1STBANK HOLDING COMPANY
April 16, 2004
Ms. Jennifer J. Johnson, Secretary
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, N.W.
Washington, D.C. 20551
Dear Ms. Johnson:
This letter is written in response to the request for comments on
the request for burden reduction recommendations on consumer protection
lending-related rules (Docket Number R-1180) under the Economic Growth
and Regulatory Paperwork Reduction Act of 1996 (EGRPRA) review.
The first regulation for which we would like to comment relates
to Loans in Identified Flood Hazard Areas. While this regulation
still provides a useful purpose, we believe that the documentation
requirements are burdensome and could be reduced. The requirement
to obtain a record of receipt of the notice to the customer indicating
that the property lies within a special flood hazard area seems unnecessary.
The underlying flood insurance statute does not appear to require
a record of receipt of the notice by the customer. Since an institution
must obtain flood insurance prior to making the loan, it would seem
that as long as the institution has evidence that the notice was
delivered to the customer and that flood insurance in place, then
the requirements of the law have been met. It is unnecessary to require
the institution to follow up to ensure that a signed receipt is obtained
for the file.
Another level of flood documentation requirements that could be
reduced relates to the requirement to show evidence of coverage for
the entire life of a loan. While we understand the importance of
maintaining insurance for the life of a loan and for following proper
procedures in the event of a coverage lapse, it seems unnecessary
to maintain outdated insurance declaration forms in file to show
coverage has been in place for the entire term of the loan. This
is especially true on loans that have been outstanding for lengthy
periods of time. As long as the bank can demonstrate flood insurance
was in place at origination, that flood insurance is currently in
force, and that the institution has adequate processes and procedures
to follow up in the event of a lapse, it seems unnecessary to require
the institution to maintain the excess documentation.
The last item related to flood regulations for which we would like
to comment is that we believe there should be more explicit guidance
on
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Ms. Jennifer J. Johnson
April 16, 2004
determining adequate flood insurance coverage for individual condominium
units. It seems to take an inordinate amount of time trying to
determine whether coverage is adequate. There are many complexities
in determining whether association coverage is adequate on a per
unit basis, whether the association or insurance agent has updated
the valuation of the project timely, whether a co-insurance penalty
is applicable, or whether supplemental unit insurance is needed
or available. It is further complicated when the property is mixed-use,
containing both residential and commercial condominium units. We
recently had a situation where one of our banks contacted the NFIP
Direct Writing unit and was told that supplemental insurance was
available for a residential unit in a mixed-use project. This was
also confirmed by an insurance agent. However, the application
was subsequently rejected by that same department stating that
supplemental coverage was not available for the residential unit.
If employees at the NFIP give conflicting information, then how
is a financial institution supposed to adequately address the coverage
issue? This takes additional time and effort to document files
and also creates customer relation problems.
The second regulation for which we would like to comment relates
to Unfair or Deceptive Acts or Practices. Although it could be argued
that many of the provisions are outdated, the majority of this regulation
continues to make sense and does not impose a substantial burden
on financial institutions. However, the area related to co-signers
could be updated to reduce burden. Under the existing regulation,
transactions involving the purchase of real property are excluded
from the co-signer provisions. Refinancing of purchase transactions
are also excluded from the provisions if the majority of the proceeds
are used to refinance the original purchase debt. It would seem that
any loan in which the lender takes a first lien position in real
property as part of a mortgage transaction should be exempt from
the co-signer provisions.
Given the growth in mortgage volume over the years, this loan type
has become a valuable financing vehicle for more than just purchase
money transactions. Borrowers have generally refinanced their mortgages
more than one time over the past several years. Reviewing each refinance
transaction to ensure that it is primarily refinancing purchase money
is becoming more burdensome. Mortgage loans are generally lower risk
transactions, and the collateral is usually sufficient to extinguish
the debt in the event of default. Mortgage insurance also reduces
the risk of a deficiency in the event of foreclosure. Most transactions
involve family members guaranteeing the loan, and they are aware
of the terms of the transaction. For these reasons, the guidance
should be updated to exempt all first mortgage transactions from
the requirements.
The next regulation for which we would like to comment is the Home
Mortgage Disclosure Act. The requirements for obtaining and reporting
information continue to grow, and this regulation is one of the most
burdensome for financial institutions. With time spent training personnel,
identifying covered applications, collecting monitoring information,
reporting and reviewing information, and the cost of software, we
conservatively estimate that our organization spends
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Ms. Jennifer J. Johnson
April 16, 2004
$500,000 per year complying with this regulation. This equates to
roughly $80 per HMDA application for the most recent reporting
year. This cost is passed on to borrowers in the form of higher
rates and fees.
Understanding
the public policy factors driving the purpose behind the regulation,
we still
believe that the burden of collection and
reporting outweighs the benefits derived from the information. This
is especially true for smaller organizations. The information is
to be used as a tool by the regulatory agencies in fair lending enforcement.
We have been informed by the regulatory agencies that for smaller
institutions, there are not a sufficient number of applications from
which to pull a valid sample. Therefore, they usually need to conduct
fair lending reviews on different loan types that aren’t covered
by HMDA. It would seem that any efficiency that could have been gained
through an off-site preliminary review of HMDA data has not been
realized when examining smaller institutions. Given the relatively
few fair lending enforcement actions in recent years, it appears
that data collection and reporting, including the most recent increase
in reporting requirements, may not be as necessary as it once was.
In order to balance
the public policy needs driving the regulation with the goal of
reducing
unnecessary burden on financial institutions,
we would propose raising the asset level threshold for coverage to
$500 million for regulated financial institutions. This would require
a statutory change, because even with indexing, the asset threshold
in the statute is significantly outdated. It has not taken into account
the changes in banking and branching laws over the years or the consolidation
of the banking industry. The $500 million threshold is the same as
the threshold for the large institution test under the proposed revisions
to the CRA regulations. This would make the two regulations consistent,
and consistency eases the compliance burden. In addition, larger
institutions generally have a sufficient number of applications from
which the regulatory agencies could conduct preliminary off-site
reviews and pull a valid sample. Smaller institutions would still
be subject to the collection and retention of monitoring information
pursuant to the requirements of Federal Reserve’s Regulation
B. This would decrease the reporting requirements for small institutions
while not impacting the ability of the regulatory agencies to carry
out enforcement of the fair lending laws.
An alternative solution that would help reduce some of the burden
is to eliminate reporting of certain expanded information for smaller
institutions. The information on rate spread, HOEPA status, and manufactured
housing only provides meaningful insight from a reporting perspective
if the lender engages in a high volume of transactions. As stated
previously, the smaller institutions do not have a significant volume
of applications from which to pull a valid sample. The additional
information reporting requirements seems to only add to the burden
on small institutions without providing any tangible benefit. The
regulations could be amended, without statutory change, to reflect
a tiered approach to detailed information reporting. Under our proposed
threshold, only the institutions with assets in excess of $500 million
would need to provide the additional detail as part of the
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Ms. Jennifer J. Johnson
April 16, 2004
reporting process. The smaller institutions would not need to report
the information, thereby reducing some of the burden.
The most frequent
complaint about this regulation that we receive from customers
relates to
the collection of race, ethnicity, and
gender information. These customers feel that requesting the information
is an intrusion into their privacy, despite the fact that provision
of the information is entirely optional. Our lending personnel also
do not feel comfortable “assigning” race and ethnicity
categories to applicants when the applicants decline to provide the
information. This is especially true for the recent changes creating
an ethnicity category. While we understand that the change was intended
to bring conformance between the categories and the census data,
it has added burden to the collection and reporting requirements
of the regulation.
The telephone collection of monitoring information has also added
to the burden on financial institutions. We realize that there has
been a significant increase in the number of applications taken over
the telephone. However, providing the disclosure and requesting the
information over the phone lengthens the application process and
places a negative connotation on what we try to make a pleasant experience
and an efficient process. The most common complaint again is that
customers feel the request is an intrusion into their privacy. Instead
of collecting the information over the telephone, perhaps the regulation
could be amended to allow an institution to send a written request
with the appropriate disclosure along with other required lending
disclosures. For example, the HMDA request and disclosure could be
mailed along with the good faith estimate for consumer transactions.
The final regulation for which we would like to comment is Truth
in Lending. This regulation also imposes substantial burden on financial
institutions. However, we still believe that the fundamental purpose
of the regulation remains valid and the basic requirements imposed
are still relevant in the current financial services environment.
We also believe that there are requirements imposed that could be
amended to reduce the burden and other amendments that would level
the playing field with lenders that are not as highly regulated.
One of the main areas under the regulation that we believe should
be revised relates to the rescission provisions. Rescission is one
area that generates the most complaints from customers. Even though
it provides protection, they generally do not understand why there
is a waiting period before being allowed access to the funds. Our
experience is that very few consumers rescind their transactions.
We believe that the rescission provisions do provide protection to
consumers and should not be eliminated entirely, especially for high
cost mortgage transactions. However, we believe that certain transactions
should be exempt from the requirements. We do not believe that any
of the changes we propose would require statutory amendments.
The first type of transaction where rescission should be eliminated
is bridge financing. We often have customers that are purchasing
a new primary residence and utilize bridge financing on their existing
homes for all or part of the financing. Under the regulation, the
purchase
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Ms. Jennifer J. Johnson
April 16, 2004
financing is exempt from the requirements, as it is a residential
mortgage transaction. However, the security interest taken in the
existing residence triggers the rescission requirements. This creates
a customer relations issue as the bank must effectively consummate
the bridge financing transaction in advance of the real estate
purchase transaction in order to have the proceeds available for
the purchase. It can also create questions of security interest
perfection, because in a true bridge loan, the lender takes a lien
in both the existing residence and the new residence. By consummating
the bridge loan prior to the real estate purchase transaction,
the borrowers execute a security interest in a property to which
they have not yet taken title. It is filed after transfer of title,
but the date of execution could create issues related to priority
of competing interests.
The purpose of the rescission period is to provide the borrowers
with a cooling off period to review the transaction terms and determine
if they would like to put their primary residence at risk as part
of the transaction. Individuals are not afforded a cooling off period
in purchase transactions, as the borrower generally receives advance
disclosures and title to the property transfers at settlement. Once
the purchase transaction is consummated, the new property becomes
the primary residence of the consumer, and the consumer cannot rescind
the purchase of the property. In bridge financing, the fact that
a security interest is taken in the former residence is irrelevant,
as the new property is the primary residence. Requiring a rescission
period in this circumstance provides no real protection to the consumer
and only hinders the lending process by creating two different settlements
for the same transaction. The statute also does not require rescission
in this circumstance. Therefore, a security interest taken in an
existing residence as part of bridge financing should be excluded
from the rescission requirements.
We also believe that the Board should use its authority under the
statute to exempt transactions involving more sophisticated borrowers
from the rescission requirements. This authority is granted at 15
USC 1604 (f). Sophisticated borrowers generally do not need the additional
protections afforded by the regulation. These borrowers fully understand
the transactions in which they seek to engage and will not consummate
the transaction if they do not feel the terms are acceptable. They
also are fully aware of the fact that they could lose their residence
in the event of default. Reaching a consensus on what constitutes
a sophisticated borrower could be challenging. A sophisticated borrower
could be defined as any borrower that is also an owner/operator of
a business or an individual that owns multiple residences. We would
propose that the Board utilize the standards noted in the statute
under the waiver provisions at 15 USC 1604 (g). These standards allow
for the exemption of transactions involving consumers with an annual
income of more than $200,000 or have net assets in excess of $1,000,000.
Even though the standards were set a number of years ago, we feel
that these thresholds are still appropriate today. At a minimum,
we would propose that the Board allow for the waiver of rescission
by consumers meeting the criteria in accordance with the waiver provisions
of the statute.
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Ms. Jennifer J. Johnson
April 16, 2004
One final area related to rescission where we believe the Board should
use its exemption authority involves the refinancing of transactions
by a new creditor. The rescission provisions already do not apply
to a refinancing or consolidation of existing credit by the same
creditor provided no new money is advanced as part of the transaction.
We believe the same provisions should apply to a refinancing by
a new creditor, as long as no new money is being advanced. Borrowers
generally only refinance transactions without obtaining an advancement
of additional funds when it is to their benefit. If it is a fixed
rate transaction, the borrower will know the terms prior to and
at consummation. For variable rate transactions, the borrower will
receive advance disclosure of the variable rate terms at application
and have the opportunity to review them prior to consummation.
If the loan is also subject to RESPA, the creditor must also provide
a good faith estimate of closing costs within three business days
of application, so the borrower will know all of the fees associated
with the transaction. The fact that a new creditor is involved
should be irrelevant as to whether or not rescission applies. At
a minimum, we would encourage the Board to adopt this provision
for all mortgage transactions in which the lender takes a first
lien position.
A minor revision that could be made to the regulation relates to
the provision of variable rate disclosures at the time of application.
12 CFR 226.19 (b) requires that a creditor provide variable rate
disclosures at the time an application form is provided to the customer.
While the statute requires that open-end home equity plan information
be provided with an application form, the same provision does not
apply to these closed-end credit transactions. The statute merely
states that the disclosures be provided at application. There are
many different types of variable rate transactions, and customers
do not necessarily know which program they want at the time an application
form is provided to them. It would seem appropriate for the creditor
to be allowed to deliver the disclosures within three business days
after receiving a written application or before the consumer pays
a non-refundable fee, whichever is earlier. This would bring consistency
among the disclosures requirements for closed-end credit and allow
the creditor to deliver the information with other required disclosures,
which reduces burden. It also could lead to more meaningful disclosures,
as the creditor could choose to deliver the disclosure specific to
the terms selected by the consumer at application as opposed to delivering
information on all of the programs offered by the creditor.
The biggest competitive disadvantage our organization faces related
to this regulation is that other lending organizations do not comply
with the early disclosure, advertising, or oral disclosure of APR
requirements. These competitors are typically mortgage lending companies
where licensing is non-existent and enforcement is extremely limited.
Rates in the mortgage industry are typically not quoted as an Annual
Percentage Rate. Instead they are quoted as simple interest rates
and points. Customers understand this method of quoting rates and
are often confused by the statement of an APR. For example, if we
quote a customer a simple rate of 5.5% with a one percent origination
fee and APR of 5.715%, the non-regulated lender is only quoting 5.5%
with a one point origination fee for the exact same transaction terms.
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Ms. Jennifer J. Johnson
April 16, 2004
It appears to the customer that they will be paying a higher rate
by going through our organization. The fact of the matter is that
the customer primarily cares about the interest rate and fees paid,
and it is not possible to compare APR’s when not all lending
organizations are quoting the APR. Even quoting an APR for a sample
transaction may not be relevant to the customer’s specific
circumstance. Therefore, we would propose that the Board use its
exemption authority to exclude mortgage transactions from the oral
disclosure requirements of the regulation. This would negate the
need for the financial institution to maintain APR’s for
sample transactions, thereby reducing some of the burden.
Certain types
of advertisements should also be excluded from all of the advertising
requirements.
For example, triggering terms in
a television advertisement usually result in the addition of “fine
print.” This print cannot typically be read by a consumer prior
to the time the advertisement is finished. It would seem that the
provision of a phone number to contact the creditor for details would
suffice for compliance with the advertising provisions. Lending companies
that are not as highly regulated do not comply with the advertising
requirements. The Board could revise the rules to bring them in conformance
with other advertising regulations. For example, Federal Reserve’s
Regulation DD, which implements the Truth in Savings Act, provides
for exclusion of certain disclosures in conjunction with radio or
television advertising. We believe that it would be appropriate to
include similar exclusions in the Truth in Lending regulation. This
would not require any statutory changes.
Thank you for taking our comments into consideration. If you have
any questions, please contact David Kelly at (303)235-1491.
Sincerely,
John A. Ikard
President
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