More On the New Compliance World

In Volume III, Number 12, we discussed elements of the joint agency report to Congress on simplifying the disclosure requirements of Truth in Lending and the Real Estate Settlement Procedures Act. This is Part II of the article.

Revising disclosure forms. The primary reason for seeking this review was to simplify the disclosure forms required by Regulation Z and Regulation X. The industry hoped that differences in content, definition, and timing could be redesigned to work together, making the forms easier to prepare and to understand.

The proposed "new" forms are simply a merger of the TIL disclosure and the HUD-1 without the changes that would simplify their preparation. The agencies recommend keeping most of the concepts that confuse customers, such as defining what is or is not a finance charge, and the APR. The proposed disclosure form looks like a cut-and-paste of the existing forms with no improvements in clarity.

Adding "needed" consumer protections. In case you missed something, consumers need more protection - at least that is what HUD and the FRB seem to think. Both agencies argue that there is a need for additional consumer protection from practices such as predatory lending, and specific abuses. The agencies' recommendations take the traditional two forms of additional disclosures to provide more and better information, and additional sanctions for violations.

The primary concern is the trend in predatory lending, or pressuring consumers to enter into a transaction that is not the benefit represented by the product's pusher. The report recommends that HOEPA (Home Ownership Equity Protection Act, also known as that complex new part of Regulation Z) protections should be increased.

The recommendations target specific abusive lending practices, including forging signatures, obtaining signatures on blank documents, falsifying information, overcharging consumers with illegitimate fees, selling credit insurance to customers who do not qualify for it, fraudulently conveying title to third parties to facilitate diversion of loan proceeds, and using bait-and-switch tactics.

This editor cannot avoid observing that, with the possible exception of bait-and-switch, all of the problem activities have remedies in state law. Thus, this report seeks to make more protections available for people who are not making use of those that presently exist.

Balloon payments are a particular concern. The consumer who cannot pay off the balloon may be forced to accept a loan with more onerous terms, a practice known as loan flipping. One proposal would prohibit balloon payment loans altogether. This approach would have the effect of removing an alternative to ARMs. Many small banks use balloon notes as a means of providing a flexible loan that meets the customer's needs.

The agencies also suggest setting regulatory disclosure requirements based on features in the loan. For example, the consumer's debt to income ratio could be a trigger for the disclosure level required. Higher ratios would trigger more disclosures. Certain types of fees, or amounts of fees could be another trigger for additional disclosures. Designing programs and procedures would not be easy.

This concept has the additional problem of making lending to low- and moderate-income applicants more difficult, countering many efforts to increase lending in low- and moderate-income communities. To prevent or control abusive loan practices, the agencies recommend consideration of remedies such as limiting the amount of closing costs that can be charged upon loan flipping (or renewal), limiting compensation that can be paid to loan brokers, and restricting prepayment penalties that might deter consumers from obtaining a lower-cost loan.

Proposed remedies. There are no surprises here. HUD is seeking increased powers - and staff - to investigate and prosecute abusive lending cases. The report also recommends providing a clear private cause of action (the ability to sue the creditor) for unfair or deceptive acts and practices. HUD recommends new foreclosure remedies that would require pre-foreclosure counseling and enable the consumer to cure delinquent loans and recover equity. HUD also recommends requiring pre-transaction counseling for "vulnerable" HOEPA borrowers, and imposing information collection and reporting requirements on creditors for HOEPA loans.

The bottom line. Throughout this process, the tension between effective compliance and consumer protection is evident. The focus has been moved from designing a system that works to designing a system that will protect the most gullible consumers. We are again in the process of attempting to legislate intelligence. Experience over the last several decades should tell us that this will not work - but it will raise the cost of compliance.

This proposal is simply more of the same. It amounts to proposed legislation ensuring that compliance managers may never retire.

ACTION STEPS

Review foreclosures and delinquent files. Understand what happened and be ready to tell the stories.
Make sure Congress and the regulators understand the profile of Bank customers in this category.
Review your bank's lending to find out if you are making any high-cost (HOEPA) loans. Prepare a profile of the borrowers.
If your bank makes balloon loans, find out the story behind them. It will be important to be able to document the fact that many customers want this type of loan.
Be ready - with fact situations - to tell your Congressman what consumers really want to know.