FRB: Testimony, Meyer -- Disclosure requirements for home mortgage loans -- July 15, 1997 The Federal Reserve Board eagle logo links to home page

Testimony of Governor Laurence H. Meyer
Disclosure requirements for home mortgage loans
Before the Subcommittee on Financial Institutions and Regulatory Relief of the Committee on Banking, Housing, and Urban Affairs, United States Senate
July 15, 1997

The Board of Governors appreciates the opportunity to discuss our efforts to streamline the disclosure requirements for home mortgage loans under the Truth in Lending Act (TILA) and unify them with those of the Real Estate Settlement Procedures Act (RESPA).

Simplifying and streamlining the regulatory requirements under these two statutes is something that the Board and the Department of Housing and Urban Development (HUD) have been working on jointly for several years now. The results of our efforts, which are described in more detail later, generally have been well received. These regulatory changes have been relatively minor, however, because TILA and RESPA serve quite different purposes and contain distinct statutory disclosure requirements. Unquestionably, each statute directly affects consumer mortgage loan transactions, and the disclosure requirements are in fact related. But given the statutory requirements, there is little room for our agencies to simplify and combine disclosures in any significant way by regulation. The Board supports the congressional directive to explore ways to change the two statutes to better serve the home-buying public.

Our testimony discusses how TILA and Regulation Z regulate home mortgage lending. It describes the agencies' efforts to simplify and streamline TILA and RESPA, including our joint efforts over the years to harmonize the regulations whenever possible. Finally, the testimony outlines our plan to develop legislative recommendations.

The task facing the agencies has evolved over the past year. In the legislation enacted last September, the directive was to simplify and unify the disclosures given to consumers under the two existing statutes. That, in and of itself, can be viewed as a narrow mandate.

As you heard from industry and consumer representatives last week, however, there is a significant and growing interest in more sweeping reform. If it is possible for those parties, along with HUD and the Board, to reach consensus on reform, we have before us a unique opportunity to make significant changes to the way in which consumers shop for and obtain mortgage loans. These changes could improve the usefulness of the information that consumers receive, and at the same time reduce regulatory burden for the home mortgage industry. To the extent that beneficial change is possible, we hope to facilitate it in any way that we can.

The Truth in Lending Act
The purpose of TILA is to promote the informed use of consumer credit, primarily through disclosure, with some substantive provisions. RESPA is both a disclosure law and one that indirectly regulates prices. It requires disclosure about settlements costs, but also prohibits kickbacks and referral fees to protect consumers from unnecessarily high settlement costs, as the HUD testimony will explain.

TILA requires standardized disclosures about credit terms and costs. Creditors must disclose the cost of credit as a dollar amount (the finance charge) and as an annual percentage rate (the APR). Uniformity in creditors' disclosures is intended to assist consumers in comparison shopping. TILA requires additional disclosures for a loan secured by a consumer's home, and permits consumers to rescind certain transactions that involve their principal dwelling. The Board's Regulation Z implements the act, and an official staff commentary interprets the regulation.

The disclosure rules that creditors must follow vary depending on the type of credit that is being offered. For example, there are separate rules for closed-end credit, such as automobile or home mortgage loans, and for open-end credit, such as credit cards or home equity lines of credit. There are additional rules governing reverse mortgages, and mortgages that have rates and fees above a certain amount.

These regulatory requirements generally are derived from detailed disclosure provisions in TILA, except for certain rules governing adjustable rate mortgage loans. The statutory provisions dictate what information must be disclosed, the format in which it is disclosed, and when it is disclosed.

Regulatory streamlining efforts to date
The Board has always made a conscious effort to ensure that TILA rules are compatible with RESPA. For example, Regulation Z has long permitted creditors to substitute both the RESPA good faith estimate and settlement statement (commonly referred to as the HUD-1) for the itemization of the "amount financed" disclosure required under TILA. When RESPA was amended in 1992 to cover subordinate lien loans, the Board worked closely with HUD on the regulations that implemented the changes. Thus, in amending Regulation X to cover those loans, HUD incorporated a number of the definitions and concepts found in the Board's Regulation Z. The amendments to Regulation X also permit Regulation Z's disclosures for home equity lines of credit to substitute for RESPA disclosures.

Over the past five years, the agencies have continued to work together to streamline the rules to the extent possible. One recent example was an amendment to the Regulation Z commentary designed to avoid conflict between RESPA's escrow accounting rules and TILA's rules for calculating prepaid finance charges, such as private mortgage insurance. We are confident that the cooperative relationships that have developed between the agencies will stand us in good stead as we tackle the job of preparing legislative recommendations.

Congressional efforts to simplify the disclosure schemes have been discussed and debated for several years now. In early 1995, there were legislative proposals that would have transferred authority for RESPA to the Board, a transfer that the Board opposed as it would not have satisfied concerns about the statute. These proposals also would have directed the Board to simplify the disclosures under TILA and RESPA. In light of this potential responsibility, the Board undertook a review of the regulatory and statutory requirements of both TILA and RESPA, to identify areas where it might be possible to streamline the two regulations. Because the proposed transfer of authority for RESPA would not have been accompanied by any statutory changes, however, the list of potential regulatory changes was short. The list included things like changing the definition of a "business purpose loan" in Regulation X to match that in Regulation Z, developing a commentary to Regulation X similar to Regulation Z's, and adopting the same record retention requirements in Regulation X as are in Regulation Z.

During this process there were informal meetings with industry and consumer group representatives, and we also sought the views of the Board's Consumer Advisory Council. While representatives from all of these groups, including the Council, expressed some dissatisfaction with the current statutes and regulations, there were few concrete suggestions about how to improve the situation without major statutory changes. When Congress subsequently directed the Board and HUD to streamline the disclosures -- first by making regulatory changes if possible and second by making legislative recommendations -- we took the opportunity to formally ask interested parties what they would like to see by way of reform.

In December 1996, the Board and HUD published a joint Advance Notice of Proposed Rulemaking in the Federal Register (Attachment A). In that notice, the agencies requested specific recommendations on how TILA and RESPA disclosures could be made more consistent (including ways that the disclosures could be combined, simplified, or improved), and how the timing and format of the disclosures could be made more compatible. The Board and HUD received about 80 comment letters, primarily from creditors and their representatives, as is typically the case for agency proposals.

The comments covered a wide range of issues. Many commenters requested changes that required legislative action; for example, changing the timing of disclosures. A significant number of commenters requested more sweeping reform, such as eliminating the APR. In some instances, commenters recommended consolidating the disclosures in ways that, while not common in the industry, are permitted under the existing rules. For example, a significant number of commenters recommended the consolidation of the "early" TILA and RESPA disclosures for home purchase loans on a single form. The Board has subsequently clarified, through its commentary to Regulation Z, that there is no prohibition against putting multiple disclosures on the same page or form, provided the TILA disclosures are segregated from other information.

The need for legislative changes
The timing rules and the different disclosure requirements in TILA and RESPA are major obstacles to harmonizing the rules by regulation, beyond the actions that the agencies have taken. (The chart in Attachment B identifies the sections of the statutes that require particular disclosures.) Following a review of the public comments and upon further analysis, the Board and HUD thus concluded earlier this year that legislative changes are needed to accomplish congressional purposes. The Board published a Federal Register notice on April 2, stating our belief that making minor regulatory amendments would not be significant enough either to materially improve the disclosures for consumers or to justify the cost of the changes for the industry. (Attachment C)

You asked the Board to comment on whether the purposes of TILA and RESPA might be better achieved by consolidation of the two statutes. At this stage it is not entirely clear whether targeted amendments to the existing statutes, or the creation of a new statute, would best accomplish the needed changes. These are among the issues that the Board and HUD are currently considering and that we will address in our recommendations to Congress.

Timetable for legislative recommendations
The Board and HUD have a number of efforts under way to help us in developing our legislative recommendations. The Board's Federal Register notice of April 2 reopened the comment period for an additional 90 days, so that interested parties could submit legislative proposals. That comment period ended on June 30, and we have received more than 100 comment letters. Perhaps due to coverage of the reform issue in a nationally syndicated column, most of the letters from this second round of comments are from consumers. Although the Board is still in the process of reviewing and analyzing the letters, we can provide some general impressions about them.

Consumers' primary concern is that they do not receive disclosures about mortgage costs earlier in the process. Under the existing rules, lenders are not required to provide the TILA disclosure, or a good faith estimate of the transaction costs, until at least three days after the consumer applies for the loan; and in order to apply, the consumer may have to pay a nonrefundable fee. Most consumers who commented would prefer to receive disclosures that help them comparison shop before they apply for a loan and pay a fee. Second, consumers want the cost disclosures to be as accurate as possible, so that they are not confronted with unexpected charges at the loan closing. And third, commenters generally believed that the disclosures could be less complex, and therefore more useful.

Creditors that commented continue to support more fundamental reform, and a number of them reported that they are working on legislative proposals. As mentioned earlier, it now appears that this process for change has moved beyond streamlining and unifying disclosures to consideration of significant statutory reform. Despite the closing of the comment period, the Board would welcome these proposals whenever their sponsors are ready to share them.

During the past two months, the Board and HUD have held meetings with a number of consumer advocacy and industry groups involved in the legislative reform process. These meetings have been designed to give interested parties an opportunity to share their concerns about TILA and RESPA, and ideas about reform, without having to be concerned that they are being locked into any particular position.

In addition, the Board and HUD will hold a joint public forum in which the groups involved in the RESPA/TILA reform initiative, as well as members of the public, can discuss the benefits of and problems associated with the current statutory schemes, and the principles that should guide any reform effort. This one-day forum will be held at the Federal Reserve Board on July 30.

Following the forum, the Board and HUD will identify potential areas for legislative recommendations. These meetings will address issues raised in the comment letters received, the information gathered from the public forum and informal meetings, and other background information. If needed, we may hold additional meetings in September with the groups involved in the reform process to discuss more specific proposals.

At the end of this process, likely some time in October, we will work with HUD to begin drafting the legislative recommendations. Our goal is to provide recommendations to the Congress by the end of the year.

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1997 Testimony