COLONY BANK
April 12, 2004
Re: EGRPRA Review of Consumer Protection Lending Related Rules
Dear Sir or Madam:
As a community bank group, we greatly welcome the regulators' effort
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.
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. 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 making it difficult to waive the right of rescission
aggravates the problem. If not outright repealed, depository institutions
should at least be given much greater latitude to allow customers
to waive the right. The decision to mortgage one’s home is
not typically a “spur of the moment” decision. Also,
since real estate is involved, often times the consumer is forced
to wait for appraisals, etc. The implementation of the right of rescission
period adds an additional delay that inconveniences the consumer.
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 cost of the credit would be more meaningful to
the consumer in a dollar amount rather than as an APR, i.e., interest
as a dollar amount, all other loan fees individually as a dollar
amount and then added for a total cost of the credit. This would
allow the consumer to compare costs between banks in a manner they
understand, dollar cost per item.
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 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.
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 requirements make it difficult and almost require all parties
- and their spouses - come into the bank personally to complete application
documents. This makes little sense as the world moves toward new
technologies that do not require physical presence to apply for a
loan. Since all parties must be present to sign the collateral documents
if they have ownership and to sign the loan documents if they are
responsible for repayment, the spouse would be cognizant of all terms
and conditions of the loan.
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 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 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.
Volume of Data. The volume of the data that must be collected and
reported is clearly burdensome. 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.
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.
A concern for our company is that offices of a bank charter that
are not in an MSA and are located in rural areas are required to
do HMDA reporting when only one or two offices of the charter are
actually in an MSA. The census tract information/BNA is not required
to be reported on these loans which seem to defeat the purpose
of the reporting.
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
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. Finally, examiner training
needs to be improved to ensure that regulatory requirements are properly
- and uniformly - applied.
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, understand the special circumstances
of the local community and provide a more responsive level of service
than mega banks. 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.
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