INDEPENDENT BANKERS ASSOCIATION OF TEXAS
April 19, 2004
RE: EGRPRA REVIEW OF CONSUMER PROTECTION LENDING RULES
Dear Sir or Madam:
The Independent
Bankers Association of Texas (“IBAT”)
makes these comments on behalf of its over 600 independent community
bank members domiciled in Texas and Oklahoma. Before addressing specific
comments about lending regulations we would first observe that IBAT
has one staff attorney devoted 100% to responding to bank compliance
questions. In addition, the general counsel spends approximately
1/3 of her time addressing compliance issues. The association publishes
a monthly newsletter on regulatory changes and maintains a compliance
list serve. At the same time, the Texas Bankers Association, which
also represents banks in Texas, has a staff attorney devoted to responding
to bank compliance questions. In short, a great deal of resources
is devoted to this issue by just the trade associations. Several
years ago, IBAT sent a regulatory burden survey to the members of
its regulatory liaison council. At that time, we discovered, in an
admittedly unscientific survey, that the cost of compliance for our
smaller members was as much as 70 times more expensive when considered
as a ratio of costs to deposits than compliance costs were for our
largest member banks. In short, regulatory burden falls most heavily
on the small independent institutions of our State.
Next, we would
note that the comments in this letter are based at least in part
on the hundreds of telephone alls that IBAT receives
every month from confused and harried bankers who are doing their
best to comply with the myriad of federal laws and regulations.
Also, as a general
observation, we would note that there seems to be a complete disconnect
between the requirements in consumer lending
regulation and the information that consumers find desirable and
useful. Many of the burdensome disclosure requirements are mandated
by the statue itself. In other words, there is little regulatory
flexibility for change. We would suggest that a true overhaul and
reduction of regulatory burden would begin with focus groups meeting
with representative consumers and finding out from them what information
would be useful, the format for those disclosures, and the delivery
that would be most effective. As a case in point, one of the hallmarks
of Truth in Lending is disclosure of the APR. Based on feedback from
bankers and several FTC studies, it is apparent that APR is not information
that customers are particularly nterested in. Rather, they are most
concerned with monthly payments and how that fits within their budget.
Flood Hazard. On the positive side, we would note
that the flood hazard handbook published by the OCC is an extremely
helpful tool in understanding the requirements and intricacies of
the flood hazard rules.
The major problems
with the flood insurance requirements are primarily connected with
customer relations. Frequently, customers are upset
with the rigid flood requirements, particularly when property is
obviously above a flood line but no correction to the flood map has
been formally obtained. The process for the LOMR is expensive and
cumbersome and causes customer unhappiness. Other problems that have
been experienced with regard to flood requirements relate to condominium
situations. In some scenarios, the home owners association has refused
to obtain the insurance. A loan to an individual homeowner with mandatory
insurance placement is difficult to explain to the consumer and enforce.
Compliance with the flood insurance requirements has been significantly
simplified in recent years by the development of an industry that
provides determination information and monitors the loans during
their life. These services essentially manage this compliance function
to some extent for most lenders. The price typically is also modest
and therefore not a problem for consumers. Perhaps one of the most
difficult problems of late for lenders has been the failure of Congress
to timely continue the flood insurance program itself and appropriately
fund it.
Equal Credit
Opportunity Act. Perhaps the most volatile issue with regard to
Regulation B of late is the change in commentary clarifying
requirements for intent to make a joint application. Although the
Federal Reserve has manifested an intent to provide significant flexibility
to the creditor, there still are many scenarios that cause problems
for creditor and borrow alike. One spouse will actually make an application
for credit or take the application form home for the other spouse
to complete. The ability to effectively prove that both intended
for the application to be a joint one may be difficult in these situations.
One additional comment with regard to joint applicants could clarify
this problem. That is, if both parties actually sign the note, that
that should suffice as intent of proof to jointly apply for credit.
If there is concern that the customer would be confused and may not
understand the significance of the act of signing the note, then
a notice comparable to the cosigner notice found in Regulation AA
could be implemented.
An ongoing dilemma
in Texas is that of spousal signatures. As a community property
state,
our property provisions with regard to
married couples are somewhat complex. The possible types of property
that can be owned in Texas include husband’s sole and separate
property, wife’s sole and separate property, community property
jointly managed, community property managed by the husband and community
property managed by the wife. Our prior Family Code provided at least
that the community property was subject to contractual debt incurred
during marriage. However, that section has been revised with rules
indicating that if the property is subject to sole management and
control, then it may not be subject to a debt incurred solely by
the other spouse. Extremely complex legal and factual conclusions
are required in order to determine whether or not a particular piece
of property might be available to support the debt of one or other
of the spouses. A simple rule that spousal signatures on any instrument
for collateral may be obtained – without the qualifying requirement
of deeming it necessary to reach the collateral-would be a preferable
clarification from our prospective.
The adverse action
notices requirements of the Equal Credit Opportunity Act creates
traps for the unwary. If a lender discloses too many
reasons for a turndown, then it will be criticized. However, if it
does not disclose tnough reasons then it is facing a dilemma with
the borrower arguing that the reason is not appropriate when a decision
may not be entirely back and white. Most community banks do not use
scoring systems but rather subjective ones. Therefore, it can be
difficult to pinpoint with laser accuracy the reason for a turndown
when it may be a mixture of reason.
A Texas compliance officer once performed an experiment and utilized
the short form adverse action notice merely advising consumers that
they had a right to know the reason for the turn down. This compliance
department, in one of the largest Texas domiciled banks, discovered
that virtually no consumer ever asked for an explanation for the
exact reason. Typically, the customer already has a fairly strong
understanding of the defects in their credit history that led to
the turndown. Thus, the adverse action disclosure is irrelevant for
most customers. However, a failure to comply carries severe adverse
consequences.Recently one of the most troubling dilemmas faced by banks is balancing
compliance with the customer identification program requirements
of the USA Patriot Act against the limitations in information gathering
of the Equal Credit Opportunity Act. These present quandaries for
officers who want to obtain enough information to verify identity
without collecting information that might subsequently be held
inappropriate under a Reg B analysis.
Home Mortgage
Disclosure Act (“HMDA”). This law and
its implementing regulation is terribly burdensome, particularly
for smaller community banks. One improvement could be a significantly
higher threshold for exclusion, such as $250 million. Furthermore,
I do not believe that it serves the purpose for which it was designed.
Perhaps Mark Twin said it best: “There are three types of lies:
lies, damn lies, and statistics”. HMDA represents the sort
of lies that occur when statistics are used inappropriately. Consider
the following real life examples.
- Suppose a
bank is in an area with very few minorities. Six African Americans
apply for credit. If one of them is turned down, then the
turn down rate for African Americans is greater than that for whites.
If two African Americans are turned down, then the statistics are
horrific.
Another example from a Texas institution is also particularly distributing:
- A “Border
Bank” decided
to do an aggressive outreach to Spanish speaking potential customers.
It engaged in an aggressive
advertising campaign for mortgage loans in Spanish. As a result of
those efforts, there was flood of applications. The bank weeded
out those customers who did not have valid immigration papers and
thus could not guarantee that they would be in the United States
long enough to make payments on their home loan. This was quite a
few applications in this border town. None-the-less, the bank actually
booked a tremendous volume of new mortgage loans to Hispanic customers.
They were recognized for their effort under the Community Reinvestment
Act but criticized severely and punished for their turn down rate
as reflected in HMDA.
Consumer advocates
have expressed a need for consumers to shop well for credit. However,
if consumers actually shop for credit, then
every bank with whom they apply is going to have an application on
the HMDA log. Only one of the institutions will have a completed
loan. Therefore, to the extent we are successful in encouraging consumers
to shop for the best credit terms, we are also significantly adversely
affecting HMDA statistics.
The recent revisions
to HMDA present horrible data collection and reporting nightmares
for community banks. Among burdensome requirements
include the requirement to assess loans against the Home Ownership
and Equity Protection Act (“HOEPA”) and reporting rate
spread; determining the date the interest rate was set; determining
physical property address or census tract information in some rural
areas; and analyzing credit life insurance sales to determine whether
HOEPA standards are met.
Racial determinations
are also increasingly complex. Personally, I have grandchildren
who are ¼ Japanese, ¼ Hispanic
(Puerto Rican) and ½ Anglo. Should they select multiple categories
or only one? They could be Asian American or Hispanic or Anglo. Asking
some of these questions are actually more offensive to borrowers
than they are helpful. Texas
banks have only been able to offer home equity loans for brief period
of time.
Therefore, the application of HMDA to Home Equity
is a fairly new issue to us. We find it very confusing. If a loan
is secured by the home, then it seems like it should be reportable
under HMDA. Looking to the underlying purpose is simply too confusing
and doesn’t appear to serve any rational purpose.
Truth in Lending Act. As noted above, in our experience customers
are not interested in APR. Rather, they are interested in monthly
payments and how those fit into a budget. None-the-less, creditors
are severely punished for missing the APR outside of the tolerances.
Clearly Truth in Lending is significantly better following the Truth
in Lending Simplification Act in 1981. However, it too still contains
problem areas.
The revisions
to the Home Ownership and Equity Protection Act (“HOEPA”)
requirements are difficult and confusing. Obviously, there is a public
policy attempt to push creditors into offering monthly premium product.
However, I performed an open records request in the State of Texas
to determine what monthly premium insurance products were available.
I found no level premium products until very recently. Furthermore,
the Texas Department of Insurance took approximately 18 months to
approve the insurance carrier filing for monthly level premium credit
life. All of the other insurance programs are based on a monthly
outstanding balance. Data processing systems offered by the major
vendors in Texas support level premium but not monthly outstanding
balance for closed end loans. Therefore, the regulation is pushing
lenders to offer a product that is not generally available or to
deny consumers the right to have credit life, accident and health
insurance. Although credit life products are despised by consumer
advocates, there are many consumers in Texas for whom the credit
life product is the only one that they have to protect their family
and in fact may be the only product for which they can qualify since
it is a guaranteed issue group program.
The Right of Recission rules are difficult to understand in certain
situations and are much despised by customers. Revisions to Regulation
Z have made it virtually impossible to waive the waiting period.
This infuriates customers who want to get started on a home improvement
project. Furthermore, the waiver is permissible only for a financial
emergency. Often times, the emergency is not financial in nature.
Yet, bankers are afraid to conclude that an emergency based upon
a natural disaster is the equivalent of a financial emergency outside
of a formal pronouncement from the Fed. Texas has many natural disasters
including floods, hurricanes, tornadoes, strong winds, and other
problems that Mother Nature throws at us. All too often, these result
in damages to homes. Must the homeowner prove up a financial component
to their problem or simply wait three days to begin repair their
home? The answer is not clear enough. Furthermore, the application
of Right of Recission in bridge loan situations is also not as clear
as it should be to the front line loan officer trying to comply.
Determining what
does and does not go into finance charge and does and does not
go into APR continues to boggle the imagination of lenders.
Again, the rules are complex and riddled with exceptions. Recently,
the Federal Reserve and the FDIC disagreed (to the detriment of a
state bank) as to how to handle a debt cancellation product. Regulation
Z states that debt cancellation agreements are excluded from finance
charge if they are voluntary and certain disclosures are made. However,
the FDIC examiner concluded that if the bank had charged more than
the contractual liability policy used to manage the risks, then the
amount of the difference constituted a finance charge. This flies
in the face of the plain language of the regulation but presents
a terrible reimbursement dilemma to financial institutions attempting
to offer a gap product (a type of debt cancellation agreement).
Prepaid finance
charges continue to confuse consumers and compliance officers alike.
They cause distorted APRs much to the dismay of the
lender. Texas recently authorized a $25.00 administrative fee on
consumer loans ($20.00 for loans of $1,000 or less). The last Fed
functional cost analysis on loans indicates that it cost more than
$100 to make a consumer loan. Texas law does not permit a bank to
recoup the cost of documentation, credit reports, or any other of
the items that go into making the loan. Only the administrative fee
can be used to help with some of the costs. That administrative fee
is a prepaid finance charge and significantly increases the APR on
a small consumer loan. This confuses the consumer and distresses
the ank that is trying to offer a reasonably priced product to its
customers.
Another area
that is especially troubling and confusing and one that is treated
differently by
different regulators is the distinction
between the modification of a loan and refinancing. FDIC examiners
do not recognize modifications. Federal Reserve examiners and OCC
examiners do. It is not uncommon for small banks to use balloon notes
in their real estate portfolio with a five year term and a balloon.
It is simply too expensive for these banks to comply with the Truth
in Lending variable rate disclosures and too easy for them to make
mistakes. Therefore, they use five year notes with a balloon. The
note is usually modified and extended at the end of the term. Under
one logical analysis this is just a modification and should not trigger
new disclosures. However, FDIC examiners conclude that it is a refinancing
and always trigger new disclosures. This inconsistency is troubling.
Also, the inability to read the rule and actually know what is meant
by “refinancing” without consulting a lawyer is equally
troubling.
Thank you for the opportunity to comment. We realize that many of
the changes that would make these regulations less burdensome will
necessitate statutory revisions. However, we hope that his process
will continue and that only those disclosures that are meaningful
to consumers will be retained while overrules will be overhauled
or eliminated.
Sincerely,
Karen M. Neeley
General Counsel
|
