CUNA Comment Letter

CUNA Comment Letter on Revisions to Regulation Z, the Truth in Lending Act

October 24, 2001

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

Re: Revisions to Regulation Z, the Truth in Lending Act

Dear Ms. Bistay:

The Credit Union National Association (CUNA) appreciates the opportunity to comment on possible revisions to Regulation Z, the Truth in Lending Act (TILA). The Federal Reserve Board’s (Fed’s) Consumer Advisory Council (CAC) will discuss this issue, with significant attention to the Regulation Z credit card rules, during meetings held this week and these comments are intended to raise relevant issues of concern to credit unions. Our comments raise issues with respect to the credit card rules, as well as other issues that are covered under TILA. CUNA represents more than 90 percent of our nation’s 10,500 state and federal credit unions. This letter reflects the opinions of those credit unions and the opinions of CUNA's Consumer Protection Subcommittee, chaired by Kris Mecham, CEO of Deseret First Credit Union, Salt Lake City, Utah.

Summary of CUNA’s Position

I. Credit Card Rules

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 that is borrowed. The amount is intended to recoup the cost of providing this convenient service for their members. In these situations, we believe that 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." Appendix G of 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 that 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 that 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.

II. Regulation Z Issues Unrelated to Credit Cards

Low APRs Offered by Automobile Finance Companies

A very timely issue for credit unions with regard to Regulation Z is the need for appropriate disclosures when automobile finance companies offer automobile loans with APRs at or near 0%. We realize that both the CAC and the Fed have exhaustively reviewed this issue in the past, but we believe that it is now necessary to revisit the issue.

When automobile finance companies offer APRs at or near 0%, it is clear that this financing is being offered at a rate that is below the market rate and is also below the companies’ cost of funds. The difference between the APR and the cost of funds 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 below the cost of funds. 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.

The Fed reviewed this issue in the mid-1980s and determined that it would be too difficult to accurately measure the difference in these two prices. Based on this determination and other factors, the Fed concluded that it would not be feasible to require additional disclosures when low APR financing is offered by the automobile finance companies.

However, regardless of whether rebates are available, we believe that 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 that 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 that 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 the low APR financing. CUNA will be pleased to assist the Fed in this effort to provide a simple, but meaningful disclosure.

Credit unions want their members to choose the best financing option when purchasing an automobile. Credit unions are willing to help their members decide if the low APR offered by the automobile finance companies is the best option available or if there are alternatives, such as accepting a rebate or finding a comparable vehicle at a lower price.

The Fed can assist in this effort by amending the Regulation Z requirements to require disclosures that would provide consumers with useful information in connection with the low APRs that are periodically offered by automobile finance companies. This will further the goal of TILA by providing consumers with meaningful comparisons of interest rates so that they can make informed credit decisions.

Revision of the 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), we believe that most consumers are adversely impacted by these rescission rules and would actually prefer to forego these rights in order to receive the loan proceeds at closing, instead of waiting an additional three days.

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 that 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 that 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 that an overwhelming majority of consumers suffer inconveniences as a result of the three-day rescission period, with very few corresponding benefits.

We realize that 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 that 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 to assist those consumers who have been inconvenienced by these provisions, without jeopardizing current and future efforts to eradicate predatory lending practices. For example, 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 in order to receive the proceeds at the time of the loan closing. CUNA will be pleased to assist the Fed in exploring this issue further.

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Thank you for the opportunity to comment on possible revisions to Regulation Z. If you or other Board staff have questions about our comments, please give Associate General Counsel Mary Dunn or me a call at (202) 682-4200.

Sincerely,

Jeffrey Bloch
Assistant General Counsel