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

Based on these numbers, it does not appear that widespread consumer problems exist. In fact, we estimate that we may have received as many complaints from lenders about consumer behavior in refinancings as from consumers about lender behavior in refinancings. For example, lenders complain about consumers who make applications to several lenders, thus burdening them with processing loan applications that likely will not become closed loans. Another frequently mentioned complaint is that consumers threaten to rescind the refinanced loan after closing--requiring the lender to refund all fees, including fees paid to third parties for appraisals and credit reports--unless the lender negotiates a lower rate.

We also suggest bearing in mind that substantial new requirements already have been imposed on real estate lending during the past few years. For example, only two years ago, the Congress amended RESPA to require several notices about transferring mortgage servicing and about escrow account balances. About three years ago, a law was enacted that requires lenders to use only certified or licensed appraisers in most rederally related mortgage transactions. Not that long ago, the Truth in Lending Act was amended to require extensive early disclosures and other protections for home equity loans. All three of these relatively new requirements have been identified by lenders as imposing great compliance burdens. And, of course, these requirements were added to the numerous consumer protection laws already governing real estate lending.

Under the Truth in Lending Act, civil liability and statutory penalties of up to $1,000 per loan (and up to $500,000 in class actions) apply to certain violations of the disclosure require ments. Actual damages and court costs may also be recovered for a broader range of violations. The bill would add several new requirements that would be subject to monetary penalties and other penalties in case of successful recovery by a consumer in court. Furthermore, the bill would increase these penalties tenfold for violations of the new requirements. It is critical to consider these potential and substantial financial risks to creditors from noncompliance with the Truth in Lending Act when assessing the burden that could be imposed by the new requirements.

A more desirable, and perhaps more feasible, alternative to extensive new legislation is to encourage greater efforts by lenders to ensure that adequate information is provided voluntarily to consumers about the costs of refinancings and the degree to which a lock-in can be relied on. After the last refinancing boom in 1987, the Board (along with other government agencies, and consumer and industry groups) prepared a series of consumer information pamphlets about refinancings, settlement costs, and lockins. These information pamphlets were written to explain these subjects and to give practical advice to consumers (including a checklist of questions to ask) so that they will be armed with adequate information when they shop for, and negotiate, loan terms. For example, A Consumer's Guide to Mortgage Lock-ins informs consumers that some lock-ins may expire before closing under certain circumstances and also suggests that consumers carefully monitor the loan processing to help prevent any delays. A Consumer's Guide to Mortgage Refinancings describes the types of fees that might be charged and gives a range of their costs. We promoted the availability of these pamphlets in a press conference when they were initially published in June 1988 and again more recently by a press release in February 1992. We have printed 250,000 of these pamphlets to date. They are also available through the Consumer Information Center in Pueblo, Colorado, and through the lending industry.