WASHINGTON (11/8/12)--The Credit Union National Association (CUNA) has urged the Consumer Financial Protection Bureau (CFPB) to eliminate from the pending combined mortgage loan forms proposal an expanded definition of "finance charge" in a major comment letter filed with the agency Nov. 6.
The CFPB mortgage proposal combines elements of the Truth in Lending Act and Real Estate Settlement Procedure Act into a single disclosure, and creates regulations to implement those changes.
Currently, under Regulation Z, a number of types of costs associated with the extension of credit are excluded from the definition of "finance charge" and the "annual percentage rate," which is calculated using the finance charge. Under the CFPB's new finance charge proposal, lenders would be required to include most up-front costs associated with a mortgage in the finance charge disclosed to borrowers. Loan charges or fees would need to be included in the finance charge, but late fees, delinquency or default charges, seller's points, some escrow payments and most insurance premiums would not need to be included.
The proposed finance charge definition, if adopted, would impact credit union mortgage loans in a variety of ways, including subjecting more loans to additional limits and requirements under the Home Ownership Equity Protection Act and excluding some mortgage loans from being considered "qualified mortgages" under the CFPB's Ability-to-Repay proposal.
In a comment letter, CUNA Deputy General Counsel Mary Dunn said CUNA agrees that the current approach to finance charge and APR disclosures under Regulation Z is imperfect and very likely limits the ability of consumers to understand the full costs associated with any loan, open- or closed-end, that they shop for or obtain. However, CUNA does not support expanding the definition of the "finance charge," as proposed.
While the CFPB's proposal would make the "finance charge" more inclusive, there is great potential for the proposed approach to be even more confusing than the current system, Dunn wrote. The expanded definition would be applied to closed-end transactions secured by real property or dwellings. However, the existing definition would still apply to all other types of loans. This may be difficult for consumers who question how different APRs are calculated, and it will likely create problems for creditors as well, the CUNA letter noted.
CUNA also said that the CFPB has not provided sufficient evidence that consumers will benefit from the expanded finance charge definition, and noted that the CFPB itself has said that expansion of the definition would result in more mortgage loans being subject to a range of additional limitations.
The timing of this finance charge action "could not be worse," Dunn wrote. "The issue of how the finance charge is defined is simply too central to mortgage lending and disclosures to be included with other rulemakings such as the complicated mortgage-related proposals that the agency is pursuing to meet its obligations under the Dodd-Frank Act," Dunn wrote.
The regulatory environment for credit unions and other financial institutions is becoming progressively more complex, and CUNA and credit unions are constantly working to analyze, prepare for and respond to a number of proposals from the CFPB and others, the letter adds. Dunn noted that there is no set deadline for the CFPB to address finance charge issues. Rulemaking related to the issue, therefore, could be delayed.
Before proceeding with major changes to the definition of "finance charge," the agency should conduct its own, robust study of the specific issues relating to this term and APR disclosures, CUNA suggested. The study should consider a range of factors and perspectives, including those of consumers, their advocates, and financial institutions.
CUNA also suggested the agency conduct a Small Business Regulatory Enforcement Fairness Act panel to solicit specific input from small financial institutions.
If the CFPB does choose to move forward with the expanded finance charge definition, the CFPB should delay implementation by at least 18 to 24 months, CUNA concluded.
For the full comment letter, use the resource link.