HERITAGE
BANK
To: Bill
Mitchell
From: Kris Welch
Date: April 2, 2004
Re: Federal Reserve Board’s proposed amendments
I am pleased to provide you my comments on the Federal Reserve Board’s
proposed amendments to Regulations Z, B, E, M and DD and their respective
Official Staff Commentaries. In addition the proposal to Regulation
Z includes several technical revisions to the staff Commentary.
The proposal makes the form of disclosures consistent among various
consumer protection regulations. Specifically, it adopts the “clear
and conspicuous” standard, along with examples currently contained
in the Commentary to Reg P (GLBA).
These proposals are unworkable and implementation will impose huge
costs on the banking industry. The subjectivity of the proposals in
my opinion will make compliance uncertain and will open the door for
expensive lawsuits without improving the disclosures in any meaningful
way.
•
Burden on all institutions:
The proposals will impose significant costs to every financial institution.
If the proposals were adopted, financial institutions will have to
review every single consumer financial product document and advertisement
containing required disclosures. For every bank this means reviewing
hundreds of agreements, forms, statements, web pages, telephone scripts
and radio advertisements.
Once identified the required disclosures will have to be segregated
from non-required disclosures, analyzed and revised. The revision effort
may be time-consuming and expensive as staff and lawyers debate “everyday
word” what are they?
As the new terminology is decided the financial institutions must attempt
to format the new disclosures and address software demands. Software
programs will have to be modified and in many places replaced; they
will not be usable as the new disclosures will no longer fit in the
original data fields.
Staff training would need to be conducted as well as modifying all
training and audit materials.
For small institutions the challenge could be overwhelming. The staff
in a small institution wears many hats beyond compliance. They will
be less able to manage those other bank functions while working on
new compliance programs or even yet not work on the required changes.
Ultimately, the costs of compliance, no matter what size the institution,
add to the consumers’ price.
I believe that the proposed changes will become a magnet for new lawsuits
by provoking litigation by providing a clear basis for challenging
compliance.
Remembering Regulation P (GLBA) it took many months to determine and
put in effect the bank’s privacy policy. Even the changes to
Regulation Z several years ago, which changed the format on credit
card solicitation disclosures I sure was costly to the affected institutions.
•
General approach/flexibility:
Financial institutions will never be certain whether they comply with
the requirements because every disclosure can always be challenged
by citing one or all of the “examples”. In many cases the
proposed “examples:” will not improve consumer understanding.
•
Regulation P is different from the consumer protection regulations:
The privacy policy disclosures of Regulation P and those of the typical
consumer protection regulations are different. Reg P requires a financial
institution to convey an institution’s general policy on a single
matter that applies to all its’ products. In contrast, the disclosures
of the consumer protection regulations convey complex, sometimes abstract
and often detailed terms that are unique to that account. In many cases,
legal and technical terms are necessary, legal language is essential
in order for the agreement to be enforceable and technical language
to be accurate as required in the regulation. “Everyday” terms
will change their meaning.
•
Provisions to Regulation Z:
The Board proposes to add an interpretative rule of construction stating
that where the word “amount” is used to describe a disclosure
requirement, it refers to a numerical amount throughout Regulation
Z. I believe the proposed interpretation is intended to address a court
decision regarding the disclosure of payments scheduled to repay a
closed-end transaction. I personally don’t believe this would
negatively impact any financial institutions.
The other proposed comment would be to revise the address situations
where a creditor fails to provide the required right of rescission
form or designate an address for sending the notice to. The proposed
comment would provide that in such cases, if a consumer sends the notice
to someone other than the creditor or assignee, such as a third-party
servicer acting as the creditor’s agent, the consumer’s
notice of rescission may be effective if under the applicable state
law this would constitute delivery. The effect of this would be minimal.
Summary:
While making disclosures more understandable for consumers is an
important goal, the Board does not identify a problem with the
existing disclosure requirements. The Board states that its goal
is to facilitate compliance and ensure consumer understanding of
the regulations. This apparently is to be achieved through standardization
of disclosure requirements. While banks will definitely appreciate
consistency among the regulations, any additional regulatory burden
should be justified by a real need.
Making disclosures more uniform between the six regulations does
not necessarily translate into improved understanding for consumers.
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