COMMENTS to the Federal Reserve Board 12 C.F.R. Part 226 [Regulation Z; Docket No. R-1366] Truth in Lending—Proposed Rule by the National Consumer Law Center1 (on behalf of its low-income clients) and for the National Association of Consumer Advocates, Consumer Federation of America Consumer Action the National Fair Housing Alliance and the Center for Responsible Lending December 24, 2009 The National Consumer Law Center (NCLC) submits the following comments on behalf of its low-income clients, as well as the National Association of Consumer Advocates, Consumer Federation of America, Consumer Action, the National Fair Housing Alliance, and the Center for Responsible Lending, to the Federal Reserve Board regarding the proposed rule resulting from the Board’s comprehensive review of the Truth in Lending Act’s (TILA) rules for closed end credit. 1 These comments were written by NCLC attorneys Carolyn Carter, Alys Cohen, Andrew Pizor, Leah Plunkett, John Rao, Margot Saunders, Jon Sheldon, and Diane E. Thompson. Please note that NCLC has also submitted comments on the proposed rule regarding open end home secured credit or home equity lines of credit (HELOCs) under docket number R-1367. Because there is some overlap between the proposals for closed-end credit and HELOCs, as well as in our discussion of them, we have included a copy of our HELOC comments as Appendix I. for ease of reference. For each section, we have also identified the section in our HELOC comments which discusses the same or a similar topic. ABOUT THE ORGANIZATIONS COMMENTING The National Consumer Law Center, Inc. (NCLC) is a non-profit Massachusetts Corporation, founded in 1969, specializing in low-income consumer issues, with an emphasis on consumer credit. On a daily basis, NCLC provides legal and technical consulting and assistance on consumer law issues to legal services, government, and private attorneys representing low-income consumers across the country. NCLC publishes a series of sixteen practice treatises and annual supplements on consumer credit laws, including Truth In Lending, (6th ed. 2007), Cost of Credit: Regulation, Preemption, and Industry Abuses (4th ed. 2009), and Foreclosures (2d ed. 2007), as well as bimonthly newsletters on a range of topics related to consumer credit issues and low-income consumers. NCLC attorneys have written and advocated extensively on all aspects of consumer law affecting low-income people, conducted training for thousands of legal services and private attorneys on the law and litigation strategies to address predatory lending and other consumer law problems, and provided extensive oral and written testimony to numerous Congressional committees on these topics. NCLC’s attorneys have been closely involved with the enactment of the all federal laws affecting consumer credit since the 1970s, and regularly provide extensive comments to the federal agencies on the regulations under these laws. The National Association of Consumer Advocates (NACA) is a non-profit corporation whose members are private and public sector attorneys, legal services attorneys, law professors, and law students, whose primary focus involves the protection and representation of consumers. NACA’s mission is to promote justice for all consumers. Consumer Action (www.consumer-action.org) is a national non-profit education and advocacy organization that has served consumers since 1971. Consumer Action serves consumers nationwide by advancing consumer rights in the fields of credit, banking, housing, privacy, insurance and utilities. Consumer Action offers many free services to consumers and communities, including an assistance/referral hotline. Consumer Action also develops free consumer education modules, training, and multi-lingual materials for its network of more than 8,000 community based organizations. Consumer Action's publications are offered in Chinese, English, Korean, Spanish and Vietnamese. Consumer Federation of America (CFA) is a nonprofit association of some 300 national, state, and local pro-consumer organizations created in 1968 to represent the consumer interest through research, advocacy, and education. The National Fair Housing Alliance is a consortium of more than 220 private, non- profit fair housing organizations, state and local civil rights agencies, and individuals from throughout the United States. Headquartered in Washington, D.C., the National Fair Housing Alliance, through comprehensive education, advocacy and enforcement programs, provides equal access to apartments, houses, mortgage loans and insurance policies for all residents of the nation. The Center for Responsible Lending is a nonprofit, non-partisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices. TABLE OF CONTENTS I. OVERVIEW OF BOARD’S PROPOSED CHANGES................................................................1 II. CRITICAL SUBSTANTIVE PROVISIONS NOT ADDRESSED IN THE BOARD’S PROPOSAL .................................................................................................................................3 A. Introduction: “The Board, by regulation or order, shall prohibit acts or practices in connection with . mortgage loans that the Board finds to be unfair [or] deceptive.”.................................3 B. The Need for the Board to More Aggressively Ban Unfair Practices in the Mortgage Market....4 C. Disclosures Are Insufficient to Protect Consumers from the Dangers of Certain Loan Products and Terms ....................................................................................................................................7 D. Payment Option ARM Loans Are So Inherently Deceptive That Few, If Any Borrowers Can Understand How They Work.......................................................................................................15 E. The Dangers of Payment Option ARM Loans Outweigh Any Temporary Benefits ....................17 F. The Board Should Extend the Ability to Repay Standard to All Home Loans.............................18 G. The Board Should Require That All Home Secured Mortgage Loans Are Underwritten for the Maximum Possible Payment........................................................................................................20 H. The Board Should Prohibit the Initiation of a Foreclosure Unless the HAMP Loan Modification Analysis and Procedure Have Been Completed.....................................................22 III. FINANCE CHARGE DEFINITION: OVERVIEW & HISTORY—§ 226.4 .............................23 A. Introduction: The Finance Charge Definition Should Be Inclusive and Uniform for All Kinds of Credit .......................................................................................................................................23 B. The Finance Charge Forms the Basis for the Disclosure of the Key Cost of Credit, the APR.....24 C. Effective Disclosure of the APR Reduces Costs ..........................................................................24 D. The APR Allows Shopping and Fosters Competition Across Different Categories of Credit .....26 E. Abuses Are Widespread in Both Mortgage and Non-Mortgage Lending.....................................27 IV. FINANCE CHARGE DEFINITION: THE BOARD’S PROPOSAL—§ 226.4 ........................28 A. Introduction: The Board’s Expansion of the Finance Charge Definition Is an Important Step Forward, but Other Steps Are Also Necessary ............................................................................28 B. The Broad Definition of the Finance Charge for Closed-End Mortgage Loans Should Be Adopted and Should Not Be Undermined Through Increased Tolerances..................................28 C. Disclosures Are Enhanced by Inclusion of Credit Insurance and Debt Cancellation or Suspension Premiums in the Finance Charge for Closed-End Mortgage Loans and When the Consumer Will Not Benefit ........................................................................................................33 V. FINANCE CHARGE DEFINITION: EXTENDING THE BOARD’S INCLUSIVE APPROACH—§ 226.4 ...............................................................................................................42 A. Seller’s Points Should Be Included in the Finance Charge When the Cost Is Passed onto the Borrower ......................................................................................................................................42 B. The Board Should Use Its § 1604(a) Authority to Remove Statutory Finance Charge Exclusions for Non-Mortgage Loans As Well.............................................................................43 C. Property Insurance Should Be Included in the Finance Charge in Appropriate Circumstances...44 D. The Board Should Remove the § 226.4(c)(7) Exceptions Entirely ..............................................46 VI. EARLY DISCLOSURES—§ 226.19 ........................................................................................47 A. Introduction to Pre-Consummation Final Disclosures and Corrections When Terms Change; Waiver of the Final or Corrected Disclosures Not Appropriate ..................................................47 B. The Board’s Expansion of the Early Disclosure Rules to All Transactions Secured by Real Property or a Dwelling is Appropriate ........................................................................................48 C. The Board’s Proposal to Require Final Disclosures Three Days Before Consummation Is an Excellent Innovation