CUNA Comment Letter
Fed Consumer Advisory Council Meeting
June 26, 2003
Ms. Ann Bistay
Secretary of the Consumer Advisory Council
Division of Consumer and Community Affairs
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, NW
Washington, DC 20551
Dear Ms. Bistay:
The Credit Union National Association (CUNA) appreciates the opportunity to comment on the preemption provisions of the Fair Credit Reporting Act (FCRA), financial privacy and the possible use of short form notices, examples of practices to combat predatory lending, and the issuance of additional debit and credit cards, topics that will be the subject of discussion during meetings this week of the Federal Reserve Boards (Boards) Consumer Advisory Council (CAC). CUNA represents more than 90 percent of our nations 10,000 state and federal credit unions.
Summary of CUNAs Position
- CUNA strongly supports retaining the preemption provisions of the FCRA on a permanent basis. The current prohibition of more restrictive state laws has resulted in substantial benefits for credit unions and their members.
- To help combat predatory lending, credit unions have developed a number of subprime lending programs that not only help those with blemished histories receive credit but also helps them to build, or rebuild, their credit histories so that they may qualify for prime loans in the future.
- Lenders should be permitted to issue additional credit or debit cards for an existing account at any time, even when it is not for the renewal or substitution of existing cards, assuming that there are sufficient security measures to protect consumers.
Preemption Provisions of the Fair Credit Reporting Act
In a number of areas, the FCRA prohibits states from enacting laws that are more restrictive. These include:
- Provisions that permit financial institutions to engage in prescreening activities.
- The ability to share information with affiliates with regard to a financial institutions transactions or experiences with consumers.
- The requirements for providing information to consumer reporting agencies.
- The requirements to provide adverse action notices to consumers when the action results from the use of a credit report.
- The procedures that a consumer-reporting agency must use if a consumer disputes the accuracy of information in a credit report.
- The content of a credit report.
- Consumer rights with regard to his or her credit report.
These FCRA preemption provisions will expire at the end of 2003, and Congress will debate this year whether to extend the expiration date of these provisions or make these provisions permanent. Along with Federal Reserve Board Chairman Alan Greenspan and others, CUNA strongly supports retaining these provisions on a permanent basis. The prohibition of more restrictive state laws in these areas has resulted in substantial benefits for credit unions and their members. These include the following:
- Faster credit decisions based on more accurate information, which is not only convenient for credit union members, but have also led to lower transactions costs for credit unions, with the savings being passed on to the members.
- Facilitating credit transactions on the Internet. The convenience of the Internet has helped level the playing field between smaller financial institutions, such as credit unions, and larger financial institutions that have a wider network of branches and automated teller machines.
- Uniform national laws, which have saved money for credit unions in terms of the compliance costs to track state laws, with the savings being passed on to the members.
CUNA is also examining the issue of preemption in other areas as well, such as in response to current efforts by certain states and municipalities to enact privacy laws that are more stringent than federal law. This has become increasingly important for those credit unions that operate and serve members in multiple jurisdictions.
Financial Privacy and Short Form Notices
With regard to privacy, CUNA has examined the issue as to how the current privacy notices required under the Gramm-Leach-Bliley Act can be simplified. For example, some in the industry have been examining whether these privacy notices can be drafted in a form similar to the nutrition labels that are now required for food and drink products.
Examples of Practices to Combat Predatory Lending
CUNA supports eliminating predatory lending practices that are intentionally structured in a manner that is deceptive and disadvantageous to borrowers. This is in contrast to the legitimate subprime lending practices that credit unions often undertake in order to provide borrowing options to those members that may have blemished credit histories.
Over the years, credit unions have developed a number of subprime lending programs that not only help those with blemished histories receive credit, but also helps them to build, or rebuild, their credit histories so that they may qualify for prime loans in the future. Here are a number of examples of such programs:
- Offering subprime loans at rates above the prime rate, which then drop when the borrower makes a certain number of on-time payments. The borrower must then continue to make on-time payments in order maintain the lower rate. These loans not only provide the borrower with a powerful incentive to make on-time payments in order to keep the lower rate, but also help the borrower improve his or her credit history.
- Loans that provide the borrower with a number of other options to reduce the rate. These include rate reductions under the following circumstances:
- The borrower attends one consumer credit counseling class, with a possible further reduction if he or she attends more than one class.
- Each year in which there are no further draws or escalation of debt.
- Each year in which the borrower makes a small deposit in a savings account and keeps the money on deposit over a period of time, such as one year.
- Mortgage loans that only require a 1% down payment on the condition that the borrower attends an approved homebuyer education seminar. These seminars provide borrowers with financial guidance and budgeting assistance. Such programs are often restricted to members with incomes below certain levels that wish to purchase homes below a maximum price.
- Encouraging borrowers to refinance with a conventional loan after timely payments are made for at least one or two years.
- No-cost refinancing for members that have been victims of predatory lenders.
Financial literacy is essential in order to protect vulnerable consumers from predatory lenders, and we fully support Federal Reserve Board Chairman Alan Greenspans views on this important issue. Providing financial education to members to help them achieve financial literacy has always been an important mission of the credit union movement.
As member-owned, not-for-profit financial institutions, credit unions work hard to provide members with financial services at the lowest possible cost. In addition to this important service, credit unions are also dedicated to providing their members, as well as their communities, with a variety of financial education opportunities so that they may make wise financial decisions.
In recent years, CUNA and credit unions have undertaken a number of initiatives to support financial literacy. CUNA has been a partner with the National Endowment for Financial Education (NEFE) to develop and provide financial education for our nations high school students. The materials that are developed provide a basic introduction to personal financial planning, covering the impact of career and work factors on earnings potential, spending and saving money, using and managing credit effectively, protecting assets, and the time value of money. Students are also taught how to develop their own personal spending and savings plan.
CUNA is also very active in the Jumpstart Coalition and is represented on its board of directors. CUNA has also devoted an area of its website to issues related to financial education and literacy. This includes NEFE materials and Savingteen Magazine, a periodical that provides a wealth of financial information for high school students.
We appreciate the CAC and the Boards interest in financial literacy and would welcome the opportunity to work with the Board on any initiatives that it may develop in this area.
Issuance of More Than One Credit or Debit Card
Until recently, the official staff commentary to Regulation Z, the Truth in Lending Act, indicated that a lender may not issue more than one credit card as a renewal or substitute for a previously accepted card, unless more than one card was initially issued for multiple users on one account. As a result of recent changes, the official staff commentary now clarifies that lenders may replace an accepted card with more than one card on the same account under these circumstances, as long as the consumers total liability for unauthorized use with respect to the account does not increase.
CUNA supports this approach with regard to the issuance of more than one credit card and believes that lenders should be permitted to issue additional cards for an existing account at any time, even when it is not for the renewal or substitution of existing cards. The Board has correctly recognized that lenders now employ a number of security measures when issuing cards, such as sending cards that are not activated until the consumer undertakes certain actions to verify receipt of the card. We agree with the Board that these measures should provide sufficient security when replacing an accepted card with more than one renewal or substitute card and that such security measures would also be sufficient if cards were issued at other times as well. Such security measures should also provide sufficient protection with regard to the issuance of multiple debit cards.
Credit unions recognize that some of their members may not expect or want these additional cards, especially when they are not issued in connection with a renewal of a previously issued card. Members may have specific concerns with regard to the security of the account and possible misplacement of these additional cards. Because member service is the top priority for credit unions, we believe that a number of credit unions will be sensitive to such concerns and will provide some type of prior notice to their members if they decide to issue additional cards, which will also provide an opportunity for members to reject these additional cards. It would not be in the credit unions interest to provide products and services that are not wanted.
Thank you for the opportunity to comment on these important issues that will be discussed during the CAC meetings this week. If you or other Board staff have questions about our comments, please give me a call at (202) 638-5777.
Assistant General Counsel