Statements to Congress - Transcript

Federal Reserve Bulletin, Sept, 1997

Statement by Laurence H. Meyer, Member, Board of Governors of the Federal Reserve System, before the Subcommittee on Financial Institutions and Regulatory Relief of the Committee on Banking, Housing, and Urban Affairs, U.S. 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. 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 homebuying public.

Our testimony discusses how TILA and Regulation Z (Truth in Lending) 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 settlement 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 (Borrowers of Securities Credit) 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.