From: Kent Gaudian [mailto:kmg@fmbanktrust.com]
Sent: Thursday, April 01, 2004 6:29 PM
To: Comments
Subject: EGRPRA Comments
Kent Gaudian
221 Jefferson Street
Burlington, Iowa 52601
April 1, 2004
Dear FDIC:
I am writing
on behalf of Farmers & Merchants Bank & Trust,
a
state-chartered bank located in Burlington, Iowa. Our customer base
is
primarily agricultural and moderate income consumers with lending
activities are broad based and include commercial, consumer and real
estate lending. Our current asset size is $234,000,000 with a total
consumer and residential real estate loan portfolio of $35,000,000.
We
appreciate the efforts of the Office of Comptroller of the Currency,
Federal Reserve Board, Federal Deposit Insurance Corporation and
Office of
Thrift Supervision, “the Agencies”, in reviewing the
current consumer
regulations to identify outdated, unnecessary, or unduly burdensome
regulatory requirements pursuant to the Economic Growth and Regulatory
Paperwork Reduction Act of 1996 (EGRPRA). We also appreciate the
Agencies’ recognition and understanding of the challenges faced
by
community banks in meeting the requirements of the ever-growing number
of
compliance regulations.
I would like to offer the following comments regarding the current
regulatory rules and environment:
Equal Credit Opportunity Act (Reg. B)
The spirit and intent of Reg. B is to prohibit discrimination based
upon
one of the nine prohibited basis. The current requirements under
Reg. B
are far broader and create numerous challenges for creditors.
The recent revisions to Reg. B which prohibit lenders from assuming
the
submission of a joint financial statement constitutes a request for
joint
credit and now requires whenever more than one individual applies
for
credit, those applicants sign a separate statement of intent to apply
for
joint credit creates additional documentation for creditors and is
often
very difficult to manage, particularly in commercial and agricultural
transactions involving two or more borrower 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 are
not legally
organized as such. Rather than evidencing intent for each application,
creditors should be given the 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 additional statement of intent
for
each application/loan for that intended purpose.
The revisions to the model credit applications in order to comply
with the
requirements to evidence intent to apply for joint credit are
appreciated.. In early September the FRB published revisions in the
Federal Register relating to Fannie Mae’s Uniform Residential
Loan
Application. At that time we assumed that the changes made to the
URLA
were done to facilitate by the Reg B revisions as well as CIP mandates
to
collect date of birth and Reg. C changes for collection of government
monitoring information. Now the indication we are receiving from
federal
regulators is that the revised URLA does not meet the requirements
for
evidencing joint applications for credit and that creditors must
have
residential real estate applicants sign a separate statement. This
seems
redundant given the number of disclosures and authorizations a home
loan
applicant all ready signs at the time of application.
The collection of 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. With the growing use of home equity loans
and
lines of credit in the market place, does it not make more sense
to either
collect monitoring data for all loans secured by a borrower’s
principal
dwelling or eliminate collection all together for non-HMDA and small
bank
CRA reporting entities? It certainly would lead to less Reg. B violations
during exam procedures. The Agencies can be assured if a bank were
guilty
of discriminatory practices, local consumer groups, state’s
attorney
generals and individual consumers would alert them.
Home Mortgage Disclosure Act (Reg. 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 that 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, 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 banks 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 is the inconsistencies in reporting loan amounts
for home
equity lines of credit and home equity loans. Only that amount of
a home
equity line of credit 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.
Rate spread is now required to be reported on the HDMA LAR if the
APR on
the loan is above a certain threshold over a comparable Treasury
yield.
The rate spread calculation determination date for HMDA purposes
is not
consistent with the way the rate spread index is determined for HOEPA
purposes. This too leads to confusion and errors. Rate spread indexes
and calculations methods should be consistent in order to promote
greater
accuracy.
The scope of required reporters needs to be revisited. Ten counties
in
Iowa were added to MSAs as a result of the 2000 census. Nine of those
counties have a county-wide population of 25,500 or less with the
smallest, newest county having a population of just 11,353 persons
according to census data. What value is gained by gathering data
from the
banks located within these counties, the majority of which have total
assets of less than $100 million? The benefit gained cannot warrant
the
burden beared by these new reporters.
Truth-in-Lending Act (Reg. 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/question that occurs after sending out an early TIL
to a
consumer is “I thought you said my interest 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 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 financial needs.
The recent revisions to Section 32 of Reg. Z have been more problematic
than helpful to consumers and have also caused confusion among creditors.
If a loan falls into coverage of a “high cost mortgage loan” as
defined by
this section, the consumer must be provided a 3-day notice prior
to
consummation. Consummation, however is not defined in Reg. Z and
often is
not defined by state law either. Is consummation considered the point
at
which the borrower signs the note? Or in a rescindable transaction,
is it
the point at which the transaction is funded? Can a borrower be
considered legally obligated on a transaction when they do not have
receipt of the funds? Consummation needs be clarified under this
section
to ensure compliance.
Section 32 mortgages are generally rescindable transactions. If
the
Section 32 disclosure is to be provided three days prior to signing
the
note, then the borrower at best has a time period of seven days from
application to closing. The extended waiting period often time has
adverse effects on the borrower for the time period they cannot access
their loan proceeds such as overdraft fees, loss of purchase
opportunities, etc. If the Section 32 three-day time frame ran concurrent
with the rescission 3-day timeframe, the consumer is still afforded
a
“
cooling off” period and would still have the opportunity to
change their
mind and rescind the transaction.
Currently the three-day time frames for the Section 32 is not counted
in
the same manner as the rescission three-day time frame. The Section
32
three-day time frame expires on the third business day, whereas the
rescission time frame expires on midnight following the third business
day. The inconsistency is confusing for both consumers and creditors.
If a loan is determined to be a high-cost loan under Section 32
of Reg. Z,
the creditor has to provide the borrower with an additional disclosure
which warns the borrower they could lose their home if they default
on the
loan and also provides additional information including the loan
amount,
the APR, the monthly payment amount, the fact the rate may go up
following
closing (if applicable), and whether a balloon payment will occur.
These
disclosures are also provided in the final Truth-in-Lending statement
provided at closing, the note itself and many times as mortgage clauses
as
well. Simply put, the disclosure is duplicative.
Also, in regard to HOEPA loans, the explanation for the calculation
for
“
total loan amount” is not clear. Could there not be a simpler
definition
or amount used for this calculation?
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 that is being taken in their personal residences
but
prefer the product due to the tax deductibility of the interest paid
and
preferable rates and terms often associated with it. These consumers
consider the three-day waiting period a nuisance, not a consumer
protection device, and would much prefer to waive their right rather
than
wait three days for their funds. Given that the rescission rules
were
intended to protect consumers from unscrupulous financers, the greater
majority of which are unregulated, would it not make sense to allow
consumers borrowing from a federally-regulated financial institution
have
the ability to waive their right to rescission in instances other
than a
personal bona fide emergency?
National Flood Insurance RulesUnder the Flood insurance rules, when
borrowers are using a property located in a special flood hazard
area as
security on a loan, lenders must provide notice to the borrowers
within a
“
reasonable period of time” prior to closing, advising the borrowers
that
the property is in a flood plain and flood insurance under the NFIP
is
required prior to closing the loan. 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 customer from losing their loan commitment
while they shop for adequate, affordable insurance coverage. The
“
reasonable period” of time was not however, 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 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 appreciate your consideration of my comments.
Once again, thank you for the opportunity to comment on these very
important issues. I appreciate your serious consideration of my concerns
over the above-mentioned regulatory burdens currently facing America's
community banks.
Sincerely,
Kent M. Gaudian
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