CUNA Comment Letter
Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA)
May 4, 2004
Ms. Becky Baker
Secretary of the Board
National Credit Union Administration
1775 Duke Street
Alexandria, Virginia 22314-3428
Dear Ms. Baker:
The Credit Union National Association (CUNA) is pleased to respond to the National Credit Union Administration (NCUA) Boards request for comments to identify outdated, unnecessary, or burdensome regulatory requirements imposed on federally insured credit unions. NCUA and the other federal financial institution regulators are required by a 1996 paperwork reduction law, the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA), to review their regulations at least once every ten years. EGRPRA requires the NCUA and the other regulators to categorize the regulations, publish the categories for public comment, report to Congress on any significant issues raised by the comments, and eliminate unnecessary regulations.
We understand that NCUA will request comments from now until 2006 on ten categories of regulations that impose burden on federally-insured credit unions. At this time, NCUA is requesting comments on consumer protection rules, primarily those related to lending, including those that have been issued by the Federal Reserve Board (Fed). By way of background, CUNA is the largest credit union trade association, representing more than 90% of our nations nearly 9,800 state and federal credit unions.
Summary of CUNA's Position
- When automobile dealers offer below market-rate financing, an additional amount should be included as a prepaid finance charge under the Truth in Lending Act to reflect the compensation that the automobile finance company is receiving from the manufacturer.
- Consumers should have the authority to waive their rights under the three-day right of rescission rules for loans secured by real estate.
- The Fed is currently considering whether fees for overdraft privilege services should be disclosed as a "finance charge" under the Truth in Lending Act. There are a number of compliance difficulties if such a disclosure were required, including the difficulty of calculating and incorporating this fee as part of the annual percentage rate (APR) and that the Federal Credit Union Act forbids federal credit unions from offering loans that exceed an interest rate of 18 percent. This will discourage credit unions from providing these services, which help members avoid the substantial fees that are imposed by merchants and others for checks that bounce. This will likely encourage consumers to use the services of pawnshops and payday lenders, which increases the risk that members will be exploited by predatory lenders.
- The APR calculation under the Truth in Lending Act should be changed to accurately reflect that the cash advance fee is only imposed at the time of the advance and not on a monthly basis.
- It should be permissible to disclose the APRs for purchases, cash advances, and balance transfers in one "Schumer box" if the rate is the same for all of these transactions.
- For risk-based credit cards, it should be permissible to disclose the range of APRs, instead of each APR that may apply.
- Fees for debt cancellation coverage are not considered finance changes if three conditions are met. One of these conditions is that the consumer must request the coverage in writing. This requirement is burdensome for credit unions as well as for consumers and delays coverage for members.
- The Federal Emergency Management Agencys (FEMA's) authority to extend flood insurance contracts under the National Flood Insurance Program (NFIP) must be periodically authorized by Congress. There is no guarantee that Congress will reauthorize the NFIP, or that reauthorization effective after the funding expiration date will be retroactive. We encourage NCUA to work with the other federal financial institution regulators to seek a statutory remedy to this problem of periodic stopgap funding decisions by requesting that Congress permanently reauthorize the NFIP.
- The revised categories regarding data collection required under the Home Mortgage Disclosure Act (HMDA) shifts those of Hispanic descent from the race to the ethnicity category. This may raise an issue of protection for this group of consumers, since ethnicity is not a protected category under Regulation B, the Equal Credit Opportunity Act.
- With regard to the rules that will allow for the electronic delivery of the disclosures required under Regulations Z, B, E, M, and DD, the definition of "electronic address" should be more flexible in order to accommodate the use of home banking programs and other Intranet websites.
- These electronic disclosure rules also require that a consumer must provide consent, or confirmation of consent, electronically and in a manner that "reasonably demonstrates" that he or she can access the disclosure information. More guidance is needed regarding the term "reasonably demonstrates."
In total, the consumer protection rules that credit unions are required to follow impose considerable burdens, especially on smaller credit unions, which have limited human, financial, and other resources. This burden has increased recently as a result of the new HMDA requirements and the additional burdens imposed by the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA Patriot) Act of 2001. Because credit unions are not-for-profit financial institutions, the additional costs that result from these considerable burdens are passed directly on to their members, either in the form of lower interest rates on loans or higher rates paid on member accounts.
NCUA has specifically requested comment on how consumer protection rules may be changed to minimize the economic impact on small credit unions. CUNA would welcome the opportunity to work with NCUA and the other financial institution regulators to develop specific approaches in this area, with particular attention to reducing record keeping and paperwork requirements, as well as reducing fines and penalties for inadvertent violations. Below are specific suggestions for reducing burdens for all credit unions.
Regulation Z Truth in Lending Act (TILA)
Below Market-rate Financing Offered by Automobile Finance Companies
The need for appropriate disclosures when automobile finance companies offer automobile loans with APRs at or near 0% is currently a very important issue for credit unions. Although our primary concern is with automobile financing, these concerns extend to all products that are now being offered in conjunction with below market-rate financing and that the success of these programs will result in similar programs being offered more frequently in the future whenever there is a need to reduce inventory.
Credit unions want their members to choose the best financing option when purchasing an automobile. However, credit unions want their members to receive all the information necessary in order to decide if the financing offered by the automobile dealership is truly the best option for them. We believe this can be facilitated by amending the Regulation Z requirements to require disclosures that would provide consumers with useful information in connection with the below market-rate financing that is periodically offered by the automobile industry. This will further the goal of TILA by providing consumers with meaningful comparisons of interest rates so they may make informed credit decisions.
When automobile finance companies offer APRs at or near 0%, it is clear this financing is being offered at a rate that is below the market-rate and is also below the costs that these companies incur when making these loans. The difference between the APR and these borrowing costs can be determined by reviewing the financial statements of these companies, which are publicly available.
It is unrealistic for consumers to expect that they are actually borrowing money that is less than the borrowing costs incurred by the automobile finance companies. Consumers can generally negotiate a lower price for the automobile if he or she foregoes the low APR. The difference between these two prices must be disclosed as a prepaid finance charge under Regulation Z and reflected in the APR. This difference is often reflected in a rebate that the consumer may elect in lieu of the low APR. Here, the consumer is paying for the low APR by foregoing the rebate, which we believe is a prepaid finance charge that needs to be disclosed under Regulation Z.
Even when rebates are not available, we believe there is a method to determine the additional prepaid finance charge that should be disclosed when a consumer elects a low APR. Automobile finance companies are compensated when low APR loans are offered to the public. It is our understanding that for each transaction, these companies generally receive a payment from the automobile manufacturer to cover the difference between the low APR and the APR that is offered in the absence of these special financing programs. A portion of this payment is often recouped from the individual dealers.
We believe this payment is an accurate measurement of the additional amount that should be included as a prepaid finance charge. The automobile finance company will always receive this payment or compensation in some form, either from consumers when they borrow at times when low APR financing is not offered or from the manufacturer when this special financing is offered. Either way, the consumer is paying this amount, either directly when low APR financing is not offered or by paying a higher price for the automobile to compensate the manufacturer for the payments it makes to the automobile finance company under these special financing programs. These payments from the manufacturer should be considered a prepaid finance charge and disclosed as required under Regulation Z.
Alternatively, we believe a relatively simple disclosure requirement should be included in Regulation Z to reflect that purchasers may be paying a higher price for the automobile if they decide to accept below market-rate financing. This disclosure would only be required of lenders offering such programs. CUNA will be pleased to assist NCUA and the Fed in this effort to provide a simple, but meaningful disclosure.
Three-day Right of Rescission Rules
For certain real estate transactions, Regulation Z provides consumers with the right to rescind the loan transaction within three business days. For home equity loans and home equity lines of credit (HELOCs), this is a burdensome requirement for both financial institutions and consumers. We believe consumers would actually prefer to forego these rights in order to receive the loan proceeds at closing, instead of waiting an additional three days. This waiting period also penalizes consumers in that they have to pay a higher interest rate for three additional days if the consumer is refinancing with a lower rate loan.
Consumers who close on home equity loans and HELOCs generally expect to receive their proceeds at the time of the loan closing. Many consumers are required to take time from work, arrange child-care, or suffer other inconveniences in order to attend the loan closing. They are often surprised and upset when they realize they will not receive the loan proceeds at that time, and they often suffer additional inconveniences as a result of not having access to these proceeds at the time they expect.
Credit unions have informed us over the years that very few, if any, of their members exercise their rescission rights. Therefore, it appears an overwhelming majority of consumers suffer inconveniences as a result of the three-day rescission period, with very few corresponding benefits.
We realize the three-day rescission period was originally designed to protect consumers from predatory lending practices, and credit unions support meaningful efforts to protect consumers from such practices. However, it appears this provision has not provided consumers with significant protections against these abusive lending practices. For whatever reason, victims of predatory lending practices have not been exercising their rescission rights. This further confirms our view that very few, if any, consumers are receiving any of the intended benefits from these rescission rights.
We believe it is now time to examine this issue to determine if it is possible to amend these rescission rules or to enact legislation to assist those consumers who have been inconvenienced by these provisions, without jeopardizing current and future efforts to eradicate predatory lending practices. As an alternative to complete elimination of the rescission requirement, there may be certain situations in which it should be permissible for consumers to have the option of waiving the right to rescind the transaction for any reason in order to receive the proceeds at the time of the loan closing. The waiver option could be provided to the consumer at any time between receipt of the loan application and closing, along with an explanation of the consequences to the borrower.
Overdraft Privilege Services
The Fed last year requested comment on whether fees for certain overdraft privilege services, also referred to as bounce protection, should be disclosed as a finance charge under TILA. The result would be that an APR would have to be calculated for these fees.
In our comment letter to the Fed on this issue, we asserted that although credit unions support disclosing such fees, and indeed are disclosing them as required under the Truth in Savings Act, fees for overdraft privilege services should not be disclosed as a "finance charge." There are a number of compliance difficulties if such a disclosure were required, including the difficulty of calculating and incorporating this fee as part of the APR. Also, the Federal Credit Union Act forbids federal credit unions from offering loans that exceed an interest rate of 18 percent and including such fees in the APR would likely exceed the usury limit. This will discourage credit unions from providing these services, which help members avoid the substantial fees imposed by merchants and others for checks that bounce. This will also likely encourage consumers to use the services of pawnshops and payday lenders and increases the risk that members will be exploited by predatory lenders.
The Fed is considering these additional regulatory requirements because some financial institutions have engaged in false or misleading advertising when promoting their overdraft privilege services. We are concerned because these requirements will affect credit unions, which have not been engaging in such practices.
To distinguish credit unions from these other financial institutions, the CUNA Board recently approved guidelines that provide all credit unions the opportunity to reaffirm consumer protections and to restate they do not engage in a number of practices that have been subject to such criticisms.
Calculation of the Cash Advance Fee
Under Regulation Z, a cash advance fee is a component when calculating the APR. The fee is generally an assessment and is imposed only at the time of the advance. However, under Regulation Z, the calculation of the APR assumes that this fee is assessed on a periodic or monthly basis, resulting in APR calculations that tend to be much higher than the actual cost of the credit.
Credits unions often charge a specific amount as the cash advance fee, as opposed to a percentage of the amount borrowed. The amount is intended to recoup the cost of providing this convenient service for their members. In these situations, we believe this fee should be disclosed separately and not included in the APR calculation.
Consolidating APR Information When the Rates are the Same
Currently, the APR for purchases, cash advances, and balance transfers must be disclosed in the "Schumer box." Regulation Z provides a model and sample form, which indicate that these APRs should be listed in separate boxes.
For credit unions, the APRs for purchases, cash advances, and balance transfers may be the same. In these situations, we do not believe there should be separate boxes to disclose these rates. If the APR is the same for all of these activities, then it should be appropriate to consolidate this information in one box that clearly states the APR and states that this is the APR for purchases, cash advances, and balance transfers. A disclosure in this format should be less confusing for consumers.
Disclosure of Rates for Risk-based Credit Cards
We request that the Fed provide additional guidance in the Regulation Z official staff commentary on how lenders are to disclose APRs for risk-based credit cards. The APRs on these cards are determined for each consumer based on his or her risk profile and other factors.
The issue that needs clarification is whether each APR needs to be listed in the application or solicitation for these cards or whether a disclosure of a range of APRs would be acceptable. We believe a disclosure of a range of rates should suffice. A listing of all of the rates would require a significant amount of additional information that would only serve to confuse consumers. A listing would not provide any additional information that could not be derived from a disclosure of a range of rates.
Debt Cancellation Fees
Currently, fees for debt cancellation coverage are not considered finance changes if three conditions are met. One of these conditions is that the consumer must request the coverage in writing. This requirement is burdensome for credit unions as well as for consumers and delays coverage for members. An example would be when a member applies for a loan by telephone and then elects to have debt cancellation coverage. The requirement for the request to be repeated in writing adds to the delay in receiving this coverage.
Regulation C Home Mortgage Disclosure Act (HMDA)
The Fed recently amended the HMDA rules. These changes expand coverage, redefine key terms, and require the collection of additional categories of data, including the spread between the APR of the loan and the yield on comparable Treasury securities when the spread exceeds certain levels.
CUNA generally opposed these revisions. Although intended to combat predatory lending, the burden imposed by these changes affect all financial institutions that meet the HMDA threshold, regardless of whether they are involved in predatory lending. Credit unions are a specific example of institutions adversely affected by these changes that have no involvement in predatory lending.
These revisions to Regulation C have required expensive changes to data collection systems and staff retraining. This has burdened all lenders but has had a disproportionate impact on small financial institutions, such as credit unions. Also, the financial institutions industry is among the most heavily regulated and while not insurmountable alone, this additional regulatory burden has added to the considerable compliance burdens that financial institutions already face.
We understand the Fed may not at this time want to review these recent changes, although CUNA always stands ready to work with NCUA or the Fed on how to relieve the burdens posed by HMDA, especially on smaller institutions, such as credit unions.
However, we believe the Fed should at this time review an issue regarding categories of race and ethnicity. Effective January 1, 2004, the race of Hispanic was removed from the HMDA data collected and a new category titled ethnicity was created, which includes either Hispanic or Not Hispanic. Since ethnicity is not a protected category under Regulation B, which implements the Equal Credit Opportunity Act, this raises the issue as to whether those of Hispanic descent will receive the same protections under these regulations that they had prior to the changes to Regulation C. We urge the federal financial institution regulators to review this issue to ensure that protection for this group of consumers is consistent among these regulations.
FEMA oversees the NFIP, which provides insurance coverage for millions of homeowners in communities that have land-use control measures to minimize the risk of flooding and mitigate potential flood damage. FEMA' s authority to extend flood insurance contracts under the NFIP must be periodically authorized by Congress. This often creating complications for credit unions that wish to provide loans to members in affected areas whenever there is an issue as to whether Congress will continue funding on a timely basis. Current funding for the NFIP expires June 30, 2004.
As has been the case in the past, there is no guarantee that Congress will reauthorize the NFIP, or that reauthorization effective after the funding expiration date will be retroactive. In the past, Congress has adjourned without extending the statutory authority to issue flood insurance policies under the NFIP. Credit unions, however, must still make flood determinations, provide timely and accurate notices to borrowers, and comply with other parts of the flood insurance regulations that have not lapsed. We encourage NCUA to work with the other federal financial institution regulators to seek a statutory remedy to this problem of periodic stopgap funding decisions by requesting that Congress permanently reauthorize the NFIP.
In 2001, the Fed issued interim final rules on how financial institutions and others may provide electronically the disclosures that are required to be given in writing under Regulation Z (Truth in Lending Act), Regulation B (Equal Credit Opportunity Act), Regulation E (Electronic Fund Transfer Act), Regulation M (Consumer Leasing Act), and Regulation DD (Truth in Savings Act). These rules were issued to ensure consistency with the Electronic Signatures in Global and National Commerce (E-Sign) Act, which became effective on October 1, 2000. The E-Sign Act permits the use of electronic signatures and disclosures, provided that appropriate consent is received from the consumer.
CUNA supports the ability of credit unions to transmit these disclosures electronically. However, we continue to have concerns regarding the 2001 interim final rules that were issued by the Fed. Our primary concern is that the definition of electronic address should be more flexible in order to accommodate the use of home banking programs and other Intranet websites.
The interim final rules require that the electronic disclosures must be sent to the consumers electronic address or made available at another location, such as an Internet website. If the disclosures are made available at another location, the creditor must send a notice to the consumers electronic address alerting him or her that the disclosures are available and indicating how they may be accessed.
The official staff commentary defines an electronic address as an e-mail address that is not limited to receiving communications transmitted solely by the creditor. This would appear to prohibit communications through mechanisms such as home banking programs.
We believe the interim final rules and the current narrow definition of electronic address will be burdensome for credit unions that had intended to or would consider using home banking programs or other Intranet systems to communicate with consumers and would prevent members from receiving the benefits of these technologies. This definition would also contradict both the language and intent of the E-Sign Act. Section 104 of the E-Sign Act generally prohibits a regulatory agency from issuing a rule unless it concludes that the rule would not impose unreasonable costs on the acceptance and use of electronic records. Section 104 also prohibits rules that accord greater legal status to a specific technology or technical specification to the detriment of others, such as home banking programs or other Intranet systems.
Our other primary concern regarding these rules is the means by which consumers may indicate that they are able to receive these disclosures electronically. The E-Sign Act requires that a consumer must provide consent, or confirmation of consent, electronically and in a manner that reasonably demonstrates he or she can access the disclosure information. More guidance is needed regarding these consumer consent provisions, specifically the term reasonably demonstrates. For example, we believe this could include accessing the Internet and clicking an icon indicating consent to receive disclosures electronically. We would welcome the opportunity to work with both NCUA and the Fed regarding our concerns with these electronic disclosure rules.
Regulation B Equal Credit Opportunity Act
Credit unions have recently expressed concerns regarding the Feds recent changes to Regulation B and the corresponding official staff commentary that require a credit union to obtain documentation of a joint applicants intent to apply for joint credit at the time of application. The change clarifies that submission of a joint financial statement or signature on a promissory note would not be sufficient for purposes of demonstrating the intent to apply for joint credit.
CUNA staff and a representative of the Feds Consumer Advisory Council met with Fed staff on February 24, 2004 to discuss concerns credit unions have with regard to complying with these provisions on joint credit. At this meeting, Fed staff indicated that there was flexibility in complying with these requirements. For example, at the time of application may be considered a window of time and that intent for joint credit may be submitted within a certain period of time after the application is first submitted. The Fed also explained that there was a wide variety of means to comply in lieu of indicating intent on the application, such as telephone and e-mail communications with the joint applicant.
We have been communicating this information with our members and are identifying remaining concerns with regard to this issue. We intend to continue our dialog with the Fed and would be happy to include NCUA in our efforts.
Thank you for the opportunity to comment on these consumer protection rules as part of the EGRPRA review process. If Board members or agency staff have any questions about our comments, please contact Associate General Counsel Mary Dunn or me at (202) 638-5777.
Assistant General Counsel