Consumer Protection Regulations
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Consistent protection for different products is needed. For example, credit
and debit cards should have the same protections to eliminate confusion; many
consumers do not realize that debit cards do not have limited liability
protection against unauthorized use. There is a need for more consumer protection where
consumers are vulnerable such as with payday lenders. Services like Pay Pal and products
such as stored value cards do not have regulatory protections. Also, consumer protections
do not exist for victims of identity theft.
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Unregulated entities present problems because consumer protections are lacking
and enforcement is not the same for various types of lenders. Consumer laws and
protections should apply to all lenders, not just financial institutions. All
financial service providers should be held to the same standards in order to level
the playing field.
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Regulations need to address problems with demand drafts as a means of
payment since consumer protections do not apply. Consumers do not have the
right to contest payments made for goods not delivered or defective products.
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Participants agreed that community banks are important and beneficial to
consumers and local communities; however, they still need to be subject to
consumer protection rules.
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A basic addition that would benefit consumers is to create and require
standard ways for customers to be able to contact financial institutions for customer
service.
CRA
Consumer and group representatives provided views and comments regarding
the current CRA ANPR. Participants were encouraged to provide the agencies
with written comments to ensure their comments are complete and fully understood.
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CRA - Small bank asset-size threshold:
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Do not raise the small bank size threshold. Community organization coalition members
and lenders view any change as burdensome.
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As the performance context takes into account limited community development
opportunities and competition for these opportunities, there is no reason,
relating to the investment test requirements of large banks, to raise the threshold.
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There is concern that small institutions in rural areas already are expected
to do less, when they may need to do more. Raising the threshold would compound
the problem by lowering expectations further for more banks.
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The regulators should research what the market share is for banks
between $250-500 million in rural areas. These banks are critical to meeting
investment and service needs in rural areas. Large banks tend to emphasize urban
rather than rural areas.
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For example, in North Carolina, over 60% of banks are below $250 million
in assets; if you raise the threshold, then you should also raise the
expectations for good performance in the small bank evaluation method to
compensate for fewer large banks.
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If the small bank threshold is raised, then increase the scrutiny
(of large and small banks) if only in those areas (whether rural or urban)
where this change would have a significant or negative impact.
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CRA - Predatory lending:
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There is general agreement that illegal credit practices should have
a negative effect on CRA evaluations.
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We object to only importing the OCC’s so-called “pre-emption standard”.
Addressing the negative effect of asset-based lending alone in the proposal is
not enough; rather, high fees, prepayment penalties and other potentially
harmful or predatory features should also be included in the review and
should have a negative effect on CRA evaluations and ratings.
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Consider defining predatory lending evaluated under CRA using the Federal
Reserve’s HOEPA standards and closely review those loans.
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Review investment securities that may be backed by predatory loans,
which should also have a negative effect on a rating.
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Define a set of subprime loans, suing HMDA and HOEPA information,
to scrutinize during CRA evaluations.
- CRA - Data enhancement:
- Our members support more data disclosure.
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The agencies should use it to improve evaluations: purchases should count
less than originations which is harder to do and, therefore, deserve more credit.
- CRA - Assessment areas:
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The proposal misses a “golden” opportunity to address assessment
area problems arising from changes in banking.
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Large regional or nationwide banks tend to have small geographic
assessment areas that do not encompass much of their lending that should be
included in the evaluation.
- CRA - Affiliates:
- Rather than permit banks to elect product lines, the agencies should review all
loans in the affiliate.
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Object to considering only asset-based loans inside the bank’s assessment area,
you should also include such loans outside the assessment area.
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Non-bank affiliates that are subprime lenders should be reviewed during CRA examinations.
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Subprime loans should be counted less than prime loans, that is prime loans to
low and moderate income, minority and elderly should count more. Studies show
the number of high cost loans increases dramatically to minority and elderly
populations compared to others.
Disclosures
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The format of some disclosures makes them difficult for consumers to understand.
For example, the Schumer box disclosure is effective, simple, and easy to understand,
while privacy notices are not. The Schumer box provides consumers with better
information for comparing credit cards.
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More meaningful disclosures regarding the effect of making only minimum
credit card payments should be provided and the information should be provided
in real terms.
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The costs for bounce protection should be disclosed consistent with other loans
since it is, in effect, a loan.
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APR disclosure is effective but needs to include the true cost of credit.
HUD-1 is more useful in terms of cost disclosure than TILA because not all costs are
included in the TILA APR. Current technology should make it easy for banks to provide
consumers with the true cost of credit. It was recommended that Regulation Z tolerances be
narrowed based on current technology.
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Disclosures should not be eliminated – they should be more accurate and provided early.
Delivery of disclosures before the actual loan closing is key to their effectiveness and
earlier disclosure may take the pressure off of consumers who do not understand the
documents. Consumers who receive and read disclosures for the first time at closing
do not always realize they can choose not to sign the documents or choose not to complete the
transaction if they find errors.
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Good faith estimates are often inaccurate and late. Good faith estimates for real
estate loans should be required to be more accurate - perhaps within a certain range of
the actual costs. To increase effectiveness, regulators were encouraged to
consider using disclosures like those in the Fairbanks FTC case.
Sub-prime lenders do not always provide copies of closing documents to borrowers
as required.
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Eliminating a few pieces of paper won’t make a transaction less complicated.
Market practices make transactions complicated. The trend in the last 20 years
in the consumer protection arena has been to provide and improve disclosures rather
than improving regulations covering the terms and conditions of the underlying
transactions.
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Disclosures are not always meaningful in that they sometimes provide too
much information in formats that are not reader friendly. For example,
too much information is provided about the variations that arise based on the
method of payment.
EGRPRA
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No one regulation is a problem, it is the cumulative effect of overlapping regulations
that causes confusion. Regarding EGRPRA,
participants believed that the agencies should not tinker around the edges and
asked the agencies not to make small changes for the sake of change.
EGRPRA should examine and consider the reason for disclosures
(law, regulation or industry practice).
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Consumer group participants agreed that if the purpose of a law or regulation
is no longer relevant, perhaps changing the law would reduce regulatory burden. It
will be more harmful to consumers if regulations are radically streamlined or eliminated –
instead the regulations should be updated.
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Plain English - regulations and disclosures need to be written in plain English.
Electronic Commerce
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Laws have not kept up with technological changes. Consumer and Community Group
participants indicated that there is concern with the delivery of financial
services over the internet. Technological changes have outpaced disclosures
and consumer awareness; effective disclosures are needed for web-based transactions.
There is a general lack of consumer awareness about differences between paper and
electronic transactions and there is a fear that e-banking facilitates identify theft.
Older consumers distrust information security processes and hesitate to provide
personal information such as social security numbers on-line.
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Participants observed that some banks are encouraging customers to
move to electronic transactions. However, many consumers do not want to
convert their business to e-banking and not everyone has the same level of
knowledge about computers or access to computers. Banks should give incentives to
customers who use computers without penalizing those who do not.
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Electronic transactions often do not provide clear authorization, but banks book
transactions anyway. There is a need for more enforcement in requiring compliance for
these transactions.
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Payday lending via e-banking is increasing. This could escalate even more if
rules are relaxed.
Financial Literacy
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Begin financial literacy education early so that consumers are aware of the
protections provided to them.
HMDA
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Consumer and Community Group participants stated that the reporting threshold
should not be raised and suggested that the EGRPRA review should consider
whether resistance to HMDA is about the lack of available technology and data
processing systems, about the mechanics of reporting, or about preserving
proprietary information. There appears to be concern about public disclosure of
competitively sensitive information. Technology costs present a disproportionate
burden for smaller banks that do not have electronic processes to collect HMDA data.
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HMDA data is effective and the data can be used for many purposes.
HMDA is important to community development organizations, because they can use
this information to determine untapped areas in certain neighborhoods.
Implications, therefore, go beyond individual consumer protections.
HMDA data identifies market trends, tracks infusion of capital, and shows
assets and opportunities in neighborhoods. For example, increasing
sub prime lending in rural areas could be an opportunity for community banks.
HMDA information is different from most government data that only identifies
problems - HMDA data can identify signs of vitality in community development.
The HMDA reporting universe should be expanded to include more financial
service providers, as much as possible, so the data is more useful.
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A cost benefit analysis of HMDA compliance was a principal
factor with the FRB’s review of what additional information to require under HMDA.
Getting pricing information is the key to getting a handle on the scope of
predatory lending. Education is necessary to make sure consumers understand the
purposes of HMDA data and how banks use this information.
Privacy Notices
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Consumer and Community Group participants agreed that privacy disclosures are
not effective and that simpler privacy notices would be desirable. They recommend
conducting focus groups in order to obtain recommendations. It was also suggested
that privacy notices have standard disclosures, standard formats, and should provide
the names of the institutions’ affiliates.
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Consumers should not have to respond in order to opt out; rather consumers
should have to opt-in before their confidential information can be shared and,
the opt-out or opt-in notice should be at the beginning of the document.
Generally, consumers think there is no reason for them to opt-out
because they wrongly believe that their information will not be shared.
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Consumers may not understand privacy disclosures the first time they receive
one and may need to see the notice again (annually). The fact that consumers
receive many notices at one time makes them less meaningful.
By comparison, using the “do-not-call list” process is much easier.
Right of Rescission
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The mechanics and terms of loan transactions are difficult for consumers
to understand, therefore, the right of rescission is an important protection
even if it’s not exercised frequently. Perhaps better, firmer and earlier
disclosures would decrease the need for a right of rescission.
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The right of rescission is an important right considering that consumers cannot get
their good faith estimates promptly. Refinances are among the biggest area of
abusive lending.
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Participants suggested that the EGRPRA task force refer to and use
regulatory changes proposed in the HUD-FRB 1998 report.
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The following comments were made:
- Waivers should be kept narrow.
- Disclosures and the three day right of rescission should be sent in advance.
- The three day timeframe is too short.
- Older consumers are concerned that additional waiver options for avoiding the
three day waiting period will be used to take advantage of them.
- Regulators should encourage use of the existing exemption
(bona fide personal financial emergency) for granting waivers and educate
examiners that the use of this exemption should not result in an institution getting a
poor rating.
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Ways should be found to dispense funds on day one with the right to rescind still
possible on day three.
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Consumer and Community Group participants discussed verbal disclosures.
On the one hand it was felt that verbal disclosures help borrowers understand
terms and conditions better and understand their rights better. On the
other hand, there is concern that rights are explained in a negative way.
For example the lender may indicate they can’t fund the transaction for three days, rather
than explaining that the protection permits the borrower to back out if necessary.
As to eliminating the requirement for written disclosure of the right of
rescission and moving to a verbal disclosure, it was stated that written
disclosures are needed for an audit trail and that oral notices may not be given properly.
Thresholds
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Some regulations or provisions within regulations are tied to dollar
or size thresholds. The Consumer and Community Group participants suggested
that certain fees and thresholds needed to be adjusted upward for inflation.
Some specific recommendations included increasing the thresholds and penalties in TILA,
adjusting the EFT limits, and adjusting credit card liability limits.
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Another threshold recommendation was to keep the $50 limit for unauthorized use
of credit cards.
Unfair and Deceptive Acts or Practices
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Participants applauded the agencies for expanding the FTC Act to
prohibit the use of unfair and deceptive practices.
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Regulators should beware of “rent a charter” entities.
Comments on the EGRPRA Process
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As the EGRPRA project moves forward, a process that allows for building trust
between consumers and the industry is needed in order to get consensus on
regulatory reform.
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It is difficult for some groups to send a representative to these
outreach meetings because of distance and cost. The participants
recommended the use of conference calls with a limited number of
participants, and recommended involving state and local consumer protection
agencies as well as legal services attorneys. Allocating time at already scheduled
local consumer conferences would be a good opportunity to establish dialog.
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It was recommended that instead of using the term regulatory burden, the
term regulatory responsibility should be used.
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