From: Kerry Hoops
[mailto:kerry.gasb@ffgbank.net]
Sent: Monday, April 19, 2004 11:11 PM
To: Comments
Subject: EGRPRA Review of Consumer Protection Lending Related Rules
Kerry Hoops
2575 Royal Oaks Drive
Freeport, Illinois 61032
April 19, 2004
Dear FDIC:
As a community
banker, I greatly welcome the regulators' openness to
consider input on the critical problem of regulatory burden. Community
bankers work hard to establish the trust and confidence with our customers
that are fundamental to customer service, but consumer protection rules
frequently interfere with our ability to serve our customers. The
community banking industry is slowly being crushed under the cumulative
weight of regulatory burden, something that must be addressed by Congress
and the regulatory agencies before it is too late. This is especially
true for consumer protection lending rules, which though well intentioned,
unnecessarily increase costs for consumers and prevent banks from serving
customers. While each individual requirement may not be burdensome
itself, 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 predatory lenders. It's time to acknowledge
that consumer protection regulations are not only a burden to banks but
are also a problem for consumers who are becoming overwhelmed with the
number of consumer-protective type disclosure documents that are thrown at
them when we close a loan.
Truth in Lending
(Federal Reserve Regulation Z)
Right of Rescission.
One of the most burdensome requirements is the
three-day right of rescission under Regulation Z. Rarely, if ever, does a
consumer exercise the right. Also, consumers 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 makes it
difficult to waive the right of rescission which further aggravates the
problem. If not outright repealed, depository institutions should at
least be given much greater latitude to allow customers to waive the
right. This is another example of a regulation that was put in place due
to a few unscrupulous lenders who took advantage of people and rather than
penalizing those few, the whole industry suffers through this additional
regulation.
Finance Charges.
Another problem under Regulation Z is the definition of
the finance charge. Assessing what must be included in - or excluded from
- the finance charge is not easily determined, especially fees and charges
levied by third parties. And yet, the calculation of the finance charge
is critical in properly calculating the annual percentage rate (APR).
This process desperately needs simplification so that all consumers can
understand the APR and bankers can easily calculate it. The fear of
under-disclosing and being penalized by regulators often forces banks to
overstate the APR to avoid regulator scrutiny, which ultimately could
result in the loss of the loan to a competitor who is not taking such a
conservative approach to this regulation.
Credit Card Loans.
Resolution of billing-errors within the given and
limited timeframes for credit card disputes is not always practical. 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 use 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.
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, for instance, is
often difficult because the line between an inquiry and an application is
not clearly defined.
Spousal Signature.
Another problem is the issue of spousal signatures.
The newly implemented revision to Reg B makes it difficult and almost
requires all parties - and their spouses to come into the bank to
personally complete loan documents. The revised Reg also seeks to verify
the intent of the applicants in the lending process. In a rural community
like ours, with a large portion of agricultural and small business credit
where one spouse handles the majority of the business, it is rather absurd
to have both spouses come into the bank each time they want to apply for a
loan to verify their intent. We know our customers and they know us and
they expect simple, unencumbered access to credit without jumping through
numerous hoops. This new Reg also makes little sense as the world moves
toward new technologies that allow for the on-line application of loans
with electronic signatures similar to the IRS and the electronic
transmission of their federal income tax returns.
Adverse Action
Notices. Another problem is the adverse action notice. 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, that may then trigger
requirements to supply adverse action notices. For example, it may be
difficult to decide whether an application is truly incomplete or whether
it can be considered "withdrawn." A straightforward rule on when
an
adverse action notice must be sent - that can easily be understood -
should be developed.
Other Issues.
Regulation B's requirements also complicate other instances
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 yet obtain copy of
driver's licenses and other sufficient information to identify a customer
under section 326 of the USA PATRIOT Act seems contradictory and extremely
burdensome. And always, the nation's financial institutions are always
called on, through additional regulation, to monitor everything from money
laundering to terrorist identification.
Home Mortgage
Disclosure Act (HMDA) (Federal Reserve Regulation C)
The volume of
data that must be collected and reported is clearly
burdensome. The changes implemented in 2004 make this statement even
truer. Now, even more loans from our commercial and agricultural loan
portfolios are considered HMDA reportable under the new definition of
refinance. These loans will further skew the HMDA data from its original
intent.
Certain data
collection requirements are difficult to apply in practice
and therefore add to regulatory burden and the potential for error, e.g.,
assessing loans against HOEPA (the Home Owners Equity Protection Act) and
reporting rate spreads; determining the date the interest rate on a loan
was set; determining physical property address or census tract information
in rural areas, etc. Talk about additional regulatory burden!
Exemptions. The
HMDA requirements are the one area subject to the current
comment period that does not provide specific protections for individual
consumers. HMDA is primarily a data-collection and reporting requirement
and therefore lends itself much more to a tiered regulatory requirement.
The current exemption for banks with less than $33 million in assets is
far too low and should be increased to at least $250 million.
Ironically, at
a time when regulators are reviewing burden, the burden
associated with HMDA data collection was only recently increased
substantially. Consumer activists are constantly clamoring for additional
data and the recent changes to the requirements acceded to their demands
without a clear cost-benefit analysis. All consumers ultimately pay for
the data collection and reporting in higher costs, and regulators should
recognize that.
Flood Insurance
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. Flood insurance requirements
should be streamlined and simplified to be understandable.
Additional Comments
As a community
banker, we are often called upon to wear many hats.
However, the regulatory burden in the banking industry continues to grow
exponentially. In fact, the amount of banking regulation that I have seen
put in place in my short 20 year banking career is staggering. Where does
it end? And, unfortunately as a community bank with limited resources, we
are forced to comply with the same level of regulation as large financial
institutions. Somehow, banking regulations must be tiered to different
size banking institutions or reduced based on a history of compliance or
limited infractions.
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 were
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. In fact, many times even the regulatory examiners themselves
don't know how to interpret some of the regulations and how they are
written. Finally, examiner training needs to be improved to ensure that
regulatory requirements are fairly and uniformly enforced.
Conclusion
The volume of
regulatory requirements facing the banking industry today
presents a daunting task for any institution, but severely saps the
resources of community banks. We need help immediately with this burden
before it is too late. Community bankers are in close proximity to their
customers, we understand them and their special circumstances and we pride
ourselves on providing a more personalized and responsive level of service
than the large megabanks. However, community banks cannot continue to
compete effectively and serve their customers and communities without some
relief from the crushing burden of regulation.
Thank you for
the opportunity to comment on this critical issue!
Sincerely,
Kerry L. Hoops
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