V

Miscellaneous—Continued Page
Hearings on H.R. 11601 before the Subcommittee 

on Consumer Affairs of the House Committee 
on Banking and Currency, 90th Cong., 1st
Sess. (1967)__________________________ 15,16,22

Hearings on S. 6 before the Subcommittee on 
Financial Institutions of the Senate Com­
mittee on Banking and Currency, 90th Cong.
1st Sess. (1967)_________________________  15

Hearings on S. 750 before a Subcommittee of the 
Senate Committee on Banking and Currency,
88th Cong., 1st & 2d Sess. (1963-1964)___  15

Hearings on S. 1740 before a Subcommittee of the 
Senate Committee on Banking and Currency,
87th Cong., 1st Sess. (1961)_______  14, 15, 16, 21

Hearings on S. 1740 before a Subcommittee of the 
Senate Committee on Banking and Currency,
87th Cong., 2d Sess. (1962)______________  15

H. Rep. No. 1040, 90th Cong., 1st Sess. (1967)_ 20, 24 
Jackson, The Struggle for Judicial Supremacy,

(1941)__________________________________  29
S. Rep. No. 392, 90th Cong., 1st Sess. (1967) __ 19,

20, 24
S. Rep. No. 750, 92d Cong., 2d Sess. (1972) __ 6





J it to  j&qjrcm* djtort af to  Winlid States
October Term, 1972

ISTo. 71-829

L eila M ourning, petitioner,
v.

F amily P ublications Service, I nc.

ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF 
APPEALS FOR THE FIFTH CIRCUIT

BRIEF FOR THE UNITED STATES AS AMICUS CURIAE

O PIN IO N S B E L O W

The opinion of the court of appeals (Pet. App. 6a- 
23a) is reported at 449 F.2d 235. The opinion of the 
district court (Pet. App. la-5a) is unreported.

JU R IS D IC T IO N

The judgment of the court of appeals was entered 
on September 27, 1971. The petition for a writ of 
certiorari was filed on December 23, 1971, and granted 
on March 20, 1972 (405 IT. S. 987). The jurisdiction 
of the Court rests on 28 U.S.C. 1254(1).

(i)



2
QUESTIONS PR E SE N TE D

The United States will discuss the following ques­
tions :

1. Whether the Federal Reserve Board acted beyond 
its rulemaking authority under the Truth in Lending 
Act in promulgating the “ four installment rule” o f 
Regulation Z, which provides that any credit trans­
action payable in more than four installments is sub­
ject to the disclosure rules of the Act regardless of 
whether there is an identified finance charge involved 
in the transaction.

2. Whether the four installment rule creates a “ con­
clusive presumption” regarding the imposition of 
finance charges that violates the due process clause 
of the Fifth Amendment to the Constitution.

C O N ST ITU T IO N A L P R O V IS IO N , ST A T U T E S A N D  R E G U L A T IO N S
IN V O L V E D

The Fifth Amendment to the United States Consti­
tution, the relevant provisions of the Truth In Lend­
ing Act, 15 U.S.C. 1601-1665, and the pertinent regu­
lations of the Federal Reserve Board, 12 C.F.R. 226, 
are set forth in an Appendix to this brief, infra.

ST A T E M E N T

Under the Truth in Lending Act, 15 U.S.C. 1601— 
1665, creditors who regularly extend “ credit” involv­
ing finance charges 1 must disclose “ to each person to 
whom consumer credit is extended and upon whom a 
finance charge is or may be imposed,” 15 U.S.C. 1631

115 U.S.C. 1602(f).



3

(a ), information such as the cash price, the amount of 
the down payment, the total amount to be financed, the 
amount of the finance charge, and the number and 
amount of payments required. 15 TJ.S.C. 1638(a); 12 
C.F.R. 226.8. Since creditors could easily evade the 
Act’s requirements by ceasing to identify the finance 
charge while inflating the “ purchase”  price,2 and since 
the Federal Reserve Board has the duty of prescrib­
ing rules and regulations “ to prevent circumvention 
or evasion” of the Act, 15 U.S.C. 1604, the Board’s 
Regulation Z includes within the class of covered 
creditors any creditor who extends credit in a trans­
action where repayment, pursuant to an agreement, is 
or may be made in more than four installments. 12 
C.F.R. 226.2 (k).

Petitioner Leila Mourning brought this action in 
the United States District Court under the Act, 15 
U.S.C. 1640, alleging that on August 19, 1969, she 
entered into a written contract with Family Publica­
tions Service, Inc. (“ F P S ” ) for the purchase of mag­
azines; that in addition to her downpayment of $3.95 
the contract obligated her to make thirty monthly 
payments of $3.95 each in return for a sixty months’ 
subscription to four magazines; and that FPS failed 
to disclose the total purchase price of the magazines, 
the unpaid balance and other matters, as required by

2 Federal Reserve Board letter, No. 86, August 26, 1969, 
from J. L, Robertson, Vice-Chairman, Board of Governors, 
Federal Reserve Board, summarized 1 C.C.H. Consumer Credit 
Guide 1f 30,457. See also Federal Reserve Board letter, July 24, 
1969, 1 C.C.H. Consumer Credit Guide, 1^30,113, 30,114; and 
note 22, infra.

472—022— 72---------- 2



4

Regulation Z, 12 C.F.R. 226.8 and the Act, 15 U.S.C. 
1638.

On cross-motions for summary judgment the dis­
trict court held that EPS had violated the Truth in 
Lending Act and Regulation Z by extending credit in 
a transaction involving more than four installment 
payments without making the required disclosures 
(Pet. App. 3a-5a). The court found that FPS had 
extended “ consumer credit” within the meaning of 
the Act, 15 IT.S.C. 1602; see 12 C.F.R. 226.2(k) : FPS 
had given petitioner a sixty-month subscription in ex­
change for a promise to pay a specified sum in thirty 
monthly installments; the contract provided that it 
could not be cancelled and that failure to make 
monthly payments would render the entire balance 
due; and FPS itself considered the transaction to be 
a credit transaction (Pet. App. 4a). Pursuant to the 
A ct’s civil penalty provision, 15 U.S.C. 1640(a), the 
court awarded petitioner $100 together with attorney’s 
fees of $1,500 (Pet. App. 5a).3 The district court did not 
question the validity of the four installment rule in 
Regulation Z.

The court of appeals reversed, holding that the 
Board had exceeded its statutory authority in promul­
gating the four installment rule (Pet. App. 6a-23a).4 
In the court’s view, the Act “requires that a finance 
charge must be found present, directly or indirectly,”

3 The civil penalty in actions brought by consumers is set by 
the Act at “ twice the amount o f the finance charge * * * ex­
cept that the liability * * * shall not be less than $100 nor 
greater than $1,000.” 15 U.S.C. 1640(a) (1).

4 The court o f appeals did not pass on the question whether 
FPS had extended credit as the district court found.



5

in a transaction before the creditor is subject to the 
disclosure rules (Pet. App. 19a). But under the 
Board’s four installment rule, disclosure is required 
“whether or not there is found in such transactions 
the imposition of a finance charge as an incident to 
the extension of credit”  (ibid.). The court therefore 
held that the Act did not authorize the Board’s 
regulation.

The court of appeals also held that the four in­
stallment rule created a “ conclusive presumption”  that 
a finance charge had been imposed, that such a conclu­
sive presumption violates the due process clause of the 
Fifth Amendment, and that Congress itself thus could 
not have validly enacted the four installment rule. 
The court accordingly held the Board’s rule void (Pet. 
Api>. 21a-23a).

IN T E R E S T  OE T H E  U N IT E D  ST A TE S

The court of appeals has invalidated a significant 
regulation designed to prevent evasion and circum­
vention by creditors of their obligations under the 
Truth in Lending Act. The Federal Reserve Board 
has the duty of promulgating rules and regulations, 
such as that involved in this case, in order to secure 
compliance with the Act, 15 U.S.C. 1604, and the 
Federal Trade Commission has general enforcement 
responsibilities under that Act,3 15 TJ.S.C. 1607(c).5 6 
Both agencies believe that the decision below will im­

5 A  violation o f the Truth in Lending Act is a violation of 
the Federal Trade Commission Act, 15 TJ.S.C. 1607(c).

6 Other federal agencies have specific enforcement responsi­
bilities in limited areas. 15 TJ.S.C. 1607(a).



6

pair public and private enforcement of the Act,7 
and will significantly impede full realization of the 
Act’s goal of assuring “ a meaningful disclosure of 
credit terms so that the consumer will be able to com­
pare more readily the various credit terms available 
to him and avoid the uninformed use of credit.” 15 
U.S.C. 1601.8

S U M M A R Y  OF A R G U M E N T

» I

A.

Under the Truth in Lending Act, creditors who 
regularly extend credit involving a finance charge 
must disclose pertinent information to consumers in 
credit transactions where a finance charge is or may

7 Under 15 U.S.C. 1640, consumers may sue creditors for vio­
lations of the Act in any court of competent jurisdiction.

8 On April 27, 1972, the Senate passed the Fair Credit 
Billing Act, S. 652, in which the four installment rule is in­
cluded as an amendment to the Truth in Lending Act. The 
accompanying report, S. Rep. No. 750, 92d Cong., 2d Sess. 18 
(1972), explains the provision’s purpose as follows:

This section applies the disclosure provisions o f the T IL  A  
to creditors who levy no charge but who permit payment 
in four or more installments. The Board administratively 
promulgated the more-than-four installment rule to pre­
vent any potential circumvention by creditors who might in- 
include a finance charge in their cash price. One court de­
cision held the Board’s rule exceeded its authority while 
another decision affirmed the Board’s authority. The amend­
ment thus clarifies the Board’s power to issue such a 
regulation.

S. 652 is currently before the Consumer Affairs Subcommittee of 
the House Banking and Currency Committee.



7

be imposed. 15 TT.S.C. 1602, 1631. There would be no 
difficulty in applying this provision to installment sales 
if creditors always differentiated the cost of credit 
from the price of the goods. However, some creditors 
simply pack credit costs into the selling price, thereby 
hiding the finance charge, which includes all charges 
incident to the extension of credit in addition to inter­
est. 15 TT.S.C. 1605(a).

This practice was often mentioned during the seven 
years of congressional hearings on the Act. Congress 
assumed that whenever credit had been extended “ free 
of charge” this simply meant that the creditor had 
buried the finance charge in the price of the goods. 
Although Congress did not perceive any way of pre­
venting this practice, it believed that the Act would 
nevertheless benefit consumers in “ no-charge-for- 
credit” sales since creditors would still have to disclose 
information other than the finance charge, such as the 
cash price, the amount of downpayment, the number 
of payments, and the amount to be financed. This 
would enable consumers to shop on the basis of price 
even when they could not shop by comparing finance 
charges.

B.

It is against this background that the Board promul­
gated the “ four installment rule” in its Regulation Z, 
which provides that where consumer credit is extended 
and where, pursuant to an agreement, the purchase 
price is payable in more than four installments, the 
creditor is subject to the Act’s disclosure requirements.



8

12 C.F.R. 226.2 (k).9 The Board exercised its rule- 
making authority pursuant to Section 1604 of the Act, 
15 U.S.C. 1604, after considering the recommendations 
of a representative advisory board and after receiv­
ing hundreds of comments and suggestions from in­
dustry and consumer groups and government agencies. 
Under Section 1604, the Board’s regulation is valid 
if  the resulting classifications or adjustments in the 
class transactions are, in the Board’s judgment, neces­
sary or proper to effectuate the purposes of the Act, 
to prevent evasion or circumvention of the Act, or to 
facilitate compliance with the Act.

As to the first of these independent grounds for 
rulemaking, the four installment rule effectuates the 
purposes of the Act by assuring that consumers will 
have the benefit of meaningful information, from cred­
itors even when finance charges are not identified. 
This fulfills the Act’s goal of providing consumers 
with full information so they can better decide whether 
to enter into credit transactions. By making disclo­
sure turn on whether more than four installments are 
involved, rather than on whether the creditor has in 
fact differentiated the cost of credit from the price of 
the goods, the Board’s regulation ensures the Act will 
reach “no-charge-for-credit ” vendors, which is consis­
tent with Congress’ assumption in this regard.

9 The regulations define creditors subject to the Act as those 
who regularly extend “ consumer credit,” which includes trans­
actions where the purchase price is payable in more than four 
installments. 12 C.F.R. 226.2 (m ).



9

c.

Moreover, the four installment rule is necessary 
and proper to prevent evasion of the Act. Without it, 
creditors could easily attempt to circumvent all of 
their disclosure obligations by hiding the finance 
charge in the selling price, thereby exempting them­
selves from coverage. 15 TJ.S.C. 1602(f), 1631, 1638. 
And this would mean that the less creditors tell their 
customers, the easier it would be for them to avoid 
compliance with provisions designed to give consumers 
full information.

Even if the four installment rule reaches credit 
transactions that the provisions of the Act themselves 
might not cover because there are in fact no finance 
charges involved directly or indirectly,10 the Board 
validly promulgated the rule under Section 1604. 
When Congress authorized the Board to make adjust­
ments in any class of transactions to prevent evasion, 
it must have intended to allow the Board to include 
transactions the provisions of the Act itself might, on 
their face, not reach.

D.

In addition, the Board’s regulation is valid under 
Section 1604 because it facilitates compliance with 
the Act. Private civil actions are one of the p r i m a r y  

methods of enforcing the Act. But if  the actual exist­
ence of finance charges had to be shown before no­

10 Congress, however, assumed that whenever credit is ex­
tended the costs necessarily incurred by the creditor are in fact- 
passed on to the consumer despite the absence o f an identified 
finance charge.



10

charge-for-credit vendors were required to disclose 
information, there would be endless legal disputes 
after the fact over bookkeeping practices and other 
matters foreign to the central purpose of providing 
the consumer with full information. Yet the Act is 
designed to relieve consumers of the burden of discov­
ering undisclosed information; and disclosure is to 
be made before the transaction is consummated.

The four installment rule is intended to. meet these 
problems. It provides consumers and creditors with 
an easily understandable rule to rely upon in no- 
eharge-for-credit transactions. It ensures uniform ap­
plication of the Act with respect to such transactions 
and facilitates compliance.

Since the Board’s four installment rule is author­
ized under Section 1604, it should be upheld. We deal 
here with remedial legislation and with a regulation 
that is reasonably related to the purposes of the Act. 
Thorpe v. Housing Authority, 393 U.S. 268, 280^281. 
Furthermore, the regulation in question represents 
the Board’s interpretation of the provisions and pur­
poses of the Act, and that interpretation is entitled 
to grant weight, especially since this is a new statute 
that the Board must set in motion through regula­
tions. Udall v. Tollman, 380 U.S. 1, 16. The court be­
low erred in holding that the Board had exceeded its 
authority.



11

II.

The court of appeals also erred in holding that the 
Board’s regulation deprives creditors of due process 
in violation of the Fifth Amendment. The constitu­
tionality of the four installment rule depends not on 
whether it establishes a “ conclusive presumption” re­
garding the existence of finance charges, as the court 
below found, but rather on whether there is a rational 
basis for the regulation and whether it is reasonable 
in relation to the end sought to be achieved. West 
Coast Hotel Co. v. Parrish, 300 U.S. 379, 391; Fergu­
son v. Skrupa, 372 U.S. 726, 730-733. Under that 
standard, the regulation should be sustained. Even if 
some creditors in fact give “ free” credit, the burden 
of requiring them to disclose is far outweighed by the 
benefits of the Board’s prophylactic rule, which we 
have discussed above.

Thus, characterizing the Board’s regulation as a 
“ conclusive presumption” does not answer the question 
whether the substantive rule of law it represents is 
constitutionally valid. This Court, as well as the courts 
of appeals, have often upheld conclusive presump­
tions, which are simply a method of classifying. As 
we have stated above, with respect to economic regula­
tion of business activity, due process requires only 
that the provisions at issue have a rational basis and 
be reasonable in view of the policies served. The four 
installment rule meets that test and the court below 
erred in holding otherwise.

472- 022— 72- 3



12

A R G U M E N T

I.

T H E  FO U R  IN S T A L L M E N T  R U L E  IS  A  V A L ID  E X E R C ISE  OF 

T H E  FED ER AL RESERVE BO A R D ’S R U L E -M A K IN G  A U T H O R ­

IT Y  U N D E R  T H E  T R U T H  IN  L E N D IN G  ACT

Aside from constitutional questions, which we dis­
cuss separately below, this case turns upon whether 
the Board, in promulgating the disputed regulation, 
acted within its authority under 15 U.S.C. 1604, which 
provides that:

The Board shall prescribe regulations to carry 
out the purposes of this subchapter. These reg­
ulations may contain such classifications, dif­
ferentiations, or other provisions, and may pro­
vide for such adjustments and exceptions for 
any class of transactions, as in the judgment 
of the Board are necessary or proper to effec­
tuate the purposes of this subchapter, to pre­
vent circumvention or evasion thereof, or to 
facilitate compliance therewith.

In our view, the four installment rule is a proper 
exercise of the Board’s Section 1604 rulemaking au­
thority and validly serves not simply one, but all three 
of the enumerated functions of rulemaking under 
that provision: it effectuates the purposes of the Act, 
it prevents evasion of the Act, and it facilitates com­
pliance with the Act. Prior to dealing with these 
specific points, however, we shall discuss briefly the 
legislative history of the Act, to put the issues in 
proper perspective.



13

A .

THE LEGISLATIVE HISTORY OF THE ACT SUGGESTS THAT CONGRESS 
INTENDED THAT, EVEN IF SELLERS WERE NOT REQUIRED TO DIS­
CLOSE FINANCE CHARGES HIDDEN IN  THE SELLING PRICE, THEY 
NEVERTHELESS HAD TO COMPLY WITH THE ACT’S OTHER DISCLO­
SURE REQUIREMENTS

The Act itself requires a “ creditor” to disclose 
pertinent information in a “ consumer credit” transac­
tion where a “ finance charge” is or may be imposed. 
15 U.S.C. 1631. To understand the applicability of 
this requirement, one must refer to the Act’s defini­
tions of the quoted words and phrases. “ Creditor” 
means someone who regularly extends credit “ for 
which the payment of a finance charge is required.”  
15 U.S.C. 1602(f). “ Credit” is the right granted 
by a creditor to a debtor “ to incur debt and defer 
its payment,” 15 U.S.C. 1602(e), and the adjective 
“ consumer” refers to transactions where the debtor 
is a natural person and the subjects of the transac­
tions are primarily for personal, family, household 
or agricultural purposes. 15 U.S.C. 1602(h). “Finance 
charge”  is not simply interest, but “ the sum of all 
charges, payable directly or indirectly by the person 
to whom the credit is extended, and imposed directly 
or indirectly by the creditor as an incident to the 
extension of credit * * *.”  15 U.S.C. 1605(a).

These statutory provisions thus contemplate that 
the Act’s disclosure requirements apply to credit 
transactions involving finance charges and there would 
be no difficulty with respect to installment purchases 
if, in all such transactions, the charges for allowing



14

the consumer to pay over a period of time were identi­
fiable or if the sum of the payments totalled more 
than the stated cash price of the goods purchased, 
which would indicate the presence of a finance charge. 
But what if the finance charge is buried in the install­
ment price? (That is, the seller does not differentiate 
the cost of credit from the total selling price.) Of 
course, if  the creditor then gives a “ discount” for cash 
purchases this would be tantamount to charging a 
higher price for credit sales, or, in other words, a 
finance charge.11 But suppose the creditor does not 
state a cash price or does little or no cash business so 
that such a comparison is not readily available. Should 
such creditors be able to escape all of the Act’s dis­
closure requirements by merely refusing to identify 
finance charges and quoting to their customers only 
the amount of the monthly payment ?

These questions highlight one of the major problem 
areas considered by Congress in the seven years of 
hearings on the Truth In Lending Act: the existing 
practice of burying finance charges in the selling 
price 12 and the possibility that this practice not only

11 See Hearings on S. T/Ifi before a Subcommittee o f the Sen­
ate Committee on Banking caul Currency, 87th Cong., 1st Sess. 
57 (1961) (.lames Tobin, Member of Council o f Economic A d­
visers: “ [W jhere the store says to a potential time customer, 
‘Tliis is my price and there are no credit charges or the credit 
charges are very low’ ” and “he is at the same time saying to a 
potential cash customer, ‘My price is really much lower than the 
one I  am quoting for time customers,’ then I  think he is in 
violation of the bill.” )

12 Senator Proxmire, one o f the co-sponsors o f this legisla­
tion, estimated that in 1961 more than 50 percent of all retail 
merchants “ concealed” their credit charges in the price of the



15

would continue but also would become more wide­
spread if legislation required creditors to disclose in­
formation such as the cost of credit, the cash price for 
the goods sold, and the total installment price.13 Dur­
ing the hearings, everyone assumed that “ no charge 
for credit” simply meant that the creditor had 
“ buried,” “ concealed” or “packed”  finance charges in 
the price of the goods sold.14 And there are indications 
in the hearings that the provisions of the pending- 
legislation might not, in themselves, forbid creditors 
from doing this.15 16

goods. Hearings on S. 171fi before a .Subcommittee o f the Sen- 
ate Committee on Banking and Currency, 87th Cong., 1st Sess. 
389-390 (1961).

13 See, e.g., Hearings on S. 17iO before a Subcommittee o f the 
Senate Committee on Banking and Currency, 87th Cong., 1st 
Sess., 49, 57, 127, 389-390, 447-448, 563, 999-1000 (1961); H ear­
ings on S. 171fi before a Subcommittee o f the, Senate Com­
mittee on Banking and Currency, 87th Cong., 2d Sess. 16, 45, 
360-361, 366 (1962); Hearings on S. 750 before a Subcommittee 
o f the Senate Committee on Banking and Currency, 88th Cong., 
1st & 2d Sess. 500-501, 97S (1963-1964); Hearings on S. 5 be­
fore the Subcommittee on Financial Institutions o f the Senate 
Conimittee on Banking and Currency, 90th Cong., 1st Sess. 
377-378, 513, 699 (1967); Hearing on H.R. 11601 before the 
Subcommittee on Consumer Affairs o f the House Conimittee on 
Banking and Currency, 90th Cong., 1st Sess. 590-591, 596, 802, 
825-826 (1967).

14 See, e.g ., note 13 supra; the following statement by Senator
Proxmire in Senate Hearings on S. 5, supra note 13, at 513 (“ I 
see, then what you are saying is that at Foyes you don’t pay 
a carrying charge of any kind. Foj'es offers free payment ac­
counts without interest. Obviously what Foyes is doing is bury­
ing the charge and [sic] [in] the cost of the merchandise.” ) ; 
and House Hearings on H .R. 11601, supra note 13, at 538 (Kep. 
Williams: “ credit isn’t free under any circumstances” ).

16 See, e.g., Senate Hearings on S. 174,0, 87th Cong., 1st Sess., 
supra note 13, at 381 (Senator Proxmire).



16

However, although a creditor might not he required 
to disclose finance charges if these were concealed in 
increased prices, this did not mean the creditor would 
have no obligation to disclose other relevant informa­
tion, such as the cash price and the total amount to 
be financed. Senator Douglas, who had been the prin­
cipal proponent of the Act, replied as follows to Sen­
ator Bennett’s claim that it would be impossible to 
prevent the burying of finance charges: 16 * 18

Senator Douglas. I  would like to call to your 
attention, Senator, for purposes of the rec­
ord, that this bill does not provide for judg­
ment solely on the basis of the two, annual in­
terest rate or the total finance charges. It also 
provides that there shall be a statement of the 
cash price or delivery price of the property or 
service to be acquired. Both things are to be 
stated, price and finance charges, and the judg­
ment of the consumer can be on the basis of 
both of these factors, not merely on one alone;

16 Senate Hearings on S. 1740, 87th Cong., 1st Sess., supra 
note 13, at 447-448.

Others made the same point with respect to buried finance 
charges. See, e.g., id., at 563 (R. C. Morgan, President, Credit 
Union National Association: “ And if  there is a separate charge 
for credit, a price for that charge. In  any event, the customer, 
the buyer, can find out and tell exactly what the total cost, 
including the credit, be it concealed or otherwise, is going to 
be. This I  think, is what is good about this legislation»” )
(emphasis added); House Hearings on II.R . 11601, supra 
note 13, at 825-826 (Rep. Sullivan: I f  the merchant conceals 
the cost o f credit by raising the purchase price and the con­
sumer nevertheless buys “ at least he knows what he is doing 
and he is doing it with his eyes open. This is what we are try­
ing to accomplish in this legislation.” ).



17

and if a merchant tries to have a low finance 
charge and bury it in a high cash price or de­
livered price, then the purchaser can shop on 
price just as much as on the finance charges.

In sum, it was generally assumed that whenever 
a merchant extended credit and purported to impose 
no finance charges it simply meant that the cost of 
credit had been absorbed in the price of the goods or 
services. But this did not relieve the creditor o f his 
duty to disclose; although he might not have to revise 
his pricing scheme in order to differentiate the cost 
of credit from the price of the goods, he nevertheless 
had to tell the consumer the other information set 
forth in the Act."

B.

THE BOARD’S FOUR INSTALLMENT RULE, WHICH CLARIFIES THE

SCOPE OF THE ACT, EFFECTUATES ITS PURPOSE AND IS THEREFORE

VALID UNDER SECTION 1604

It is against this background of legislative history 
and the provisions of this Act that the Federal Re­
serve Board promulgated the “ four installment rule.”  
Under the Board’s Regulation Z, a “ creditor” subject 
to the disclosure rules is anyone who regularly ex- 17

17 That identifiable finance charges are not the sine qua non 
o f the obligation to disclose is further indicated by the fact 
that the disclosure requirements are specifically applicable to 
certain types o f leases and bailments where the bailee or lessee 
is given an option to buy—transactions which, by their very 
nature, do not involve identified finance charges. 15 U.S.C., 
1602(g). As with “no-charge-for-credit” installment sales, Con­
gress believed that this was simply another way o f deferring 
payment and that finance charges would therefore be present, 
although imposed indirectly and not stated.



18

tends “ consumer credit,” 12 C.F.R. 226.2(m ), and 
“ consumer credit”  means the extension of credit 
where a finance charge is imposed or where, pursuant 
to an agreement, the purchase price “ is or may be 
payable in more than four installments.” 12 C.F.R. 
226.2 (k). Thus, “ no-charge-for-credit”  vendors must 
disclose other pertinent information when payment is 
made in more than four installments, even if  finance 
charges are not identifiable.

Before so exercising its rulemaking authority, the 
Board established, pursuant to Section 1609 of the 
Act, 15 U.S.C. 1609, an advisory board of 20 members, 
representing “ retailer, lender, and consumer groups in 
all sections of the country. ” 18 In September 1968, 
after careful study with the advisory board’s assist­
ance, the Board issued a draft of proposed regulations 
and later received more than 1200 comments and sug­
gestions about the draft from industry and consumer 
groups, and others, including state and federal agen­
cies.19 In light of these comments, the Board published 
and later promulgated Regulation Z with the “ four 
installment rule.”  20

The reasons for the Board’s action are clear. The 
Board knew, as the hearings on the Act had revealed, 
that vendors could easily evade their disclosure obli­
gations by including finance charges in the price of

18Hearings on Consumer Credit Regulations before the Sub­
committee on Consumer Affairs o f the House Committee on 
Banking and Currency, 91st C.ong., 1st Sess. 378 (1969) (state­
ment of J. L. Robertson, Vice Chairman, Board of Governors 
o f the Federal Reserve System).

19 Id. at 379.
20 34 Fed. Reg. 2002 (1969).



19

the goods or services. The Board's answer to the prob­
lem—the four installment rule—effectuates the “ cen­
tral objective [of the Act] of providing full informa­
tion to consumers”  21 22 and clarifies the scope of the Act 
with respect to “ no-charge-for-eredit”  practices. 23 
The Committee Reports indicate that Congress de­
fined creditors as those who extend credit and require 
a finance charge, 15 U.S.C. 1602(f), in order to ex­
clude from coverage only deferred-payment sales that 
are essentially cash transactions. Thus, “ the disclosure

21 S. Rep. No. 392, 90th Cong., 1st Sess. 2 (1967); see also 15 
U.S.C. 1601.

22 See statement of ,1. L. Robertson, Vice Chairman o f the 
Board o f Governors, Federal Reserve System, Hearings on Con­
sumer Credit Regulations, supra, note 18, at 380-381:

Another less troublesome problem involves credit ex­
tended “ without charge.”  The act defines creditors as per­
sons who “ regularly extend or arrange for the extension 
o f credit for which the payment of a finance charge is re­
quired.” In many cases creditors claim to make no finance 
charge, although in every other respect they regularly ex­
tend consumer credit. Take, for example, the merchant who 
advertises watches for a dollar down, and a dollar a week, 
with no indication of how many dollars are required to pay 
for the watch. There is little doubt that lie is in fact, col­
lecting a finance charge, included but not identifiable in the 
cash price. And it seems clear that Congress intended to 
reach advertising o f this kind.

Accordingly, the regulation defines “consumer credit” to 
include credit payable in more than four installments even 
though no finance charge is expressly imposed. Thus, the 
advertising and disclosure provisions apply to this type of 
credit except for those provisions that cannot be complied 
with because the finance charge cannot be identified. In the 
example given above, the merchant would have to state the 
price o f the watch and give particulars as to the payment 
schedule, even though he could not give the amount o f the 
finance charge expressed as an annual percentage rate.



20

requirement would not apply to transactions which 
are not commonly thought of as credit transactions, 
including trade credit, open-account credit, 30-, 60-, or 
90-day credit, etc., for which a charge is not made.”  23 
Beyond this, however, Congress believed that finance 
charges—identified or not—would be present in longer 
term installment sales 24 since the costs of money, the 
costs of collecting overdue amounts, the costs of credit 
investigations, and so forth would be involved.

Thus, “ finance charge”  is defined in the Act as “ the 
sum of all charges, payable directly or indirectly by 
the person to whom the credit is extended and imposed 
directly or indirectly by the creditor as an incident 
to the extension of credit.” 15 TJ.S.C. 1605(a) (em­
phasis added) .20 And the general disclosure require­
ments of the Act are for the benefit of “ each person 
to whom consumer credit is extended and upon whom 
a finance charge is or may be imposed,” 15 TJ.S.C. 1631 
(emphasis added)—which indicates that it is sufficient 
that the nature of the transaction renders the presence 
of such a charge likely.

The Board’s four installment rule thus makes clear 
what is implicit, if not explicit, in the Act itself: that

23 S. Rep. No. 392, 90th Cong., 1st Sess. 14 (1967); H.R. Rep. 
No. 1040, 90th Cong., 1st Sess. 25 (1967). In light o f these 
comments and since most installment purchases involve monthly 
payments, the Board limited its rule to credit transactions pay­
able in more than four installments.

24 See pp. 15-16 supra.
23 See S. Rep. No. 392, 90th Cong., 1st Sess. 8 (1967) (the 

annual rate o f finance charge is “ a composite rate which in­
cludes all charges incident to credit including interest” ).



21

even if they do not identify a finance charge, creditors 
are still subject to the other disclosure requirements.26 
In the language of Section 1604, it “ effectuate[s] the 
purposes o f” the Act by making a reality the A ct’s 
promise “ to assure a meaningful disclosure of credit 
terms so that the consumer will lie able to compare 
more readily the various credit terms available to him 
and avoid the uninformed use of credit.” 15 U.S.C. 
1601. It assures all credit customers that they will at 
least be informed of such important credit informa­
tion as the cash price, the number and amount of pay­
ments, default or delinquency charges, any security 
interest held by the creditor, and the amount to be 
financed.2715 U.S.C. 1638.

26 On the basis o f the legislative history, the Board's position 
is that if the cost o f extending credit is not identifiable, the 
amount of any “ finance charge” need not be disclosed. See note 
22 supra. In such situations, a creditor’s violation o f the other 
applicable disclosure requirements would make him liable for 
the minimum statutory penalty of $100. 15 U.S.C. 1640(a)(1).

27 That Congress knew the importance o f informing the con­
sumer of the total installment price is shown by the specific 
requirement in 15 U.S.C. 1638 that the creditor disclose this. 
See Senate Hearings on S. l l l f i , 87th Cong., 1st Sess., supra, 
note 13, at 117, which contains the following colloquy:

Mr. B lack . Another point that should be made here, too, 
is that when people buy on time, what they frequently will 
ask is: What is it going to cost me a month?

Senator B ennett . That is right.
Mr. B lack . In many instances, I  gather they do not 

bother to add it all up and find out what the total cost 
would be. Vei'y often, they do, but that is the main con­
cern o f people, in many instances: What is it going to cost 
me a month?

Senator B ennett1. That is right.
Mr. B lack . When you think about it that way, this 

monthly charge, sometimes it adds up to more than the



( 22

c.

THE BOARD ALSO VALIDLY EXERCISED ITS RULEMAKING AUTHORITY
UNDER SECTION 16 04 BECAUSE THE FOUR INSTALLMENT RULE IS
NECESSARY TO PREVENT EVASION OF THE ACT

The four installment rule is “ in the judgment of the 
Board * * * necessary or proper * * * to prevent 
circumvention or evasion”  of the A ct28—another, 
separate basis for the Board’s exercise of rulemaking 
authority under Section 1604. Without the rule, cred­
itors could avoid their obligation to disclose by simply 
raising their selling price and ostensibly discontinuing 
charging for credit, thereby exempting themselves 
from coverage because they do not impose finance 
charges. See 15 XJ.S.C. 1602(f), 1631, 1638.29 This

buyer can afford. I think, unfortunately, situations arise 
as a result o f that.

See also House Hearings on H .R. 11601, supra note 13 at 1176, 
where Senator Robert F. Kennedy pointed out that “ The most 
shocking cases o f overreaching are generally o f poor people, 
who cannot afford a down payment, are attracted by low 
monthly payments, and are unsophisticated about the total cost 
they will end up paying.”

28 See note 22 supra.
29 In addition to the disclosure requirements o f the Act, 

Section 1635 grants the consumer a three-day right o f rescission 
when he enters into a credit transaction involving a security 
interest in his residence. This provision was inserted in the 
Act partially as a result o f overreaching by some home improve­
ment contractors. 114 Cong. Rec. 1611 (1968). Should the more 
than four installment rule be held invalid, such creditors could, 
conceivably, bury their finance charges to avoid giving consumers 
these rescission rights, as well as the Truth in Lending disclo­
sures. Moreover, it could be argued that the prohibitions against 
“ bait” advertising in Section 1662 of the Act would then not be 
applicable.



23

would bring about the ironic consequence that the less 
the creditor tells his customers the more easily he 
can evade his duty under an Act passed for the pur­
pose of providing consumers with full information.

Although competition from other sellers with lower 
cash prices might deter this practice in middle class 
neighborhoods, where a large segment of consumers 
buy on a cash basis, there would be no such deterrence 
in poorer areas where the vast majority of consumers 
buy on credit; 30 indeed, during the hearings Congress 
heard evidence that this practice already was prev­
alent.31 As the court held in Strompolos v. Premium 
Readers Service, 326 F. Supp. 1100, 1103 (h.D. 111.), 
the Board’s four installment rule is authorized by the 
Act and is “not only sensible but also necessary to 
prevent the Truth in Lending Act from becoming a 
hoax and delusion upon the American public.” 

Respondent has contended that despite the need to 
prevent circumvention of the Act, the Board had no 
authority to promulgate the rule because it covers 
some transactions that the Act itself might not reach— 
that is, credit transactions payable in more than four 
installments where the consumer does not in fact pay 
a finance charge directly or indirectly. Even assuming 
that such transactions are theoretically possible, al­
though Congress assumed otherwise as a practical 
matter,32 this is not a basis for striking down the rule. 
As Mr. Justice Holmes stated for the Court in West­

30 See, e.g., Caplovitz, The Poar Pay More, 12-18, 88, 117-150 
(1963), and note 27 su-pra.

31 See note 12 supra.
32 See p. 15 supra.



24

fall v. United States, 274 U.S. 256, 259, “ when it is 
necessary in order to prevent an evil to make the law 
embrace more than the precise thing to be prevented 
it may do so.” See also North American Co. v. Securi­
ties and Exchange Commission, 327 U.S. 686, 710-711. 
Congress recognized this in Section 1604, when it au­
thorized the Board to make “ adjustments and excep­
tions for any class of transactions” in order to prevent 
evasion of the Act. See Gemsco, Inc. v. Walling, 324 
U.S. 244. This must mean that for credit transactions 
with no identified finance charges the Board had au­
thority to promulgate a general rule to prevent cir­
cumvention even if the rule embraces some trans­
actions that the provisions of the Act might not, on their 
face, reach.

D.

THE BOARD’S REGULATION ALSO IS VALID BECAUSE IT FACILITATES 
COMPLIANCE WITH THE ACT— ANOTHER BASIS FOR RULEMAKING 
UNDER SECTION 1604

The Board also reasonably concluded that the four 
installment rule was necessary and proper “ to facili­
tate compliance” with the Act—still another indepen­
dent basis for rulemaking under Section 1604. As the 
Committee Reports state, one of the main methods of 
enforcing the Act is through private civil actions.33 
However, if  in “ no-charge-for-credit” transactions the 
creditor’s duty to disclose turned on whether the con­
sumer could show the actual existence of buried finance

33 See S. Rep. No. 392, 90th Cong., 1st Sess. 9 (1967) (“ The 
enforcement o f the bill would be accomplished largely through 
the institution of civil actions authorized under section 7 of 
the bill.” ) ; H.R. Rep. No. 1040, 90th Cong., 1st Sess. 19 (1967).



25

charges as a component of the price of the goods, there 
would be great difficulties in securing compliance.

Disclosure of all required information is to be made 
at the outset, when the presence of a finance charge 
may not be apparent; the creditor is not to await the 
consumer’s discovery of hidden charges before ful­
filling his disclosure obligations. The very purpose of 
the Act is to relieve consumers of the substantial 
burden of discovering such things so that they will be 
assured of having sufficient information to decide 
whether to enter into the credit transaction.

In addition, if  each transaction had to be dissected 
after the fact in order to determine the existence of 
buried finance charges, there would be endless legal 
disputes over bookkeeping practices and other matters 
far-removed from the central purposes of the Act, The 
Board justifiably rejected any such approach in light 
of the great difficulties in administration and the lack 
of uniformity that would be bound to arise, which 
would not only frustrate the A ct’s goal of informing 
consumers, but also would leave creditors without any 
clear and easily understandable rule to follow in “ no- 
charge-for-credit ’ ’ transactions.34

34 Sections 1663 and 1664, 15 U.S.C. 1663, 1664, generally pro­
vide that i f  a specific credit term is advertised, for example, 
“ ten dollars down,” the creditor must give additional credit 
terms in his advertisement to inform fully prospective custom­
ers of his credit plan. In the absence of the four installment 
rule, creditors who extend long term credit that nominally did 
not involve a finance charge might, advertise such specific terms 
without complying- with the more complete advertising require­
ments applicable to covered creditors. Since the advertisement 
would not, itself, indicate either to enforcement agencies or to 
competitors why a particular creditor’s advertising did not com-



26

This case itself, illustrates the wisdom of the 
Board’s rule. I f  BPS had complied with the Act and 
the regulations thereunder, it would have informed 
Mrs. Mourning of, among other things, the “ cash 
price”  of the magazine subscriptions. See 15 U.S.C. 
1638. But PPS did not do this, claiming that the Act 
did not apply to it because it imposed no finance 
charges. \ret in its brief in opposition to the petition 
for a writ of certiorari, at p. 9, note **, PPS ad­
mitted for the first time that it gave a discount to 
cash customers, which is simply another way of saying 
that persons who buy on time are charged for some­
thing more. And that something is at least part of 
what Congress defined as a finance charge, imposed 
“ indirectly.” 35

Of course, Mrs. Mourning could not have known of 
this difference in price for cash and time purchases 
at the time she signed her contract. And perhaps PPS 
actually thought it had not imposed any finance 
charges, although all indications now are that it did. 
But one of the major reasons for the four installment 
rule is that creditors, as v̂ ell as consumers, will clear­
ly know what is required with respect to disclosure * 33

ply with the Act’s requirements, the Board and the Federal 
Trade Commission foresee substantial administrative problems 
in policing credit advertising and encouraging voluntary com­
pliance should the rule be invalidated.

33 See note 11, supra, indicating that giving a discount to cash 
customers while claiming to time customers that no finance 
charges are being imposed would be a violation of the Act.



2 7

before the transaction is consummated and that com­
pliance with the Act will thereby be facilitated.

O
In sum, we believe that the hoard’s action in pro­

mulgating the regulation in question is an example 
of the administrative process working at its best. 
After thorough study and consideration, the Board 
dealt with the problem of buried finance charges and 
the potential for evasion of the Act by setting down a 
clear and consise rule upon which both consumers and 
creditors can confidently rely in determining their 
rights and obligations under that Act, Where, as here, 
Congress has enacted remedial legislation and con­
ferred broad rulemaking authority upon an expert 
agency, the agency’s regulation should be upheld if 
it is “ reasonably related to the purposes of the en­
abling legislation”  36 and “ within the bounds of [its] 
administrative powers.” 37 And to the extent that the 
Board’s rule represents its interpretation of the pro­
visions and purposes of the Act, this construction is 
entitled to great weight,38 particularly since we deal 
here with a new statute and with rules promulgated 
by the agency charged with the duty of setting it in

36 Thorpe v. Housing Authority, 393 U.S. 268, 280-281; see 
American Trucking Associations, Inc. v. United States, 344 U.S. 
298, 308-313.

37 American Telephone & Telegraph Go. v. United States, 299 
U.S. 232, 236.

38 See National Broadcasting Co. v. United States, 319 U.S. 
190; Norwegian Nitrogen Products Co. v. United States, 288 
U.S. 294, 315.



28

motion.39 40 Under these standards, the court below erred 
in holding that the Board had exceeded its authority.49

II.

T H E  FO U R  IN S T A L L M E N T  R U L E  DOES N O T V IO L A T E  DUE

PROCESS

The court of appeals also held that the four install­
ment rule establishes a “ conclusive presumption”  that

39 See Vdall v. Tollman, 880 U.S. 1, 16; Power Reactor De­
velopment Go. v. International Electricians, 361 U.S. 396.

The rule that the contemporaneous construction of a statute 
by the administering agency is entitled to great weight has a 
long history. See Edward''s Lessee v. Darby, 12 Wheat. 206, 
210: “ In the construction of a doubtful and ambiguous law, 
the contemporaneous construction of those who were called 
upon to act under the law, and were appointed to carry its pro­
visions into effect, is entitled to very great respect.”  The rule 
is based on the idea that contemporaneous constructions in 
regulations often reflect the general understanding of law at 
the time it was enacted by those who took part in the en­
acting process and thus is evidence o f legislative intent. More­
over, the rule allows persons affected by the regulation to rely 
upon it with the knowledge that the courts will probably up­
hold the agency’s action if, in the future, the regulation is 
challenged in a lawsuit; thus, certainty and predictability of 
the law are promoted.

40 The court below ignored the important remedial aspect 
o f Truth in Lending and instead characterized the Act as 
penal because there are penal sanctions for willful and know­
ing violations, 15 U.S.C. 1611. (Pet. App. 17a). For this rea­
son, it interpreted the statute narrowly. However, the penal 
provisions are not involved in this case, and more important, 
the Truth in Lending Act and the four installment rule do 
not involve the problem of lack of notice that dictates narrow 
construction of penal statutes. See Lametta v. New Jersey, 306 
U.S. 451, 453; McBoyle v. United States, 283 U.S. 25, 27 (Mr. 
Justice Holmes). In any event, when a remedial statute is sought 
to be enforced in a civil proceeding, it is to be interpreted broadly 
to effectuate its purpose, not narrowly because it also has criminal 
sanctions. Securities and, Exchange Commission v. Joiner Gorp., 
.820 U.S. 344, 353-355.



29

all creditors impose finance charges in consumer credit 
transactions payable, pursuant to an agreement, in 
more than four installments. After so characterizing 
the regulation, the court invoked the due process 
clause of the Fifth Amendment to strike it down 
(Pet. App. 21a to 23a).

But whether the substantive rule of law embodied 
in the Board’s regulation deprives FPS and other 
creditors of due process does not depend on labels; 41 
the days of Lochner v. New York, 198 U.S. 45, and 
Adkins v. Children’s Hospital, 261 U.S. 525, and 
other similar decisions are long passed.42 Instead, when 
economic regulation of business is in question, the 
standard of review is that stated by this Court in 
West Coast Hotel Co. v. Parrish, 300 U.S. 379, 391: 
“ regulation which is reasonable in relation to its sub­
ject and is adopted in the interests of the community 
is due process.” See also Ferguson v. Sl§u,p/a, 372 U.S. 
726, 730-733.

The four installment rule meets that test. There is 
a rational basis for the classification established by the 
regulation and the regulation is reasonable in light of 
the relative benefits and burdens it creates. The Board, 
as well as Congress, knew that finance charges are

41 See Mr. Justice Holmes, joined by Mr. Justice Brandeis 
and Mr. Justice Stone, dissenting in Schlesinger v. Wisconsin, 
270 U.S. 230, 241; and Mr. Justice Stone, joined by Mr. Jus­
tice Brandeis (Mr. Justice Cardozo did not participate in the 
case), dissenting in Heiner v. Dorman, 285 U.S. 312, 332, 349 
(“ Unless the line [the regulation] draws is so wide of the 
mark as palpably to have no relation to the end sought, it is 
not for the judicial power to reject it and substitute another, 
or to say that no line may be drawn.” ).

42 See Jackson, The Struggle for Judicial Supremacy 197- 
285 (1941).



30

typically invol ved in consumer credit transactions 4° 
because, when payment is deferred, the seller incurs 
costs and those costs are passed on to the consumer. 
Even if some creditors in fact give “ free”  credit, the 
burden of disclosure is minimal while the benefits of 
the Board’s prophylactic rule are considerable.

As we discussed above, see pp 22 to 27, without 
the four installment rule there would be substantial 
danger that the Act could be easily circumvented or 
evaded; moreover, transaction-by-transaction deter­
minations regarding the existence of unidentified fi­
nance charges would frustrate the purposes of the 
Act and, in the Board’s viewT, would be unworkable. 
In short, the important policy considerations under­
lying the Board’s regulations far outweigh whatever 
inconvenience it may cause creditors. Since the regula­
tion has a rational basis and is reasonable, it satisfies 
the substantive requirements of due process.43 44

Thus, even if the four installment rule is properly 
characterized as a “ conclusive presumption,” it is 
nevertheless constitutional under the Fifth Amend­
ment. “ [T]he creation by law of such presumptions is 
after all but an illustration of the power to classify. ’ ’ 
Jones v. Brim , 165U.S. 180,183. See also Martin v. City 
of Struthers, 819 U.S. 141, 154 (Frankfurter, J. con­
curring). And this Court, as well as the courts of 
appeals, including the Fifth. Circuit, have often up­
held the validity of “ conclusive presumptions.”  See,

43 See pp. 5, supra.
44 Cf. Metropolis Theatre Co. v. City of Chicago. 228 U.S. 

61, 69-70.



31

eg., Jones v. Brim, 165 U.S. 180; Hawkins v. Bleakly, 
243 U.S 210; Ferry v. Ramsey, 277 US. 88; City of 
New Port Richey v. Fidelity & Deposit Co., 105 P. 
2d 348' (C.A. 5) ; United States v. Jones, 176 P. 2d 
278 (C.A. 9) ; Gratz v. Claughton, 187 F. 2d 46 (C.A. 
2) ; Jensen v. United States, 326 P. 2d 891 (C.A. 9) ; 
Shanahan v. United States, 447 P. 2d 1082 (C.A. 10).

The Shanahan case, supra, is particularly apposite. 
There, the question was whether Section 483 of the 
Internal Revenue Code (26 U.S.C. 483) violated due 
process because it created, in effect, a conclusive pre­
sumption that when goods are purchased on an install­
ment basis, a portion of the purchase price is interest. 
The court upheld the statute because it was anchored 
in the “ incontrovertible fact” that “ fujnlesis clearly 
intended as a gift, a seller will not sacrifice interest 
on deferred installment purchase payments”  and be­
cause it was “ a reasonable method of preventing 
avoidance of ordinary income tax represented by 
interest payments on installment sales contracts.”  447 
P. 2d at 1084. Similar factual considerations obtain 
here.

Schlesinger v. State of Wisconsin, 270 U.S. 230, and 
Heiner v. Donnan, 285 U.S. 312, relied upon by the 
court below, are distinguishable. As this Court pointed 
out in Helvering v. City Bank Farmers Trust, 296 
U.S. 85, and as the Tenth Circuit noted in Shanahan, 
the presumptions involved in Schlesinger and Heiner 
were invalidated because, in the Court’s view, they 
created unreasonable classifications. In those cases, the 
Court saw no rational basis for rules that all gifts



32

given within two years (Heiner) or six years 
(ScJilesinger) of the donor’s death were made in con­
templation of death. Moreover, the tax burden on the 
individual as a result of the rule could have been con­
siderable. Presumably, the result would have been the 
same even if the rules had been written without the 
presumptions, merely requiring that the gifts given 
within the prescribed period prior to the donor’s 
death must be taxed as part of the donor’s estate.43 
However, to the extent that Heiner and Schilesinger 
stand for the proposition that “ conclusive presump­
tions”  perforce violate the Fifth Amendment, these 
cases are contrary to West Coast Hotel, supra, and 
the other cases we have cited, pj3. 29-31 supra, and 
should be overruled.4*

In sum, whether the four installment rule is viewed 
as a conclusive presumption or as simply a substan­
tive rule of law, it is rationally founded pursuant to 
the Act and is reasonable in light of the important 
policies it serves. The Fifth Amendment requires no 
more and the court below erred in holding the regu­
lation unconstitutional.

45 Stanley v. Illinois,, No. 70-5014, decided April 3, 1972, in 
which this Court struck down a state dependency statute con­
clusively presuming parental unfitness of unwed fathers and 
depriving them of custody o f their children without a hearing, 
is similarly distinguishable. In that case, the private interest of 
a man in the children he sired and raised was considerable and 
the state offered no countervailing governmental interest sup­
porting the statute. Moreover, unlike Stanley, which involved 
essential family relationships, this case deals with regulation 
of business activity.

46 See also note 41 supra.



33

CONCLUSION

For the foregoing reasons, the judgment of the 
court of appeals should he reversed.

Respectful] y submitted.
E rwin N. Griswold,

Solicitor General. 
H arlington W ood, J r.,

Assistant Attorney General.
A. R aymond R andolph, J r., 
Assistant to the Solicitor General.

J u l y  1972.

A lan S. R osenthal,
Greer S. Goldman,

Attorneys.





A PPE N D IX

The Fifth Amendment to the United States Consti­
tution provides:

No person shall be held to answer for a capi­
tal, or otherwise infamous crime, unless on a 
presentment or indictment of a Grand Jury, 
except in cases arising in the land or naval 
forces, or in the Militia, when in actual service 
in time of War or public danger; nor shall 
any person be subject for the same offence to 
be twice put in jeopardy of life or limb; nor 
shall be compelled in any criminal case to be 
a witness against himself, nor be deprived of 
life, liberty, or property, without due process 
of law; nor shall private property be taken for 
public use, without just compensation.

The Truth In Lending Act, 15 U.S.C. 1601-1665, 
provides in relevant part:

§ 1601. Congressional findings and declaration 
of purpose.

The Congress finds that economic stabiliza­
tion would be enhanced and the competition 
among the various financial institutions and 
other firms engaged in the extension o f con­
sumer credit would be strengthened by the in­
formed use of credit. The informed use o f 
credit results from an awareness o f the cost 
thereof by consumers. It is the purpose of this 
subchapter to assure a meaningful disclosure of 
credit terms so that the consumer will be able 
to compare more readily the various credit 
terms available to him and avoid the unin­
formed use of credit.

( 3 5 )



36

§ 1602. Definitions and rules of construction. 
* * * * *

(e) The term “ credit” means the right grant­
ed by a creditor to a debtor to defer payment 
of debt or to incur debt and defer its payment.

(f )  The term “ creditor” refers only to credit­
ors who regularly extend, or arrange for the 
extension of, credit for which the payment of a 
finance charge is required, whether in connec­
tion with loans, sales of property or services, 
or otherwise. Tire provisions of this subchapter 
apply to any such creditor, irrespective of his 
or its status as a natural person or any type of 
organization.

(g) The term “ credit sale” refers to any sale 
with respect to which credit is extended or ar­
ranged by the seller. The term includes any 
contract in the form of a bailment or lease if 
the bailee or lessee contracts to pay as compen­
sation for use a sum substantially equivalent 
to or in excess of the aggregate value of the 
property and services involved and it is agreed 
that the bailee or lessee will become, or for no 
other or a nominal consideration has the option 
to become, the owner of the property upon full 
compliance with his obligations under the con­
tract.

(h) The adjective “ consumer”, used with 
reference to a credit transaction, characterizes 
the transaction as one in which the party to 
whom credit is offered or extended is a natural 
person, and the money, property, or services 
which are the subject of the transaction are pri­
marily for personal, family, household, or agri­
cultural purposes.

*  *  *  *  *

§ 1604. Buies and regulations.

The Board shall prescribe regulations to 
carry out the purposes of this subchapter. These 
regulations may contain such classifications,



37

differentiations, or other provisions, and may 
provide for such adjustments and exceptions 
for any class of transactions, as in the judg­
ment of the Board are necessary or proper to 
effectuate the purposes of this subchapter, to 
prevent circumvention or evasion thereof, or 
to facilitate compliance therewith.
§ 1605. Determination of finance charge.

(a) Definition.
Except as otherwise provided in this section, 

the amount of the finance charge in connection 
with any consumer credit transaction shall be 
determined as the sum of all charges, payable 
directly or indirectly by the person to whom the 
credit is extended, and imposed directly or in­
directly by the creditor as an incident to the 
extension of credit, including any of the follow­
ing types of charges which are applicable:

(1) Interest, time price differential, and 
any amount payable under a point, dis­
count, or other system or additional 
charges.

(2) Service or carrying charge.
(3) Loan fee, finder’s fee, or similar 

charge.
(4) Fee for an investigation or credit 

report.
(5) Premium or other charge for any 

guarantee or insurance protecting the cred­
itor against the obligator’s default or other 
credit loss.
* * * * *

§ 1631. General requirement of disclosure.
(a)_ Each creditor shall disclose clearly and 

conspicuously, in accordance with the regula­
tions of the Board, to each person to whom 
consumer credit is extended and upon whom 
a finance charge is or may be imposed, the 
information required under this part.



38

(b) I f  there is more than one obligor, a 
creditor need not furnish a statement of infor­
mation required under this part to more than 
one of them.
§ 1638. Sales not under open end credit plans.

(а) Required disclosures by creditor.
In connection with each consumer credit sale 

not under an open end credit plan, the creditor 
shall disclose each of the following items which 
is applicable:

(1) The cash price of the property or 
service purchased.

(2) The sum of any amounts credited as 
downpayment (including any trade-in).

(3) The difference between the amount 
referred to in paragraph (1) and the 
amount referred to in paragraph (2).

(4) All other charges, individually item­
ized, which are included in the amount of 
the credit extended but which are not part 
of the finance charge.

(5) The total amount to be financed (the 
sum of the amount described in paragraph 
(3) plus the amount described in para­
graph (4 )).

(б) Except in the case of a sale of a 
dwelling, the amount of the finance charge, 
which may in whole or in part be desig­
nated as a time-price differential or any 
similar term to the extent applicable.

(7) The finance charge expressed as an 
annual percentage rate except in the case 
of a finance charge

(A ) which does not exceed $5 and is 
applicable to an amount financed not ex­
ceeding $75, or

(B ) which does not exceed $7.50 and is 
applicable to an amount financed exceed­
ing $75.

A creditor may not divide a consumer 
credit sale into two or more sales to avoid



39

the disclosure of an annual percentage rate 
pursuant to this paragraph.

(8) The number, amount, and due dates 
or periods of payments scheduled to repay 
the indebtedness.

(9) The default, delinquency, or similar 
charges payable in the event of late pay­
ments.

(10) A description of any security inter­
est held or to be retained or acquired by the 
creditor in connection with the extension of 
credit, and a clear identification of the 
property to which the security interest 
relates.

(b) Form and timing of disclosure.
Except as otherwise provided in this part, 

the disclosures required under subsection (a) 
of this section shall be made before the credit 
is extended, and may be made by disclosing the 
information in the contract or other evidence 
of indebtedness to be signed by the purchaser.

(c) Timing of disclosure on mailed or
telephoned orders.

I f  a creditor receives a purchase order by 
mail or telephone without personal solicitation, 
and the cash price and the deferred payment 
price and the terms of financing, including the 
annual percentage rate, are set forth in the 
creditor’s catalog or other printed material dis­
tributed to the public, then the disclosures re­
quired under subsection (a) of this section may 
be made at any time not later than the date the 
first payment is due.

(d) Timing of disclosure in .cases of an
addition of a deferred, payment 
price to an existing outstanding 
balance.

I f  a consumer credit sale is one of a series of 
consumer credit sales transactions made pur­
suant to an agreement providing for the addi-



40

tion of the deferred payment price of that sale 
to an existing outstanding balance, and the per­
son to whom the credit is extended has approved 
in writing both the annual percentage rate or 
rates and the method of computing the finance 
charge or charges, and the creditor retains no 
security interest in any property as to which 
he has received payments aggregating the 
amount of the sales price including any finance 
charges attributable thereto, then the disclosure 
required under subsection (a) of this section 
for the particular sale may be made at any time 
not later than the date the first payment for 
that sale is due. For the purposes of this sub­
section, in the ease of items purchased on dif­
ferent dates, the first purchased shall be deemed 
first paid for, and in the case of items purchased 
on the same date, the lowest price shall be 
deemed first paid for.
§ 1640. Civil liability.

(a) Failure to disclose.
Except as otherwise provided in this section, 

any creditor who fails in connection with any 
consumer credit transaction to disclose to any 
person any information required under this part 
to be disclosed to that person is liable to that 
person in an amount equal to the sum of

(1) twice the amount of the finance charge in 
connection with, the transaction, except that the 
liability under this paragraph shall not be less 
than $100 nor greater than $1,000; and

(2) in the case of any successful action to en­
force the foregoing liability, the costs of the ac­
tion together with a reasonable attorney’s fee 
as determined by the court.

* * * * *

The regulations of the Federal Reserve Board un­
der the Truth In Lending Act, 12 C.F.R. 226, provide 
in relevant part:



41

§ 226.2 Definitions and rules of construction. 
* * * * *

(k) “ Consumer credit” means credit offered 
or extended to a natural person, in which the 
money, property, or service which is the subject 
of the transaction is primarily for personal, 
family, household, or agricultural purposes and 
for which either a finance charge is or may be 
imposed or which pursuant to an agreement, 
is or may be payable in more than four install­
ments. “ Consumer loan” is one type of “ con­
sumer credit.”

(l) “ Credit” means the right granted by a 
creditor to a customer to defer payment of 
debt, incur debt and defer its payment, or pur­
chase property or services and defer payment 
therefor. (See also paragraph (bb) of this sec­
tion.)

(m) “ Creditor” means a person who in the 
ordinary course of business regularly extends 
or arranges for the extension of consumer 
credit,, or offers to extend or arrange for the 
extension of such credit.

* * * * *

§ 226.8 Credit other than open end—specific 
disclosures.

(a) General rule. Any creditor when extend­
ing credit other than open end credit shall, in 
accordance with § 226.6 and to the extent ap­
plicable, make the disclosures required by this 
section with respect to any transaction con­
summated on or after July' 1, 1969. Except as 
provided in paragraphs (g) and (h) of this 
section, such disclosures shall be made before 
the transaction is consummated. At the time 
disclosures are made, the creditor shall furnish 
the customer with a duplicate of the instrument 
or a statement by which the required disclosures 
are made and on which the creditor is identified.



42

All of the disclosures shall be made together on 
either

(1) the note or other instrument evidencing 
the obligation on the same side of the page and 
above or adjacent to the place for the cus­
tomer’s signature; or

(2) One side of a separate statement which 
identifies the transaction.

* * * * *

U.S. GOVERNMENT PRINTING OFFICE: 1972