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FDIC Federal Register Citations

Farmers State Bank

From: Barb Huhndorf [mailto:Barb_Huhndorf@fsbmail.net]
Sent: Tuesday, April 06, 2004 10:41 AM
To: Comments
Subject: Burden Relief Comments

April 6, 2004

Robert E. Feldman, Executive Secretary

Federal Deposit Insurance Corporation

550 17th Street NW

Washington, DC 20429

RE: Request for Burden Reduction Recommendations

Dear Mr. Feldman,

I am a community banker working for a financial institution located in Marion, Iowa. I appreciate the opportunity to comment on the above referenced topic.

-Equal Credit Opportunity Act (Regulation B)

The recent revisions to Reg. B, which prohibit lenders from assuming the submission of a joint financial statement constitutes a request for joint credit, now requires whenever more than one individual applies for credit those applicants sign a separate statement of intent to apply for joint credit. This creates additional documentation for creditors and is often very difficult to manage, particularly in commercial and agricultural transactions involving two or more borrowers who are operating the business jointly but have not legally organized; for example, a husband and wife or father and son operating a farm together. Many of these borrowers consider themselves a “partnership” although they have not legally organized as such. Rather than evidencing intent for each application, creditors should be given latitude to evidence intent for a specific purpose, such as “2004 agricultural operating expenses”. Many times business borrowers have unanticipated credit needs and time is of the essence in filling those needs. If a creditor determines the borrowers are creditworthy and the purpose of the loan meets the intent statement previously affirmed, it seems redundant and burdensome for both the applicant and creditor to obtain an addition statement of intent for each application/loan for that intended purpose.

The revisions also do not clarify whether use of Fannie Mae’s 1003 is going to be acceptable in meeting the joint intent requirements. The 1003 has been shown as a model application, however, some regulators are stating that this application does not meet the requirements of the revision and an additional page needs to be supplied. Some clarification would be appreciated here to prevent banks from adding unnecessary paperwork and to develop consistency among both the regulators and financial institutions.

Also included in the latest revisions to Reg. B is a requirement that the “Right to Receive a Copy of an Appraisal” disclosure be retainable. It was very convenient to include this disclosure with the application. It was discussed at that time and the consumer was fully aware of the right. Now, we have had to add an extra page to be given out to the consumer on top of the Good Faith, Early TIL, etc, etc. My feeling is that it just gets buried or tossed with the others.

I would also appreciate seeing some guidance in regards to Regulation B and the Customer Identification Program (CIP) under the USA Patriot Act. CIP says we need to take steps to clearly identify our customers and that retaining the documents used is optional. We have chosen to retain the documents used for identification to maintain a compliance paper trail and assist with fraud and identity theft situations. However, it has been recommended that we do not keep these copies in the credit area to maintain compliance with Regulation B. If you want us to know our customers and make sure we are dealing with who the customer says they are, we would appreciate a clear opinion from the agencies as to whether or not we are allowed to keep verification in the credit files.

The collection of government monitoring information continues to be problematic. Lenders are often confused as to when to collect the data and when it is a violation to collect it. Some consistency needs to be developed such as to collect GMI only for loans secured with a dwelling or only for HMDA purpose loans. The agencies can be assured that if a bank becomes guilty of discriminatory practices, local consumer groups, state’s attorney generals and individual consumers would be sure to alert them.

-Home Mortgage Disclosure Act (Regulation C)

The new definition of “refinance” which removes the purpose test will undoubtedly result in the added reporting of many loans whose purpose has nothing to do with home purchase or home improvement. Commercial and agricultural loans will now be reportable at the time they are refinanced and retain a security interest in a dwelling. Another example would be a farm loan, which is exempt from HMDA reporting when the farm is being purchased, but becomes reportable if the farmland (which contains a dwelling) is refinanced. Obviously, business purpose loans are priced very differently from residential real estate loans. In all likelihood, the data collected on these loans will not be useful to the agencies during a fair lending review, thus all of the bank’s efforts to collect and report the data are wasted – a true burden! This is also burdensome for regulators as they will have to sort through the data submitted on the LAR and loan files to determine loan purpose and explain LAR variances.

Also problematic are the inconsistencies in reporting loan amounts for home equity lines of credit and home equity loans. Only the amount of a home equity line used for home purchase or home improvement is reportable on the LAR. Whereas, if the same amount of money was financed on a closed-end home equity loan, the entire amount would be reported on the LAR if any portion of the proceeds (even just $1) was used for the purpose of home purchase or home improvement. Please consider treating both lines of credit and closed-end loans in the same manner and eliminate the confusion. Similar inconsistencies are found in determining which loans are to be reported on the LAR. For example, a loan classified as home purchase, but secured by collateral other than the home is not reportable on the LAR, but a loan classified as home improvement secured by collateral other than the home does go on the LAR. Again, these inconsistencies only create confusion and room for error.

-Truth-in-Lending Act (Regulation Z)

The purpose behind the Truth-in-Lending Act, to provide consumers with disclosures regarding the total cost and terms of their credit extension, is necessary. However, the current approach and disclosure requirements often leave consumers more confused than informed.

Most consumers want to know three things: 1) their interest rate; 2) their monthly payment; and 3) the total closing cost amount. The most common comment that occurs after sending out an early TIL to a consumer is “I thought you said my rate was X%; this disclosure states the APR is Y%”. The annual percentage rate does not fulfill its intended educational purpose – it confuses both consumers and loan officers alike. Provide consumers with the information they need to know to make an informed decision: the interest rate, the loan term, the monthly payment and the total of all payments. Once consumers have this information along with the closing cost information provided on the GFE, let’s give them the benefit of the doubt that they can figure out which loan product best fits their needs.

Many of today’s consumers are quite savvy and seek out home equity loans and lines of credit as a tax reduction tool. They fully understand that a security interest is going to be taken in their personal residence but prefer the product due to the tax deductibility of the interest paid and preferable rates and terms often associated with these loan types. These consumers consider the three-day rescission period a nuisance, not a consumer protection device, and would much rather waive their right rather than wait three days for their funds. With appraisals to order, abstracts to update and the like, consumers have plenty of time to review GFE’s and early TIL’s and make the decision as to whether or not they want to place a security interest in their residence without having to give them another three days. Let’s give consumers the option of waving this right to rescind for reasons other than only a personal bona fide emergency.

In regards to HOEPA (Section 32) mortgage loans, the explanation for the calculation for “total loan amount” is unclear. Could there be a simpler definition or calculation for this?

-Flood Disaster Protection Act

It is stated that, when borrowers are using a property located in a special flood hazard area as security for a loan, lenders must provide a notice to the borrowers within a “reasonable period of time” prior to closing, advising borrowers that the property is in a flood plain and that flood insurance is necessary prior to closing under the NFIP. While “reasonable period of time” is not expressly defined, the NFIP guidelines and agency examiners have interpreted ten days as a “reasonable period” of time. The timeframe is established to protect the consumer from losing their loan commitment while they shop for adequate, affordable insurance coverage. The “reasonable period” of time, however, was not intended to delay closing if the borrowers have purchased adequate coverage. Currently there are examiners in the field instructing banks to wait a minimum of five to ten days from the time the notice is provided to the borrower until closing, even if the borrower has insurance coverage in place before the time period has expired. Clarification is needed in this area for both creditors and examiners.

I would also like to see you reconsider the requirement that insurance be placed on a structure in a flood zone even if the value of the land alone used as collateral supports the extension of credit. It should be the consumer’s choice in that situation to purchase the insurance, just as in the case of them owning the collateral outright. It is an additional burden to the financial institution to require the borrower get the insurance, wait the ten days apparently required after notifying them of the requirement and then close the transaction. When in reality, if the property were to flood, the collateral for our loan would not have been affected.

Again, I appreciate the opportunity to comment on your effort to reduce regulatory burden. If you should have any questions in regards to these comments, please feel free to contact me.

Sincerely,

Barbara J. Huhndorf

Asst. Vice Pres.

Credit Cards

Farmers State Bank

 

 

Last Updated 05/10/2004 regs@fdic.gov

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