Compliance Blog

Written by Steve Van Beek

Yesterday, we highlighted the various comment deadlines for the CFPB's mortgage proposals - including the extended deadline, now November 6, 2012, to comment on the CFPB's proposed change to the definition of finance charge.  

Today, I wanted to highlight NAFCU's comment letter on this issue - which has already been sent to the CFPB.  This comment letter is in addition to the joint comment letter sent on September 10th asking the CFPB to drop the APR proposal.      

Opening Comments.  Here is the part of the introduction from our comment:

"NAFCU respectfully requests that the Bureau reconsider this proposal.  Given the host of regulatory changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), the Bureau should not use its authority to require still more changes for credit unions.  The cost of this proposal will be extraordinary.  Those costs, not just in terms of money, but also in terms of time, are particularly difficult for lenders to bear as the industry struggles to comply with all of the Dodd-Frank Act.  At the same time, the benefits are modest given that the proposal will, at best, only marginally improve a disclosure that consumers do not use.  Further, the proposal would completely disregard the statutory scheme, and require a broad interpretation of the Bureau’s authority under the Truth in Lending Act (TILA).  Finally, the changes will be particularly problematic in light of all of the other consumer protection laws that are tied to the finance charge."

Focus on Dodd-Frank Mandates.  The letter asks the CFPB to focus on their Dodd-Frank mandates and not compound those burdens by adding new regulatory changes not required by law.

"NAFCU believes that the CFPB’s resources should be directed towards finalizing regulatory changes that are required by the Dodd-Frank Act.  Proposing dramatic new changes to the regulatory framework that are not required by Dodd-Frank only exacerbates the already heavy burden being borne by credit unions and other small lenders.  The CFPB is currently working on promulgating at least eight different rules that will have a dramatic impact on the mortgage market.......Given the enormous challenges presented by the Dodd-Frank Act and the tremendous strain lenders will be under to comprehend the rules, update systems and processes, train staff, and ultimately comply, the CFPB should reconsider this proposal.  There is no pressing need to make changes to the finance charge calculation and consequently, NAFCU does not support such changes at this time.  Our position on this issue is part of a broader policy that the CFPB should not, at this time, add to the regulatory burden for mortgage lenders by promulgating rules that are outside the scope of the requirements of the Dodd-Frank Act."

Cost-Benefit Analysis.  The letter goes on to argue that the benefits of the proposed change are negligible while the costs are very, very real.  

"As the Bureau discusses in the proposed rule, the Federal Reserve Board (the Board) conducted consumer testing on the APR which revealed that the figure is not widely used by consumers and is, generally poorly understood..........Given that consumers still do not understand the APR and still confuse it with the interest rate, forty years after it was introduced, the value of the proposal is somewhat speculative.   The costs, however, associated with reconfiguring systems to calculate the newly defined finance charge, updating processes and training staff will be considerable."

Easier to Calculate?  The CFPB's proposal posits that the proposed changes would reduce costs for lenders - including credit unions - because the APR determination would be easier to calculate.  NAFCU disagrees.  

"First and foremost, while the APR calculation is imperfect, lenders have existing procedures and processes in place to ensure the figure is accurately disclosed.  Even if the Bureau’s proposed changes to the finance charge make it easier to calculate in the long term, those benefits must still be weighed against the substantial, initial set-up costs required to implement changes........Currently, lenders must calculate one APR for closed-end and open-end loans.  Under the proposals advanced by the Bureau, lenders would be required to calculate an APR for closed-end [mortgage] loans for disclosure purposes and a transaction coverage rate (TCR) for closed-end [mortgage] loans for coverage purposes......Replacing one rate for disclosure and coverage purpose, with two rates that are calculated differently hardly simplifies the mortgage lending process."

The Plain Language of the Truth in Lending Act.  NAFCU also questions whether the CFPB has the authority to change the definition of finance charge when the plain language of the Truth in Lending Act clearly articulates which fees should be finance charges and which should be excluded.

"The Bureau has noted the need to make broad use of its “exception authority” to implement the proposed changes in this rulemaking.  The proposal would discard the current statutory list of inclusions and exclusions in the finance charge.........Section 105(a) of TILA and § 1405(b) of Dodd-Frank are broadly written and provide the Bureau considerable authority to modify certain requirements as it sees fit.  However, Congress did not give the Bureau power to modify or change relevant, and unambiguous, sections of TILA.  Furthermore, the Supreme Court states that “[i]f the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress.”  Chevron, U.S.A., Inc. v. NRDC, Inc., 467 U.S. 837, 842-43 (1984).  Here, the intent of Congress is clear: Congress specifically created a statutory list of inclusions and exclusions in the term “finance charge.”  Thus, NAFCU questions whether the Bureau has the authority to amend the statutory list."

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NAFCU's Comment Letters.  You can find the full September 21st letter here.  The prior joint letter is here.  

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Credit Union Comment Letters.  While NAFCU is certainly making these arguments for credit unions - it is still vitally important that individual credit unions make their voices heard on this issue.  You don't need to detail each issue in a comment letter - just explain the details of what your credit union would need to do to adjust your existing systems, train staff, set up new audit procedures, explain the issue to your members, etc.  I have a feeling the CFPB is vastly underestimating the compliance burden of this change.  Vastly.