INDEPENDENT
COMMUNITY BANKERS OF AMERICA
April 20, 2004
Public Information Room
Office of the Comptroller of the Currency
250 E Street, SW
Mailstop 1-5
Washington, DC 20219
Attention: Docket No. 04-05
Robert E. Feldman, Executive Secretary
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429
Attention: EGRPRA Burden
Reduction Comments
Ms. Jennifer J. Johnson, Secretary
Board of Governors
of the Federal Reserve System
20th Street and Constitution Avenue, NW
Washington, DC 20551
Attention: Docket No. R-1180
Regulation Comments
Chief Counsel’s Office
Office of Thrift Supervision
1700 G Street, NW
Washington, DC 20552
Attention: No. 2003-67
Re: EGRPRA Review
of Consumer Lending Related Rules
Dear Sir or Madam:
The Independent
Community Bankers of America (ICBA)1 appreciates
the opportunity to comment on the regulatory burden imposed by
consumer lending regulations. This review is being conducted under
the Congressional mandate established in the Economic Growth and
Regulatory Paperwork Reduction Act of 1996 (EGRPRA).
Overview
Regulatory Review.
The ICBA strongly supports the comprehensive review of regulations
by the federal banking regulators under EGRPRA. The ICBA believes
this is an important step and is working closely with member banks
to identify regulations that are appropriate candidates for elimination,
streamlining or revision. Community bankers work diligently to
serve their customers’ best interests, but find that regulations – especially
consumer lending regulations – consume valuable resources
and can interfere with good customer service. Initial banker feedback
indicates that consumer lending and disclosure regulations (including
the Truth in Lending right of rescission) are among the most burdensome.
(Others include: Bank Secrecy Act and anti-money laundering compliance,
Community Reinvestment Act, and privacy notices.2 )
For this reason, careful review of the regulations subject to the
current comment period is particularly important.
The Impact of
Cumulative Regulatory Burden on Community Banks. The ICBA supports
a bank regulatory system that fosters the safety and soundness
of our nation's banking system. However, recent statutory and regulatory
changes have greatly increased the cumulative regulatory burden
for community banks that are often disproportionate to the risks
they pose. These recent changes include the privacy title of the
Gramm-Leach-Bliley Act; the anti-money laundering/anti-terrorist
financing provisions of the USA-PATRIOT Act; and the accounting,
auditing and corporate governance reforms of the Sarbanes-Oxley
Act.
Regulatory and
paperwork requirements impose a disproportionate burden on community
banks with their limited human, financial and other resources.
This diminishes their ability to serve their communities, attract
capital and support the credit needs of their customers. Credit
unions and other nonbank institutions that perform “bank-like” functions
and offer comparable bank products and services are not subject
to the same laws and regulations as community banks. This places
community banks at a competitive disadvantage and increases costs
to consumers.
For these reasons,
the ICBA also strongly urges the agencies to constantly assess
regulatory burden, incorporating careful and accurate cost-benefit
analysis into all facets of the regulatory process, in addition
to the current review.
For example,
consumer activists complain about predatory lending but disregard
the fact that depository institutions, that are almost never guilty
of predatory practices, must already comply with a staggering load
of disclosures, reporting and other requirements that predators
ignore. These rules drive up lending costs, and low- and moderate-income
borrowers are driven into the arms of the very predators who already
ignore regulations. Each individual requirement may not be burdensome,
but the cumulative impact of consumer lending rules, by driving
up costs and slowing processing time for loans from legitimate
lenders, helps create a fertile ground for predators. It’s
time to acknowledge that unduly burdensome consumer protection
regulations may be part of the problem.
Current EGRPRA Review
Truth in Lending
(Federal Reserve Regulation Z)
Right of Rescission.
Perhaps one of the most troublesome issues of current regulatory
requirements is the right of rescission under Regulation Z. Bankers
have identified the right of rescission as one of the top ten regulatory
complaints. Most of the problems this particular right is designed
to rectify originate with non-depository creditors, not banks,
a fact that should be considered. Moreover, banks and thrifts are
closely examined and supervised, another key point to factor into
the equation, especially for addressing this particular element
of regulatory burden.
Bankers report
that consumers rarely exercise the right of rescission. However,
consumers do resent having to wait three additional days to receive
loan proceeds after the loan is closed, and they often blame the
bank for “withholding” their funds. Even though this
is a statutory requirement, inflexibility in the regulation that
makes it difficult to waive the right of rescission aggravates
the problem. The restrictions should be rationalized to reflect
consumer desires and modern-day realities. If not outright repealed,
depository institutions should at least be given much greater latitude
to allow customers to waive the right.
Identification
of the Creditor. In addition to the right of rescission, community
bankers have identified other problems under Regulation Z. In many
lending arrangements the bank is not the only party involved in
making the loan, creating difficulty and confusion in determining
which entity is actually responsible for making the requisite disclosures.
For example, banks often enter arrangements with car dealers to
offer loan products but do not control the dealer’s actions.
These arrangements take a variety of formats and involve the bank
in the credit at different stages of the process. However, the
bank is likely to be held responsible for what the car dealer does
or does not disclose, no matter when the bank became involved in
the loan. The responsibility for disclosures when more than one
creditor is involved should be more clearly outlined and defined
so that banks understand when and to what extent they are expected
to control the actions of counter-parties to a loan transaction.
Advertisements.
Another problem under the Truth-in-Lending Act regulation involves
how loan products may be advertised. From one perspective, advertisements
help educate consumers about available loan products, but existing
restrictions on what may be included and what must be included
if a certain trigger term is used often limits the information
actually included in advertising materials, meaning that consumers
get less – not more – information. In some cases, the
amount of information included can be virtually meaningless. While
the intent is to encourage consumers to visit the bank to get more
detailed information, the practical implications and market realities
suggest that limiting information has the opposite effect. These
restrictions should be greatly relaxed, if not eliminated. Banks
are subject to the unfair and deceptive restrictions in section
5 of the Federal Trade Commission Act, and that standard should
be more than sufficient for all bank advertising.
Finance Charges.
The definition of the finance charge under Regulation Z is a primary
example of unclear regulatory requirements. Assessing what must
be included – or excluded – is not easily determined,
especially when fees and charges may be levied by third parties.
And yet, the calculation of the finance charge is critical in properly
calculating the annual percentage rate (APR). Even if that hurdle
is overcome, actually calculating the APR and knowing when it is
permissible to use estimates is also confusing to bankers that
work with these issues every day. Explaining them to customers
that are not as familiar with banking is not easy and may actually
be more confusing to customers. This process desperately needs
simplification so that all consumers can understand the APR. These
calculations are especially frustrating in an increasingly competitive
environment where non-depositories use sleight-of-hand to exclude
certain items from the APR (bankers often point to auto dealers’ advertisement
of 0% APRs). The regulation and disclosures ought to be tested
against focus groups made up of average consumers and revised until
easily understood by consumers.
New or Revised
Disclosures. Once initial disclosures have been provided, there
may be a lapse in time between loan approval and loan closing,
especially for real estate loans. As a result, there can be changes
in the structure of the final loan, and is not always clear when
these changes mandate new disclosures. Similarly, it is not always
clear when a change in an existing account relationship, as with
a credit card account, requires a change-in-terms notice. Clearer
rules or guidance on when new disclosures must be made is needed.
Real Estate Loans.
Real estate loans create their own additional problems under Regulation
Z. For example, the requirements for the early disclosures under
Regulation Z are not in synch with the requirements under HUD’s
RESPA requirements, and yet woe to the banker that does not get
it right. The requirements should be coordinated.
Many consumers
complain about the volume of documents required for real estate
loan closings, and the volume and extent of disclosures has gotten
so extensive as to provide little meaningful information. If a
simplification process is to succeed, one set of coordinated rules
for real estate loans is needed – not a variety of regulations
issued by different agencies.
Real estate
mortgage transaction disclosures should be simple and easy to understand,
clearly specifying the obligations and responsibilities of all
parties. Disclosures should focus on the information consumers
want most: the principal amount of the loan, the simple interest
rate on the promissory note, the amount of the monthly payment
and the costs to close the loan. Information should be provided
to consumers at the appropriate stage of a transaction to allow
them to make informed decisions. One set of rules should govern
all mortgage lenders, and regulation, supervision and enforcement
must be consistent across the industry.
Credit Card Loans. For credit card loans, the requirements under Regulation
Z and Regulation E (Electronic Funds Transfers) should be reconciled. Instead
of two different regulations, it would be easier if the Federal Reserve established
one regulation for credit cards that covered all requirements. In addition,
regulatory restrictions requiring resolution of billing-errors within the given
and limited timeframes are not always practical. The timeframes should be expanded
to allow banks to investigate and resolve errors. Moreover, the rules for resolving
billing-errors are heavily weighted in favor of the consumer, making banks
increasingly subject to fraud as individuals learn how to game the system,
even going so far as to do so to avoid legitimate bills at the expense of the
bank. There should be increased penalties for frivolous claims and more responsibility
expected of consumers.
Restitution.
Recognizing the complexity of the disclosure requirements, if there
have been inadvertent errors by the bank in making disclosures,
greater flexibility should be allowed so banks do not have to review
large numbers of consumer files and possibly make restitution of
only a few cents: the costs for such actions certainly far outweigh
the minimal benefits to the individual consumer.
Equal Credit Opportunity Act (Federal Reserve Regulation B)
Regulation B
creates a number of compliance problems and burdens for banks.
Knowing when an application has taken place is often difficult
because the line between an inquiry and an application is not clearly
defined. To answer customer questions about loan products, bankers
must have sufficient information to respond correctly, and yet
having too much information can lead to an “application” that
triggers additional responsibilities on the part of the bank. While
bankers want to provide customer service, the regulations make
it difficult, and almost mandate a written application in all instances.
This should be rationalized to reflect modern technologies and
to prevent barriers to customer service.
Spousal Signature.
A related issue that creates problems for all creditors is the
issue of when to require the signature of a spouse. This can be
especially problematic for small business loans when the principal
of the business and his or her spouse guarantee the loan. Instead
of allowing banks to accommodate customer needs and provide customer
service, the requirements make it difficult and almost require
that all parties – and their spouses – come into the
bank personally to fill out the application documents. This makes
little sense as the world moves toward new technologies that do
not require physical presence to apply for a loan.
Adverse Action
Notices. Adverse action notices present another problem—one
that promises to be aggravated by new requirements under the Fair
and Accurate Credit Transactions (FACT) Act. It would be preferable
if banks could work with customers and offer them alternative loan
products if they do not qualify for the type of loan for which
they originally applied. However, doing so may trigger requirements
to supply adverse action notices. And knowing when to send an adverse
action notice is not always readily determined. For example, it
may be difficult to decide whether an application is truly incomplete
or whether it can be considered “withdrawn.”
Moreover, the
requirements for adverse action notices under Regulation B are
not always in synch with the requirements under the Fair Credit
Reporting Act (FCRA). And, while there may be more than one reason
that the loan was denied, determining what reason to provide on
the adverse action notice form may not be simple. A simple straightforward
rule on when an adverse action notice must be sent – that
can easily be understood – should be developed.
The real danger
is that it could become much easier for banks to deny an application
instead of working with customers to find a suitable loan product.
In such cases, it will be low- and middle-income loan applicants
or those that are marginal or have problem credit histories that
will be most negatively affected.
Other Issues.
Regulation B’s requirements also complicate other aspects
of customer relations. For example, to offer special accounts for
seniors, a bank is limited by restrictions in the regulation. And,
most important, reconciling the regulation’s requirements
not to maintain information on the gender or race of a borrower
and the need to maintain sufficient information to identify a customer
under section 326 of the USA PATRIOT Act is difficult and needs
better regulatory guidance.
Home Mortgage Disclosure Act (HMDA) (Federal Reserve Regulation C)
Exemptions.
The HMDA requirements are the one area under the current regulatory
review that does not provide specific protections for individual
consumers. Rather, HMDA is primarily a data-collection and reporting
requirement and therefore lends itself much more to a tiered regulatory
requirement that places fewer burdens on smaller institutions.
The current exemption for banks with less than $33 million in assets
is far too low and does not make sense in today’s banking
environment, especially when there are banks with well over $1
trillion in assets. This exemption should be increased to at least
$250 million, if not higher.
A second problem
is the definition of an MSA (metropolitan statistical area). Since
the definition of an MSA also determines which banks must report
under HMDA, the banking agencies should develop a definition that
applies to banks. Instead, banks are subject to a definition created
by the Census Bureau for entirely different reasons. As a result,
banks in rural areas and that should not be covered by HMDA reporting
requirements may be captured by rules that do not reflect the reality
of banking. Although the ICBA has often been a proponent of consistency
in regulatory definitions, HMDA reporting requirements should be
developed by the banking agencies and not subject to rules developed
by other agencies that are establishing definitions for completely
different criteria.
Volume of Data
Required. For banks that are subject to HMDA requirements, the
volume of the data that must be collected and reported is clearly
burdensome, and has been identified by bankers as one of the top
ten regulatory burdens. Consumer activists are constantly clamoring
for additional data, and the recent changes requiring collection
and reporting of yet more data succumb to their demands without
a clear cost-benefit analysis. All consumers ultimately pay for
the data collection and reporting. Moreover, collecting some of
the information, such as data on race and ethnicity, can be offensive
to some customers who hold the bank responsible. Clearly, better
cost-benefit analysis is needed in assessing the volume of data
required under HMDA, with clear demonstration of the utility that
justifies the costs involved.
Specific data
collection requirements are difficult to apply in practice and
therefore add to regulatory burden and the potential for error.
Bankers report expending precious resources to constantly review
and revise the HMDA data to ensure accurate reporting. Some of
these problems are:
• Knowing
which loans are refinancings
• Assessing loans against HOEPA (the Home Owners Equity Protection Act)
• Determining the date the interest rate on a loan was set
• Comparing Treasury yields against loan rates when maturity of loan does
not match existing Treasury securities
• Determining physical property address or census tract information in
rural areas
• Determining lien status (first, second, third)
• Coordinating reasons for denial with requirements for Reg B adverse action
notice
• Constant review and updating of information collected for reporting
These problems
should be addressed, whenever possible by eliminating the data
requirement, and regulatory guidance in this area should be clear
and easily applied. The current complexity and difficulty in applying
existing guidance to daily operations merely adds to the level
of burden and cost.
Finally, bankers
report encountering conflicts between the data required under HMDA
and the data that must be collected and reported under ECOA. The
two data collection requirements should be reconciled and coordinated
so that there is only one set of data-collection rules that apply
to the race, age, ethnicity and gender of borrowers.
Flood Insurance
Flood insurance
is another one of the top ten regulatory problems identified by
bankers. The current flood insurance regulations create difficulties
with customers, who often do not understand why flood insurance
is required and that the federal government – not the bank
- imposes the requirement. The government needs to do a better
job of educating consumers to the reasons and requirements of flood
hazard insurance.
For bankers, it is often difficult to assess whether a particular property
is located in a flood hazard zone since flood maps are not easily accessible
and are not always current. Even once a property has been identified as subject
to flood insurance requirements, the regulations make it difficult to determine
the proper amount, and customers do not understand the relationship between
property value, loan amount and flood insurance level. Once flood insurance
is in place, it can be difficult and costly to ensure that the coverage is
kept current and at proper levels. As a result, many banks rely on third party
vendors to assist in this process, but that adds costs to the loan. Flood insurance
requirements should be streamlined and simplified to be understandable.
Additional Comments
It would be
much easier for banks, especially community banks that have limited
resources, to comply with regulatory requirements if requirements
were based on products and all rules that apply to a specific product
consolidated in one place.
Second, regulators
require banks to provide customers with understandable disclosures
and yet do not hold themselves to the same standard in drafting
regulations that can be easily understood by bankers.
Third, banks
must constantly document everything to demonstrate compliance.
For example, even though regulations may not require customer signatures
on documents, banks feel constrained to obtain the signature for
everything to demonstrate compliance. A good example is the Truth-in-Lending
disclosures under Regulation Z.
Finally, many
consumer-lending rules also require banks to post notices in branch
lobbies, in addition to providing individual notices to customers.
These notices, sometimes called “federal wallpaper” have
become so extensive that they take up a great deal of space and
yet are ignored by the great majority of consumers that enter the
branch; the agencies should survey the public to assess whether
these notices are truly worth the cost and whether they provide
any benefit to the typical consumer.
Proper Allocation
of Regulatory Resources. Outside of specific problems with the
regulations being reviewed, additional problems are associated
with examination for compliance with these and other regulations.
Community banks and large, national or regional banks pose different
levels of risk to the banking system. The ICBA strongly urges Congress
and the agencies to continue to refine a tiered regulatory and
supervisory system that recognizes the differences between community
banks and larger, more complex institutions. A tiered regulatory
system allocates the costs of regulatory/paperwork burden relative
to the risk of the institution and helps restore equity in regulation,
leveling the playing field and enhancing customer service. Just
as banks are urged to focus resources to address the greatest risks,
regulators and examiners should reallocate resources to the largest
banks that pose the greatest systemic risk. ICBA strongly supports
a better allocation of supervisory and regulatory resources away
from community banks and towards larger institutions that present
systemic risk.
From time to time, Congress and the agencies have instituted welcomed regulatory
and supervisory policies that lighten the regulatory and paperwork burden for
community banks. Examples include: less frequent safety and soundness exams
for small, healthy banks; streamlined, risk-focused exam procedures for noncomplex
banks; streamlined CRA exams for small banks; and less frequent CRA exams for
small, well-rated banks. Nonetheless, bank regulators devote disproportionate
resources to examination and supervision of community banks. For example, one
agency, the Federal Reserve, devotes 75% of supervision time to banks with
less than $10 billion in assets, yet these banks only hold 30% of aggregate
assets and are unlikely to pose systemic risk. Legislators and regulators should
address these disparities to better allocate examiner resources and reduce
unnecessary burden for community banks.
It also is critical
that the regulatory agencies redouble efforts to ensure that the
directions given to banks by examiners on consumer lending compliance
is consistent with directions from agency headquarters, as too
frequently this is not the case now. And, examiners must be allowed
and encouraged to distinguish inadvertent errors that may occur
under a good faith compliance program from a pattern or practice
of violations.
Conclusion
ICBA members
are integral to their communities. Their close proximity to their
customers and their communities enables them to provide a more
responsive level of service than megabanks. However, regulatory
burden and compliance requirements are consuming more and more
resources, especially for community banks. The time and effort
taken by regulatory compliance divert resources away from customer
service. Even more significant, the community banking industry
is slowly being crushed under the cumulative weight of regulatory
burden, causing many community bankers to seriously consider selling
or merging with larger institutions, taking the community bank
out of the community.
The ICBA urges
the Congress and the regulatory agencies to address these issues
before it is too late. This is especially true for consumer lending
rules, which, though well intentioned, too often merely increase
costs for consumers and prevent banks from serving customers. The
fact that banks and thrifts are closely examined and supervised
should be taken into account in the regulatory scheme, and depository
institutions should be distinguished from non-depository lenders.
The ICBA strongly
supports the current efforts of the agencies to reduce regulatory
burden, and looks forward to working with the agencies to ameliorate
these burdens and in developing a report to Congress on how statutory
changes might be made to ensure that the community banking industry
in the United States remains vibrant and able to serve our customers
and communities.
Thank you for
the opportunity to comment. If you have any questions or need any
additional information, please contact Robert Rowe, ICBA’s
regulatory counsel at 202-659-8111 or robert.rowe@icba.org.
Sincerely,
Dale L. Leighty
Chairman
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