CUNA Regulatory Comment Call
December 4, 2003
Fed Proposes Uniform Standards for Five Consumer Protection Rules and Additional Changes to
Regulation Z, Truth in Lending
(MAJOR RULE)
EXECUTIVE SUMMARY
- The Federal Reserve Board (Fed) proposes to establish more uniform standards for providing disclosures under Regulation Z (the Truth in Lending Act), Regulation B (the Equal Credit Opportunity Act), Regulation E (the Electronic Fund Transfers Act), Regulation M (the Consumer Leasing Act), and Regulation DD (the Truth in Savings Act).
- The proposal will apply the definition of “clear and conspicuous” to these five rules that is currently included in the privacy rules that were adopted by the financial institution regulators in 2000 with regard to the annual privacy notices that must be sent by financial institutions. The privacy rules define “clear and conspicuous” as “reasonably understandable and designed to call attention to the nature and significance of the information” in the disclosure.
- The proposal also contains changes to the official staff commentary that provide further guidance regarding the definition of “clear and conspicuous,” which includes encouraging lenders to use 12-point type for these disclosures.
- The Fed also proposes the following with regard to Regulation Z:
- The term “amount” will refer to a numerical amount.
- Changes with regard to rescission of certain mortgage loans, in which the consumer may send a rescission notice to anyone considered a creditor or assignee under state law if no such contact information is provided in the notice.
- The Fed is also requesting comment with regard to debt cancellation and debt suspension agreements, including whether to change the provisions that exclude fees for these products from the finance charge under certain circumstances.
Comments on the proposal are due by January 30, 2004. Please submit your comments to CUNA by January
21, 2004. Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Associate
General Counsel Mary Dunn at mdunn@cuna.coop and to Assistant General
Counsel Jeff Bloch at jbloch@cuna.coop; or mail them to Mary and Jeff in c/o CUNA’s Regulatory Advocacy
Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, DC 20004-2601. You may also
contact us at 800-356-9655, ext. 6732, if you would like a copy of the proposal, or you may access them on
the Internet at the following address:
http://www.federalreserve.gov/boarddocs/press/bcreg/2003/20031126/default.htm
BACKGROUND
The Fed’s proposal will establish more uniform standards for providing disclosures under the five following consumer protection rules:
- The Truth in Lending Act (TILA) – TILA is intended to promote the informed use of consumer credit by providing for disclosures about its terms and cost. TILA requires creditors to disclose the cost of credit as a dollar amount and as an annual percentage rate in a uniform manner. This uniformity is intended to assist consumers in comparison shopping for credit. Regulation Z implements TILA.
- The Equal Credit Opportunity Act (ECOA) - ECOA makes it unlawful for creditors to discriminate in any aspect of a credit transaction on the basis of sex, race, color, religion, national origin, marital status, age, or because the applicant receives public assistance. Regulation B implements ECOA.
- The Electronic Fund Transfers (EFT) Act – The EFT Act establishes rights, liabilities, and responsibilities for parties involved in EFT systems, which include transfers through automated teller machines, point-of-sale terminals, automated clearinghouses, telephone bill-payment plans, and remote banking programs. Regulation E implements the EFT Act.
- The Truth in Savings Act (TISA) - TISA requires financial institutions to disclose yields, fees, and other terms concerning deposit accounts to consumers at account opening, upon request, when changes in terms occur, and in periodic statements. There are also rules about advertising deposit accounts. Regulation DD implements TISA, with credit unions being covered under substantially similar rules that are issued by the NCUA Board.
- The Consumer Leasing Act (CLA) – CLA requires lessors to provide consumers with uniform cost and other disclosures regarding consumer lease transactions. These requirements apply to consumer leases of personal property in which the contractual obligation does not exceed $25,000 and has a term of more than four months. Regulation M implements CLA.
Each of these regulations also contains official staff commentary that interprets the regulation and provides guidance in applying the regulation to specific transactions. The Fed proposes to amend these regulations and the corresponding official staff commentary to provide a consistent standard for providing “clear and conspicuous” disclosures that would apply to all five rules. The Fed is also proposing additional amendments to Regulation Z.
DESCRIPTION OF THE PROPOSAL WITH REGARD TO UNIFORM STANDARDS
The Fed’s consumer protection rules contain similar, although not identical, standards for providing disclosures that consumers will notice and understand. Generally, they must be “clear and conspicuous” under Regulations B, M, Z, and DD, with slight differences among these rules as to how this is interpreted, and “clear and readily understandable” under Regulation E. The proposal will now apply the definition of “clear and conspicuous” to these five rules that is currently included in these privacy rules that were adopted by the financial institution regulators in 2000 with regard to the annual privacy notices that must be sent by financial institutions. These privacy rules define “clear and conspicuous” as “reasonably understandable and designed to call attention to the nature and significance of the information” in the disclosure.
The official staff commentary to these five consumer protection rules will provide consistent guidance with regard to this uniform definition of “clear and conspicuous,” similar to the guidance that is included in the privacy rules. The commentary includes the following examples of what is considered “reasonably understandable:”
- Presenting the information in the disclosure in clear, concise sentences, paragraphs, and sections.
- Using short explanatory sentences or bullet points when possible.
- Using definite, concrete, everyday words and active voice when possible.
- Avoiding multiple negatives.
- Avoiding legal and highly technical business terminology when possible.
- Avoiding explanations that are imprecise and readily subject to different interpretations.
The commentary also includes the following examples of disclosures “designed to call attention to the nature and significance of the information:”
- Using plain-language heading.
- Using typeface and type size that is easy to read. Disclosures in 12-point type will generally meet the standard. Smaller type does not automatically violate this standard, although disclosures of less than 8-point type would likely be too small. (For Regulation Z, this standard already applies to credit card solicitations and advertising.)
- Providing wide margins and ample line spacing.
- Using boldface or italics for key words.
- For documents combining disclosures with other information, using distinctive type size, style, and graphics (such as shading or sidebars) to call attention to the disclosure.
Unless otherwise prohibited, this new uniform standard for “clear and conspicuous” disclosures will not prohibit adding other terms or prohibit sending promotional material with the disclosures. However, the presence of additional information will be a factor in determining whether the “clear and conspicuous” standard has been met. Segregating this additional information from the disclosures will more likely satisfy this standard.
Guidance regarding the “clear and conspicuous” standard for electronic disclosures will be considered in the rulemaking process currently underway with regard to the electronic delivery of these disclosures. Click here for more information about the interim rules that the Fed issued in 2001 with regard to electronic disclosures.
ADDITIONAL PROPOSED CHANGES WITH REGARD TO REGULATION Z
Here are the additional proposed changes with regard to Regulation Z:
- The term “amount” will refer to a numerical amount. This change responds to a recent court decision in which the amount was not written in numerical terms.
- In certain credit transactions secured by the consumer’s home, the consumer may rescind within three business days after the transaction is finalized (which may extend up to three years under certain circumstances). The creditor must provide a notice and form for the consumer to use if he or she decides to rescind that includes the creditor’s name and address. The creditor may designate an agent to accept these rescission notices, as long as the agent’s name and address appear on the notice. For those situations when the form or the address of the creditor or agent is not provided, the official staff commentary will be amended to permit the consumer to send a notice to a third party if delivery to that party would be considered delivery to the creditor or assignee under applicable state law. An example may be a third-party loan servicer.
- When rescinding a mortgage transaction, there is a process by which the creditor returns any money or property received and the consumer then returns any money or property it received from the creditor. The official staff commentary will be amended to state expressly that the substantive right to rescind the transaction will not be affected by this procedure.
With regard to debt cancellation and debt suspension agreements, the Fed is not proposing any amendments at this time but is requesting comment on possible changes in the future. Under these agreements, a creditor agrees to cancel, or temporarily suspend, all or part of a borrower’s obligation to repay a debt upon the occurrence of specified events, such as death, disability, or unemployment.
Although the fees charged for these agreements meet the definition of “finance charge,” these fees may be excluded from the finance charge on the same conditions as credit insurance premiums. However, this applies for liability: 1) in the case of accident or loss of life, health, or income; or 2) in the amount exceeding the value of collateral securing the debt. (This is commonly referred to as “gap” insurance, often sold in connection with automobile loans.)
The Fed is now aware that some creditors are offering expanded coverage. An example is suspension of payment for life events, such as marriage and divorce. Some in the financial institution industry have requested additional guidance as to the circumstances in which fees for agreements that cover these events can also be excluded from the finance charge, as well as clarification regarding the disclosures that should be provided.
QUESTIONS TO CONSIDER REGARDING THE FED’S PROPOSAL WITH REGARD TO CONSUMER PROTECTION RULES
I. QUESTIONS REGARDING UNIFORM STANDARDS
II. QUESTIONS REGARDING THE ADDITIONAL CHANGES TO REGULATION Z
(The Fed is Specifically Interested in Receiving Comments on Most of the Issues Raised by the Following Questions.)
- Do you agree with the proposal that the term “amount” will refer to a numerical value? Do you agree
with the proposed changes with regard to rescission of certain mortgage loans, in which the consumer may send
a rescission notice to anyone considered a creditor or assignee under state law if no such contact
information is provided in the notice?
- With regard to debt cancellation and debt suspension coverage, what are the similarities and
differences between those and credit insurance, in the case of both open-end and closed-end credit?
- With what types of closed-end and open-end credit are debt cancellation and debt suspension products
sold? If you offer such products, do you package multiple types of coverage (for example, disability and
divorce) or sell them separately? Do you sell these products at or after consummation of a loan or
opening of an account?
- What disclosures are made with the sale of such a product or conversion from one product to another,
whether required by TILA or other laws? How are monthly or periodic fees disclosed?
- Fees for credit protection programs may be excluded from the finance charge. Is there a need for
guidance concerning the applicability of this exclusion with regard to certain types of coverage that is
now available?
- Under TILA, a credit card issuer must notify a consumer before changing his or her credit insurance
provider. Should this be interpreted or amended to address conversions from credit insurance to debt
cancellation or suspension agreements? If so, is there a need to address such conversions other than for
credit card accounts?
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Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com Mary Mitchell Dunn • SVP & Associate General Counsel • (202) 508-6736 • mdunn@cuna.com Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 • corr@cuna.com |
