Statutory plain-language is, essentially, a borrower-oriented language: Clear and conspicuous, reasonably understandable, and noticeable in relation to legislative findings and intent and the information required by law. Federal Regulation P, dealing with the Privacy of Consumer Financial Information, defines "clear and conspicuous" as a notice that is reasonably understandable and "designed to call attention to the nature and significance of the information in the notice" [12 C.F.R. 216.3(b)(1)] by using simple, short sentences and paragraphs, direct speech, active voice, everyday words with commonplace meanings, principles of readability, communications graphics, honest intent, and full and fair disclosure of all material terms and conditions. In the author's opinion, the public policy goals of plain language statutes as they apply to residential mortgage lending are: (1) to enforce honest market-place standards, (2) improve consumer understanding and access, (3) encourage participation, and (4) demystify lending.

History

Until the mid 70's, the classic boilerplate language of the law was the standard language of mortgage loan contracts and disclosures. In late 1974, banks, in the course of foreclosing, discovered that not only borrowers, but also lawyers, judges and even loan officers, did not understand the language contained in the promissory note. On January 1, 1975, First National City Bank (now Citibank) launched the very first plain-language consumer loan note, which resulted in universal praise, declining collection actions, and increased market share in the 70's and 80's.

On or about this time, with the expansion of mortgage markets and the increased opportunities for self-dealing, the concept of fair lending began to change. Governmental investigation of lenders focused increasingly on an examination of "unfair" lending practices rather than mere technical violations of the law. Legislators concluded contracts and disclosures1 that are difficult to read put consumers at risk and plain-language legislation became a political and legislative imperative, although not in all the states.

Fourteen States Have Plain-Language Requirements

Of the fourteen states with plain-language statutory requirements, only Connecticut, New York, and Texas have heavy-duty plain-language requirements that meet the four public policy goals stated above.

Connecticut General Statutes provides lenders and brokers with a choice of complying with either the "plain-language" test or an alternate "objective" test. The "plain-language" test is characterized by:

1. Short sentences and paragraphs;
2. Everyday words;
3. Personal pronouns;
4. The actual or shortened names of the parties to the contract, or both;
5. Simple and active verb forms;
6. Type font of readable size;
7. Ink that contrasts with paper;
8. Section headings and subdivisions with boldface type captions; and
9. Layout and spacing.

The "objective" test requires that contracts and disclosures adhere to all of the following rules:

1. Average less than twenty-two words per sentence;
2. Contain a maximum of fifty words in an average sentence;
3. Contain a maximum of one hundred and fifty words in a paragraph;
4. Average less than 1.55 syllables per word;
5. Use personal pronouns;
6. Use actual or shortened names;
7. Use typeface of at least 8 point in size;
8. Provide a blank space of three-sixteenth of an inch between each paragraph and section;
9. Have less than seventy-five words per paragraph;
10. Provide at least one-half inch blank space for all borders on each page;
11. Have captions in 10 point bold type if the contract is printed;
12. Have section headings underlined if the contract is typewritten; and
13. The average line cannot be more than sixty-five characters in length.

Additionally, complying with Connecticut's objective test also requires further compliance with rules of procedure involving words, sentences, paragraphs, syllables, lists, length of lines, the average number of words per sentence, the average number of words per paragraph, the average number of syllables in a word, and special procedures for list formats - rules that are too detailed to include and analyze in this article. Exempt from compliance with these plain-language tests are lenders and brokers lending more than $25,000, loans in which borrowers are represented by legal counsel, and loans in which disclosures contain specific language authorized or even required by governmental statute, regulation or rule, a court decision, or a governmental agency.

New York was the first state to enact a plain-language statute "primarily for personal, family, or household purposes." For a violation of its plain-language law, New York's General Obligation Law slaps a penalty of $50.00 plus damages for each violation. Additionally, while permitting "class action" suits for violations of the plain-language law, New York limits awards against any single lender to a maximum of $10,000.00. Stylistically, while the law requires the use of clear and coherent words with common and everyday meanings, it allows the use of words, phrases, or forms required by state or federal regulations or a governmental agency. Additionally, New York's plain-language law requires that contracts include appropriate divisions and sections with captions and applies only to loans of less than $50,000. Importantly, the New York Rules of Evidence requires the text of a contract or disclosure to be at least 8 pt. in size.

Only Texas denotes plain-language as one designed to be easily understood by the average consumer and such plain-language can be in either English or Spanish as long as font and type size make it easily readable. Rather than legislate plain-language standards and tests, Texas, via the website of the Office of the Consumer Credit Commissioner, offers "standard" contracts and disclosures for use by lenders and brokers. Alternatively, if lenders and brokers choose to use their own "non-standard" contracts and disclosures, they must "file" [submit] these for regulatory review and approval prior to their use. A signed certificate certifying that the submitted contract is written in plain English [or Spanish], that the average consumer can understand the contract, and that the contract is printed in easily, readable type and size must accompany each submission along with the name, address, phone and fax number of the contact person for the submission. If any person other than the company itself submits the disclosure, a dated letter describing anticipated users must accompany each submission designating legal counsel or another person for that submission. The Commissioner's failure to disapprove such forms cannot be interpreted as constituting an approval. Texas' plain-language law applies to, among other loans, second lien purchase money loans and second lien home equity loans with an interest rate in excess of ten percent per year.

Plain-language statutes in the following states, while they do meet all of the stated public policy goals, do not have heavy-duty, plain-language requirements.

For example, Maine's Consumer Loan and Lease Agreements provisions aims to help the average borrower read and understand the terms of loan documents without having to obtain the assistance of a professional. Accordingly, Section 1124 of the Agreements requires a loan contract to be written in a "clear and coherent manner using words with common and everyday meaning" and further "appropriately divided and captioned by its various sections." Maine also provides a "safe harbor" for forms approved by the Office of Consumer Credit Regulation or, in the case of forms or agreements from a supervised financial organization, the Bureau of Financial Institutions. A certificate of compliance issued by the Office of Consumer Credit Regulation or Bureau of Financial Institutions is an absolute bar to any legal proceeding filed by the borrower for failure to comply with the plain-language provision. The Agreements' plain-language requirements apply only to supervised loans of $100,000 or less. Massachusetts' plain-language law applies to only credit insurance disclosures, which must be detailed and meet certain "Flesch Scale" readability standards. New Jersey's Consumer Contracts' plain-language provision, specifically Section 56:12-2, requires contracts and disclosures to be written in a "simple, clear, understandable, and easily readable way," using at least 10 point type and an index or table of contents in the event contracts and disclosures exceed 3,000 words. Importantly, no dollar limitation applies to the plain-language provision of the consumer contracts involving real estate. New Jersey also offers a "safe harbor" for forms approved by the New Jersey Attorney General. North Dakota's Money Broker's Act and Regulations merely requires its money brokers to make disclosures in plain English "set forth" in meaningful order. Similarly, Pennsylvania's Plain Language Consumer Contract Act, while providing for individual action for damages for non-compliance, per mits no "class action" suits and does not void or invalidate a contract that violates plain-language requirements. Additionally, the law applies only to mortgage loans of $50,000.00 or less made by financial institutions not supervised by a federal or state regulatory authority, including the State Department of Banking. Stylistically, the Pennsylvania law requires that contracts and disclosures avoid excessive use of Latin and foreign words.

Elsewhere, the plain-language laws are far from robust. Delaware's Consumer Contracts Provision requires giving equal prominence to the conditions and exceptions to the main provisions of the contract and the sections setting forth the protections for consumers and restrictions on consumers' rights. But the plain-language provisions of the law apply only to loans of a maximum of $50,000 and exempts banks and building and loan associations. Hawaii's Language of Consumer Transactions Provisions applies only to loans of less than $25,000 and failure to comply with the provisions does not render the agreement void or voidable. Limiting its plain-language disclosures to only commitments, application denials, escrow accounts, and loan servicing disclosures, Illinois has summed its plain-language statute with just two requirements: clear and conspicuous. Poorly drafted Minnesota's Plain Language Contract Act appears to apply only to home equity loans of $50,000.00 or less "if the money is not used to purchase or refinance an interest in realty." While the law permits a private action for damages, the Court has the power to reform a non-complying contract to avoid "an unfair result". Montana's Plain Language in Contracts Act applies to only loans equal to or less than $50,000. Oregon's Plain-Language Review of Consumer Contract Provisions does not provide for damages and, it is not clear if the plain-language requirements contained in West Virginia's Consumer Credit and Protection Act applies to mortgage loans.

California and Michigan Need No Plain-Language Laws

Although California does not have a plain-language statute, consumer plaintiffs' lawyers use the California's Unfair Practices Act, specifically California Professions and Business Code Section 17200, in "class action" litigation to address a plethora of claimed unlawful practices by financial institutions. "Unfair competition," according to the statute, includes any untrue or misleading statements or disclosures.

The Michigan Consumer Protection Act requires the language of disclosures to be borrower-specific, clear, and understandable and one that does not "take advantage of the borrower's inability, reasonably, to protect his or her interests by reason of disability, illiteracy, or inability to understand the language of the loan contract or disclosure presented by the lender or broker who knows or reasonably should know of the borrower's inability." The Act's definition of other unfair, unconscionable, or deceptive methods, acts, or practices that are unlawful in mortgage lending practice, among others, are noteworthy, and include:

1. Failure to reveal a material fact, the omission of which tends to mislead or deceive the borrower, and which fact could not reasonably be known by the borrower;
2. Closing a loan in which the borrower waives or purports to waive a right, benefit, or immunity provided by law, unless the waiver is clearly stated and the borrower has specifically consented to it;
3. Gross discrepancies between the lender or broker's oral statements and disclosures and the written agreement covering the same loan;
4. Making a material statement or disclosure that the borrower believes to be false; and
5. Failure to disclose material facts in light of disclosures or statements made in a positive manner.

Conclusions

Plain-language mortgage lending contracts and disclosures are required to enforce honest market-place standards, improve access and consumer understanding, encourage participation, and demystify lending. Towards this end, states have taken three approaches: The Legislatures of thirty-four states are convinced that federal legislation in this area is enough and, thus, have found no reason to enact specific plain-language laws. Fourteen states, believing that the federal laws are not enough, have enacted plain-language laws. Of these, the difference between Connecticut and Texas' approach is noteworthy. While Connecticut provides detailed standards, tests, and procedures to determine plain-language, Texas, on the other hand, appears to leave the determination of the specific mechanics of plain-language to lenders and brokers. Additionally, Texas provides standard plain-language contracts and disclosures and requires regulatory review and approval of non-standard, lender and broker-authored contracts and disclosures.

Two states, California and Michigan, are convinced the right way to accomplish the same public policy goals of plain-language disclosures is to make lenders and brokers accountable and to burden them with the need to prove that they did not make any untrue or misleading statements - that is, in the paraphrased words of The Michigan Consumer Protection Act's latest amendment, effective March 1, 2005, that as lenders and brokers, they did not engage in unfair, unconscionable, deceptive, and unlawful acts by causing even "a probability of confusion or misunderstanding as to the terms and conditions of credit."

Thus, lenders and brokers in California and Michigan are advised to ensure that all of their mortgage lending contracts and disclosures cannot be interpreted as "untrue or misleading" under the California Act, exploitative of a borrower's situation, or "unfair or unconscionable" under the Michigan Act.