Statement by Lawrence B. Lindsey, member, Board of Governors of the Federal Reserve System, before the Subcommittee on Consumer Affairs and Coinage of the Committee on Banking, Finance and Urban Affairs of the U.S. House of Representatives, May 27, 1992 - Statements to the Congress - Transcript

Federal Reserve Bulletin, July, 1992

Statement by Lawrence B. Lindsey, Member, Board of Governors of the Federal Reserve System, before the Subcommittee on Consumer Affairs and Coinage of the Committee on Banking, Finance and Urban Affairs of the U.S. House of Representatives, May 27, 1992

I am glad to appear before your subcommittee today to offer the Federal Reserve Board's comments on H.R.5170, the Mortgage Refinancing Reform Act of 1992. The bill would amend both the Truth in Lending Act and the Real Estate Settlement Procedures Act (RESPA) to require good faith estimates of costs in refinancings of home loans within three days after an application has been made. The bill also would add a new section to the Truth in Lending Act to require "prompt" refund of unearned finance charges and insurance premiums when any consumer credit transaction is prepaid; prohibit the use of the "Rule of 78s" method for calculating the amount of finance charges to be rebated in prepayments of precomputed loans, and instead require the use of the actuarial method or another method that is as favorable to the consumer; and require that a disclosure of the amount due on any precomputed loan be provided on the consumer's request. The bill would also amend the Truth in Lending Act to regulate "lock-in" agreements by making a creditor's commitment to a finance charge a requirement of the law, unless the creditor clearly discloses that the offered finance charge is subject to change. The bill would also permit a consumer to withdraw an application without additional obligation within three days after receiving disclosures. Finally, the bill would increase the amount of civil monetary penalties that could be imposed for violating the act in residential mortgage transactions and refinancings.

NEED FOR ADDITIONAL COMPLIANCE BURDEN

In our view, new regulation, even though well intended, must pass a basic test of balance and reasonableness. Consumer legislation should balance the need to address problems with the cost of such regulation to both consumers and lenders. This approach is not only in the interests of the economy as a whole, it is also in the interests of consumers. Although consumers may benefit in some sense from protective regulation of the consumer credit market, for example, they may suffer if regulation leads to a restriction in the availability of low-cost credit options or if increased costs are passed on to consumers. Provision of additional paperwork in the mortgage process, which is already paperwork intensive, is not costless to consumers.

We understand the concerns that may have led to interest by the Congress in providing additional early information about costs in refinancings and in restricting certain creditor practices in loan prepayments and in loan term commitments. However, we must express our general opposition to the bill because we think that the burden and expense of compliance would outweigh the consumer need for the legislation.

Today, the need to consider the costs to financial institutions resulting from compliance with the myriad of laws that regulate them is vital. The Congress recognized this in the Federal Deposit Insurance Corporation Improvement Act of 1991 by calling for the federal banking agencies to study the cost of compliance with banking regulation. Because a significant increase in compliance burden likely would result from enactment of the proposed amendments to the Truth in Lending Act, we believe that a clear need for additional legislation should be established before the Congress acts. We do not think that the degree to which problems exist has been sufficiently established to justify additional general regulation in the area of refinancing disclosures, rebate calculation methods, and rate commitments.

The existence of compliance burden does not obviate the need for regulation when there is a pressing need for additional consumer protection. At this point, however, the volume of complaints by consumers does not suggest that such a pressing need exists. Since the beginning of 1991, the Federal Reserve System has registered a total of almost 3,300 consumer complaints on various issues (about half of which were referred to other regulatory agencies). Yet we received only thirteen complaints by consumers about various problems in refinancing loans (five related to problems in getting a pay-off amount and only three related to the adequacy of cost information), three complaints about prepayment penalties, and no specific complaints about the Rule of 78s rebate method. Further, we have not received many complaints about undue delays in loan processing causing lock-ins to expire. We have recorded only about eighteen complaints from consumers asserting delays in loan closings (including loss of locked-in rates). Although complaints are not a precise gauge of the extent to which a consumer problem exists, the number of these complaints seems especially small given the large volume of mortgage refinancings during that time.(1) For example, according to data from the Home Mortgage Disclosure Act, in calendar year 1990, more than 700,000 (first and second lien) mortgages were refinanced. We estimate that many more were refinanced in 1991.