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

The requirement in proposed section 115(c) of the bill would impose an additional burden on creditors. That section requires a disclosure to be provided, within five days of a consumer's request, of the amount necessary to prepay a loan with precomputed interest. We also note that the National Housing Act recently was amended to require creditors to provide a similar statement annually to borrowers on mortgages insured by the Federal Housing Administration. There might be additional burden to institutions from having to comply with two sets of federal requirements on disclosing the remaining principal balances that apply to different categories of loans.

Restrictions on Loan Term Commitments

The bill would also amend the Truth in Lending Act to ensure that commitments relating to finance charges in mortgage loans will be honored if the loan is closed within a specified time. The bill would also impose additional disclosure requirements on creditors. We would make many of the same observations about these lock-in provisions as we have about the other provisions of the bill. First, the requirements would involve another change in procedures and another new disclosure at a time when the complaints about the burden of compliance with consumer protection laws affecting mortgage lending are significant. Second, these provisions also would expose creditors to substantial additional civil liability risk in litigation by creating a new set of requirements that will be subject to civil liability under the act generally and by increasing these penalties for violations of the new provisions tenfold. Third, we are not aware of widespread problems with lenders honoring their commitments. And finally, state regulation of loan terms in our opinion is preferable to federal regulation, and we understand that more than half of the states already regulate lock-ins in some manner.

Proposed section 128(e)(1) would further transform the disclosure orientation of the Truth in Lending Act by making breaches of credit contracts a violation of the act. Furthermore, an unintended result of this provision might be that creditors will avoid locking-in any elements of the finance charge and instead make clear that these "offers" are subject to change, as provided in proposed section 128(e)(2).

In another substantive provision, the bill would allow consumers to withdraw their applications within three days after receipt of the disclosures, which are given within three days after application. A consequence of section 128(e)(4) might be that creditors would wait six days after an application is received to begin processing the application to see whether the consumer had mailed in a withdrawal. Thus, the bill could have the effect of increasing the length of time it takes to process a loan application.

CONCLUSION

In our experience, well-intentioned legislation and regulations, particularly as they pyramid one on top of the other, involve a cumulative burden, which is sometimes not fully appreciated. With this in mind, the Congress has asked the federal banking agencies to study their regulations this year to assess the degree to which they impose unnecessary burdens on depository institutions and to recommend limited revisions designed to reduce those burdens. All of us should be concerned about the expense and burden of new rules when a need for legislation has not been clearly demonstrated. In our view, this need has not been established.