IOWA BANKERS ASSOCIATION
April 16, 2004
Office of the Comptroller of the Currency
Communications Division
250 E Streets, SW.
Public Information Room, Mailstop 1-5
Washington DC 20219
Attn: Docket No. 04-05
Jennifer J. Johnson, Secretary
Board of Governors
Federal Reserve System
20th Street and Constitution Avenue, NW.
Washington, DC 20551
Attn: Docket No. R-1180
Robert E. Feldman, Executive Secretary
Federal Deposit Insurance Corporation
550 17th Street, NW.
Washington, DC 20429
Re: EGRPRA Burden Reduction Comment Regulations Comments
Chief Counsel’s Office
Office of Thrift Supervision
1700 G. Street, NW.
Washington, DC 20552
Attn: No. 2003-67
Re: EGRPRA Regulatory Burden Reduction Comments
Dear Madams and Sirs:
Iowa Bankers
Association (“IBA”) is a trade association
representing nearly 95% of 400+ banks and savings and loan associations
in the State of Iowa. 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identify outdated, unnecessary, or unduly burdensome regulatory requirements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.
In developing our comments contained herein, the IBA invited members
of its Compliance Committee to provide suggestions for ways burdensome
regulatory requirements could be reduced without jeopardizing consumer
protections.
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 prohibit lenders from assuming the
submission of a joint financial statement constitutes a request for
joint credit. Creditors are now required whenever more than one individual
applies for credit to have those applicants sign a separate statement
of intent to apply for joint credit. This additional documentation
requirement is not burdensome when related to consumer credit transactions
but becomes very difficult to manage in commercial and agricultural
transactions involving two or more borrowers. Regulation B does not
require written applications for business credit. Such "applications" are
often the result of several conversations (including negotiations),
the submission of a financial statement(s), and a business plan(s).
Further complicating the issue is the working structure of many small
businesses made up of individuals who are operating a 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
made 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 (URLA). 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 as well as 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 already signs
at the time of application. The typical residential real estate loan
applicant signs the URLA, an authorization statement to allow the
lender to order a credit report, a mortgage servicing disclosure
statement and very often in face-to-face applications, a good faith
estimate, early TIL, appraisal disclosure and an acknowledgement
stating the applicant has received these disclosures. After signing
all these disclosures, and often more, is there really any doubt
who the applicants are or that they intend to obtain credit jointly?
A creditor’s use of the Fannie Mae or Freddie Mac URLA should
be deemed compliant with all application provisions of Reg. B by
all the Agencies.
The collection
of monitoring information under Reg. B 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 altogether for non-HMDA and small bank CRA reporters?
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. Many previously non-reportable commercial and agricultural
loans will now be reportable at the time they are refinanced and
retain a security interest in a dwelling. For example, 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 pricing
variances on the LAR. Certainly, such reporting does nothing to enhance
the quality and utility of the data, nor does it accurately reflect
trends in the housing market – a primary purpose of HMDA.
Also problematic
are 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. For purposes of reporting “loan amount,” please
consider treating both lines of credit and closed-end loans in the
same manner and eliminate the confusion.
Rate spread must now 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 for HMDA purposes is not consistent with
the rate spread calculation for HOEPA purposes. This too leads to
confusion and errors. Rate spread indexes and calculations methods,
including rate determination dates, should be consistent in order
to promote greater accuracy. A more simplistic approach could be
taken and the rate spread reporting could be replaced with reporting
of the APR. The APR along with the lien position, property type and
purpose codes would provide meaningful explanations for varying rates,
be far less burdensome to reporting institutions and would in all
likelihood result in a more accurate tool by which consumer advocacy
groups and regulators could compare lending institutions or identify
abuses within the industry.
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 countywide population of 25,500 or less with
the smallest, newest county having a population of just 11,353 persons
according to census data. As a result, nearly 50 banks will be first-time
reporters for calendar year 2004. Nearly 80% of these banks have
assets of less than $100 million, many having assets under $50 million.
What value is gained by gathering data from the banks located within
these counties? The minimal benefit gained cannot warrant the burden
borne 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) interest rate; (2) monthly payment;
and
(3) the total closing costs. The most common
comment/question that occurs after sending out an early TIL to a
consumer is “I thought your 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
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
need.
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 borrowers 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, restricting timely access to
loan proceeds, potentially resulting in additional expense to the
borrower or the potential loss of purchase opportunities. If the
Section 32 three-day time frame ran concurrent with the rescission
3-day timeframe, consumers would still be afforded a “cooling
off” period and maintain the opportunity to change their mind
and rescind the transaction.
Currently the three-day time frame for the Section 32 required notice
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 at 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 must provide borrowers with an additional
disclosure which warns 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 included 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 redundant
and duplicative and should be withdrawn from required disclosures.
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 and prefer the product to other types of consumer
credit due to the potential tax deductibility of the interest paid
and preferable rates and terms often associated with home equity
loans. 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, the ability to waive their right to rescission
in instances other than a personal bona fide emergency?
NATIONAL FLOOD INSURANCE RULES
Under 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 a loan commitment while obtaining adequate,
affordable insurance coverage. The “reasonable period” of
time was not however, intended to delay closing once the borrowers
have purchased adequate coverage. Currently, there are examiners
in the field instructing banks to wait a minimum of ten days from
the time notice is provided to the borrower until closing, even when
the borrower has insurance coverage in place before the time period
has expired. Certainly it was not the intent of the NFIP to delay
closings with this “reasonable period of time.” Clarification
is needed in this area for both creditors and examiners.
Today’s
community banks are drowning in regulatory red tape, utilizing
valuable resources
to meet regulatory compliance mandates
that could be put to much better use for economic and community development
purposes in the communities they serve. Thank you for recognizing
this and requesting comments on how consumer lending regulatory burden
could be reduced. The IBA applauds your efforts and appreciates your
thoughtful consideration of our comments. If you have any questions
related to this letter, please feel free to contact me at (800) 532-1423
or at rschlatter@iowabankers.com.
Sincerely,
Ronette Schlatter
Compliance Coordinator
Iowa Bankers Association
8800 NW 62nd Ave.
Johnston, IA 50131
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