The New "Burden Relief" Banking Act

Congress has passed a new "Burden Relief ' act that will keep regulators and compliance managers busy for the next several years. This issue covers key provisions of this new act that will have a significant effect on compliance programs. Some provisions of the new act take effect immediately; others have a six month effective date. Although many of the provisions discussed in the issue take effect immediately we recommend that you wait for guidance from the appropriate regulatory agency before changing your forms and procedures.

Simplification and Unification of RESPA and TILA Disclosures!
An important provision in the new act is almost revolutionary in concept. Under the sleek title of "Simplification and Unification of Disclosures Required under RESPA and TILA for Mortgage Transactions" is a provision requiring the FRB and HUD to work over the next six months to redesign, simplify, and combine TIL and RESPA disclosures. This gives them a deadline of April 1, 1997 also known as April Fool's Day.

The review and redesign of disclosures is limited to credit transactions which are subject to RESPA and TIL. The act specifically calls for a single format for disclosure to comply with both acts. In short, the HUD-1 and the Regulation Z disclosure must be combined into one disclosure format that satisfies the requirements of each act.

Within the context of simplifying and improving the disclosures, the agencies are specifically required to review the timing of the disclosures. The review will therefore look at and consider changes to the three day early disclosure requirements for certain loans and the pre-consummation disclosures. One of the key differences between Truth in Lending and RESPA is the requirement of accuracy and consequences of inaccurate disclosures under Truth in Lending. There is not a parallel requirement in RE SPA. This should be a consideration for the regulation drafting team and for creditor when any proposal is issued.

Exemption Authority for Loans
The new act amends the Truth in Lending Act to give the FRB authority to exempt any type of loans except high cost mortgage loans. The Board may review a type or category of loan and make a determination that the disclosures and protections of Truth in Lending would not provide a "meaningful benefit" to consumers. The meaningful benefit should be either in the form of information or legal protections. This authority permits the Board to review types of loan programs and types of borrowers to determine whether to exempt the group from Truth in Lending. In doing so, the Board must consider a variety of factors including:

The amount of the loan;
Whether the disclosures and legal protections provide a benefit to consumers;
The extent to which compliance with Regulation Z actually complicates or hinders the type of loan or makes it more expensive;
Whether the loan is secured by the borrower's principal residence;
Whether the goals of consumer protection would be undermined by the exemption; and
The status of the borrower.

With respect to considering the need for Truth in Lending's protections for the borrower, the Board must consider factors such as the borrower's financial sophistication the relationship of the loan to the borrower's other financial arrangements, and the importance to the borrower of the credit.

Finally, the Board must consider the relationship of the category being considered for exemption to the Act's goals of consumer protection.

As a practical matter, the exemptions will probably be limited to situations that fall outside the scope of what is generally considered to be consumer protection. For example, accommodation loans to business customers and certain types of loans made to private banking or trust customers are likely to be considered for exemption.

There are several important considerations here. First, any proposed exemptions will be closely watched, and opposed, by consumer protection groups. Generally, consumer protection advocates view any relaxation of protections as a crack in the dike that must be opposed to prevent any reductions in needed protections. This philosophy has been at the heart of consumer advocates opposition to changes in Truth in Savings and CRA.

Second, there are some CRA-like concepts built in to the factors the FRB must consider. Exemption factors such as the protections needed for the consumer, the consumer's need for the credit, the consumer's sophistication, and the impact of compliance on the cost of credit are similar to concepts in CRA. It is probable that the Board will have CRA issues in mind as it reviews categories for exemption.

Finally, because of the new requirement to unify RESPA and Truth in Lending disclosures, the Board may limit its exercise of this exemption authority (which does not exist in RESPA) to non-mortgage loans. Limiting the exemption authority to non-RESPA loans resolves the inconsistencies between the two laws and would not interfere with joint disclosures. However, the practical result could well be no exemptions. There is no apparent or demonstrated need for exemptions of consumer loans. In fact, it is quite the opposite. In the context of today's car prices, there is increasing pressure to raise the $25,000 ceiling for non-real estate loans.

ACTION STEPS

Preparing disclosures involves more than filling out forms. Identify the times and circumstances for compiling information and performing calculations and identify ways this could be streamlined or made less burdensome.
Hold a meeting with lending staff to discuss or identify the "ideal" disclosure process and how this could be made easier.
Ask staff what is most confusing about Truth in Lending and RESPA disclosures. Include that information in your comment letter to the FRB.
Meet with loan departments to discuss the types of borrowers and loans that should be considered for exemption. Compile anecdotes about situations when customers objected to Reg Z coverage, particularly the three day rescission period.
List the point in time that information is collected and the sources of information that are used in disclosures. Discuss with lending staff the best time to obtain information and prepare disclosures.