April 19, 2004
Robert E. Feldman,
Executive Secretary
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429
Attn: EGRPRA Burden Reduction Comments
Re: EGRPRA Review
of Consumer Protection Lending Related Rules
Dear Mr. Feldman:
As a community
banker, I 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 consumer.
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 If not outright repealed, depository institutions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 customer
to waive the right.
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.
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 documents.
This make little sense as the world moves toward new technologies
that do not require physical presence to apply for a 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.
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
customer, understand the special circumstances of the local community
and provide a more responsive level of service than 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,
Tim Treml
Sr. Vice President
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