"Financial Institution Regulatory Streamlining Act of 1998"

July 16, 1998

Margot Saunders, also on behalf of Consumer Federation of America and U.S. Public Interest Research Group

Madame Chairman and Members of the Committee, the National Consumer Law Center (NCLC) is a nonprofit Massachusetts corporation founded in 1969 at Boston College School of Law and dedicated to the interests of low-income consumers. NCLC provides legal and technical consulting and assistance on consumer law issues to legal services, government and private attorneys across the country. Cost of Credit (NCLC 1995), Truth in Lending (NCLC 1996) and Unfair and Deceptive Acts and Practices (NCLC 1991), three of twelve practice treatises published and annually supplemented by NCLC, and our newsletter, NCLC Reports Consumer Credit & Usury Ed., describe the law currently applicable to all types of consumer loan transactions. thanks you for inviting us to testify today regarding the impact of the proposed Regulatory Relief Act on consumers. We offer our testimony here today on behalf of our low income clients, as well as the Consumer Federation of America and the U.S. Public Interest Research Group.

There should be no misunderstanding: this proposed bill provides no benefits to consumers. Although there are many updates and improvements to federal consumer protection laws that are needed, not one has been included in this bill. However, we are very appreciative of the fact that in its present form, this House version of the Regulatory Relief bill does not include many of the very dangerous provisions which are included in the Senate equivalent - S. 1405. The Senate bill includes provisions which would 1) undermine the protections against kickbacks in section 8 of the Real Estate Settlement Procedures Act (Section 206 of S.1405); 2) make four anti-consumer amendments to the Fair Debt Collections Practices Act (Section 207 of S. 1405); and 3) repeal the anti-tying provision in the Bank Holding Company Act (Section 204). The proposed House bill does however, include one amendment to the Truth in Lending Act which is not good: Section 401 would replace the historical table on APR changes for open end variable rate home loans with a meaningless statement of no value to consumers.

We seek to accomplish several goals with this testimony today: 1) to persuade members to include some necessary updates and clarifications to consumer laws which would benefit both consumers and the financial services industry; and 2) to convince the members of the Subcommittee not to amend the bill to insert anti-consumer amendments. First, however, we urge you to fix the language in section 401 of the proposed bill which amends the Truth in Lending Act.

I. Fix the Truth in Lending Amendment in Section 401. Section 401 would replace the historical table on APR for open end variable rate home loans with the rather meaningless statement that periodic payments may increase substantially. This change mirrors that which occurred for variable rate closed end home loans in the regulatory relief bills passed in 1996 (amending TILA § 128(a)(14)). While we have never maintained that historical information provided for an imaginary $10,000 loan was all that valuable, it does still provide some useful information to those consumers who are willing to study it. The replacement language in this bill as well as that in the 1996 law on closed end credit, really serves only one purpose -- to reduce creditor compliance burdens.

While this amendment is virtually identical to the new disclosures required for closed end credit under TILA Section 128,  that should not be the basis for passage of this provision. There are significant distinctions between open and closed end credit. First, there are many more abuses in open end credit, especially because the protections of the Home Ownership and Equity Protection Act do not apply to open end credit. Secondly, because all of the disclosures required for open end credit are so much less specific and meaningful than those required for closed end credit, the initial disclosures do not provide essential information about the potential real costs of the open end credit to the consumer. For example, under current law, consumers are not told the actual payments that they may be required to make under an open end loan; they are not told the total amount of finance charge that could be paid; and they are not told the total amount that their payments may equal. This is not fair to consumers, the disclosures that are provided for open end credit should be at least as meaningful as those provided for closed end credit.

If one truly wanted to make the disclosure of the risks involved in variable rate open end credit secured by the home meaningful to the consumer, in addition to the change proposed in § 401 of this bill, subsection (H)(ii) of § 127A(2) would be replaced with information about the highest annual percentage rate, and the highest minimum payment based on the actual loan terms. In addition, information about how long it could take to repay the outstanding balance at the highest interest rates, as well as the total possible cost should be included. To do this, the amendment would rewrite subsection (H) as follows:

(H) a statement of

This information would not be difficult for a creditor to provide. Any creditor can determine this information for a specific loan with a computer in a matter of minutes. Yet, it would afford very helpful information to consumers which is not currently provided.

II. Necessary Updates and Changes to the Truth in Lending Act. There have been no pro-consumer amendments to the Truth in Lending Act since the Home Ownership and Equity Protection Act was passed in 1994. Yet, there are a number of necessary amendments to this essential law that Congress should consider whenever it reviews the laws governing consumer credit. These amendments would include the following:

1) Clarify that the right of rescission can be used to as a defense to foreclosures of homes. The right of rescission under TILA has for many years been the primary tool used by advocates for low income consumers to save their homes from foreclosure, especially in abusive loan situations. As the result of the recent Supreme Court decision in Beach v. Ocean Federal Bank [1998 WL 183852 (April 21, 1998)], rescission is no longer available after three years from the date of the loan. This amendment would allow consumers to assert the right of rescission in defense to a foreclosure, regardless of the length of time it had been since the loan was made. The right of rescission is the primary remedy for violations of the Home Ownership and Equity Protection Act. Without this amendment, lenders providing abusive loan terms will be able to violate TILA with impunity, simply wait three years until they file for a foreclosure, and suffer no consequences from their violation of federal law. When the Rodash changes were made in 1995 Congress specifically refused do what the Supreme Court just did in the Beach case.

Amendment: Add a new sentence, after the second sentence of 130(e) of the Truth in Lending Act (15 U.S.C. §1640(e)) as follows:

2) Ban the Use of the Rule of 78s as a method of calculating rebates on closed-end loans of 5 years or less. The Rule of 78s is an antiquated method of determining the proper amount of interest to be rebated when a credit transaction is paid ahead of schedule. Its use always causes the creditor to receive more interest than is actually due, which results in a hidden prepayment penalty. The Rule of 78s encourages the practice of loan "flipping" and is an unfair burden on consumers who pay off loans voluntarily, consumers who refinance loans, and consumers who default on loans.

For example, on a $15,000 four year loan at 18% APR, if the borrower refinanced after 18 months, the borrower would be overcharged $323; a $5,000 five year loan at 30% (a typical small loan rate) refinanced in the 24th month would yield the creditor an extra $300 in unearned interest charges.

Congress took the first step in 1992 by requiring lenders to use the actuarial method to calculate rebates for loans over 61 months duration (15 U.S. C. § 1615). Another step was made against the Rule in 1994 when the Home Ownership and Equity Protection Act defined use of the Rule as a prepayment penalty which is forbidden for HOEPA covered loans, regardless of the loan term. The cumulative cost impact to consumers of the Rule of 78s is significant.

Amendment: Amend subsection (b) of 115(e) of the Truth in Lending Act (15 U.S.C. §1614(b)) as follows:

3) Increase the jurisdictional limit in the Truth in Lending Act and Consumer Leasing Act from $25,000 to $50,000. When TILA was originally passed in 1968, the $25,000 limit on covered transactions was more than sufficient to ensure that most automobiles and credit card transactions were included within TILA's umbrella. The value of $25,000 in 1968 dollars is $125,000 in today's money. As a result, today many consumer credit transactions are not protected by TILA. The problem is compounded by the fact that many state laws do not provide usury ceilings or substantive limits on credit terms for many transactions over $25,000.

Amendment: Amend Section 104(3) of the Truth in Lending Act (15 U.S.C. § 1603(3)) and Section 181(1) of the Consumer Leasing Act (15 U.S.C. § 1667(1)) by deleting "$25,000" wherever it appears and replacing it with "$50,000".

4) Increase the statutory damages in the Truth in Lending Act and Consumer Leasing Act from $1,000 to $2,000. The 1995 amendments to TILA addressed this problem for loans secured by homes, now other credit transactions should be protected from inflation as well. The minimum recovery of $100 should also be increased to $200 for the same reasons.

Amendment: Amend Section 130 of the Truth in Lending Act (15 U.S.C. §1640) by deleting "$100" wherever it appears and replacing it with "$200", and by deleting "$1,000" wherever it appears and replacing it with "$2,000".

5) Clarify that actual damages under Truth in Lending should be awarded regardless of the consumer's reliance on the incorrect disclosures. TILA was always intended to be enforced against lenders based on their compliance, not on whether the consumer could prove that but for the incorrect disclosure the consumer would have obtained a better deal. Some recent court cases have incorrectly held that in order to obtain actual damages under TILA the consumer must prove detrimental reliance.

Amendment: Amend Section 130(a) of the Truth in Lending Act (15 U.S.C. §1640(a)) by rewriting subsection (1) as follows:

6) Clarify that assignees have liability under Truth in Lending. Truth in Lending § 131 limits liability for monetary damages against assignees to those arising out of violations "apparent on the face of the disclosure statement," which encompasses both the disclosure statement itself and "other documents assigned." The intent of the limitation of liability was to balance the need to assure that there was adequate incentive for creditors to comply with the Act, while at the same time limiting the exposure of innocent secondary market purchasers. This provision sometimes must be interpreted along with a separate federal consumer protection regulation designed to assure that consumers are not deprived of consumer protection laws by virtue of the "trafficking" in consumer paper among the business and investment community. The Federal Trade Commission trade regulation rule concerning the Preservation of Consumers' Claims and Defenses, 16 C.F.R. § 433. (The "FTC Holder Rule.") That rule requires that contracts for the credit sale of goods or services contain a provision by which the assignee (or holder, in the case of a purchase money loan was made by a creditor related to the seller) agrees to stand in the shoes of the original creditor with respect to claims and defenses which the consumer may have against the seller. Courts have expressed disagreement as to how these two federal provisions relate in transactions to which both apply. (Perhaps the most common situations are auto loans and home improvement loans, often door-to-door home improvement loans.) A large portion of the transactions to which the FTC holder rule applies are ones in which the assignee is not an "arms-length, true secondary market purchaser," but rather has a business relationship with the seller. Often, in fact, the assignee is one in name only, having made the original decision to grant the credit, and determined the terms of the credit. Indeed, it is often the "assignees" who either prepare the credit documents, or provide instruction and training to the "seller/creditors" as to how to prepare the credit documents. As a matter of policy, then, it would be inappropriate to exclude the consumers rights under the Truth in Lending Act from the protection of the FTC rule. This amendment would clarify that §131(a) of Truth in Lending does not exclude the consumer's Truth in Lending claims from the protection of the FTC Holder Rule

Amendment: Amend § 131(a) of the Truth in Lending Act (15 U.S.C. § 1641(a)) as follows:

III. Do Not Include Anti-Consumer Amendments in this Bill. The Senate bill has six anti-consumer provisions. We commend you for excluding most of the anti-consumer provisions currently included in the S. 1405 (you have included one anti-consumer amendment, in section 401). We urge you to ensure that these sections are not added to this or other bills passed by the House this session. Attached as Appendix I to this testimony is a detailed analysis of what is wrong with the anti-consumer provisions in sections 206, 207 and 401 of S. 1405. We hope this analysis will be helpful in resisting any efforts to include these provisions in the House regulatory relief bill.

In addition, we understand that some members of this committee are contemplating including HR 2019, the Consumer Disclosure and Rental Purchase Agreement Act, as a part of the House regulatory relief bill. We strongly urge you to reject any efforts to include legislation on rent to own or rental purchase agreements, except Mr. Kennedy's pro-consumer bill on rent to own: HR 3060.

HR 2019 is a very bad bill for consumers. It would not provide consumers with adequate or timely disclosure of the information they need to make informed judgments about the rental purchase transaction. (See Appendix II for a more detailed analysis.) Although HR 2019 would add a new section to the Consumer Credit Protection Act, in many crucial ways, consumers would not be protected under these provisions. Indeed, the bill is really just a massive protection for the industry efforts to avoid consumer protections under state and other federal laws.

There a number of serious problems with HR 2019: these include:

Thank you for your consideration of these issues on behalf of low and moderate income consumers. I would be happy to respond to any questions.

Appendix I

Problems with Anti-Consumer Amendments in the S. 1405

I. RESPA Amendment - Affinity Group Exception in Section 206 of S. 1405. The main problem is that allowing affinity groups to receive kickbacks for referrals and endorsements of settlement services would open the door for significant consumer abuses, and would unequivocally have the effect of increasing the costs of settlement services for consumers. The original purpose of RESPA was to ensure fair and open competition in the marketplace to keep the costs of settlement services as low as possible.

RESPA currently allows anyone to be paid for services that are actually rendered. RESPA's section 8 only prohibits the payment of "referral fees." Section 206 of S. 1405 would allow an affinity group to be established -- for a common purpose -- by anyone other than a settlement service provider. (Does anyone really know what an affinity group is?) Then the affinity group could make endorsements of settlement service providers and receive payment for the endorsements so long as disclosures are provided to consumers.

The effect of this amendment would be to allow the payment of a fee to an affinity group for something other than services actually rendered. As a result, endorsement fees could be paid in large sums to anyone, (including realtors) for referrals to lenders, title insurance companies, and others. While home buyers might believe that the endorsement was a true recommendation about the value of the services provided by the settlement service provider to whom they were referred, in fact the only reason the referral would have been made was because the referring party was receiving a kickback for making it. This was exactly the reason for the original prohibition in RESPA’s section 8.

There are a number of problems with this proposal:

The potential for abuse that could result from an affinity group endorsement that section 206 would allow should be contrasted with the allowable activities of affinity groups under current law. (See appendix I: article from Saturday, January 24, 1998, Washington Post.) Under current law, affinity groups make endorsements of settlement services which are generally considered to be legal. Current law allows endorsements of settlement service providers by affinity groups so long as the consumer receives the benefit of the referral. In the Long & Foster- Costco relationship described in the article, the consumer would have a received a rebate from the realty company as the result of the referral from the affinity group. Clearly consumers will benefit from this type of arrangement (although realtors may not). This arrangement is considered to be legal because of the exception to the definition of "required use" in 24 C.F.R. § 3500.2(b):

Given that this language is already in RESPA, and thus endorsements by affinity groups which result in a discount to the consumer are currently legal, the only reason to change the law would be to allow endorsements by affinity groups which do not result in a benefit to the consumer. Passing S. 206 will increase the costs of settlement services to consumers.

Additionally, the Mortgage Reform Working Group, comprised of representatives of any industry and consumer group that wants to join, has been meeting regularly and extensively for the past seven months in an effort to comprehensively draft a rewrite of RESPA, as well as the Truth in Lending Act. Section 8 protections are very much on the table in these discussions. If the Working Group is to have any real hope of accomplishing reform, it does not make sense for Congress to pass piece meal legislation amending either of these two laws at this point. For that reason alone this amendment should be rejected.

Finally, while eviscerating the major substantive protection of the Real Estate Settlement Procedures Act (RESPA) -- the prohibition against unearned referral fees -- this amendment would not even appear in the U.S. Code within the statute it amends. As such, there would be no enforcement mechanism to ensure compliance even with the minimal standards of the proposed amendment.

II. Fair Debt Collection Practices Act Amendments in Section 207 of S. 1405.

When considering proposed changes to the Fair Debt Collections Practices Act (FDCPA), one should keep in mind that the FDCPA does not make it possible for consumers to avoid paying the debts that they owe. This law only stops abusive, deceptive collections practices by debt collectors. As Congress recognized when it passed the Fair Debt Collection Practices Act in 1977:

Further, the FDCPA only stops the bad actions of debt collectors:

15 U.S.C. § 1692.

Section 207 of S. 1405 would make it much easier for abusive debt collection practices to occur without redress throughout the United States.

1) Section (a) would exempt all communications made under state or federal Rules of Civil Procedure from the FDCPA. This is overly broad, and would clearly result in abusive and deceptive collections practice.

For example, currently in § 1692(e)(15) the FDCPA makes the "false representation or implication that documents are not legal process forms or do not require action by the consumer" a violation. This provision prohibits a collector from misleading a consumer who has been sued into believing that the consumer need only send payments to the collector, when in fact legal inaction will result in a default judgment.

Consider why it is so important that all communications from a debt collector be covered by the FDCPA, even those made pursuant to the rules of civil procedure. In one survey of judgment debtors in Washington D.C. a finance company was found to have frequently misled consumers into believing that they need not respond formally to legal process. Consumers reported that they called the finance company or its lawyer after a receiving a summons and offered to catch up on their payments if the suit was dropped. The consumers were assured that everything would be taken care of once the back payments were received. Then, after accepting the promised post-summons payments from the consumers and assuring the consumers that their payments would obviate the need to defend the creditor's suit, the finance company took default judgments against these consumers. Another survey found that this type of false advice was prevalent in the collection industry. This representation by a debt collector that the consumer need not respond to a summons violates § 1692e(15). Such activity would not be illegal under the FDCPA if § 207 of S. 1405 passes.

Further, it is violation under current law for collection agencies to file suit for an inflated amount, or to include an illegal fee, or to fail to rebate unearned interest or credit insurance premiums in the requested relief. This amendment would presumably make this activity perfectly legal, as well.

2) Section 207(b) would exclude the collection of bad checks from the FDCPA. There is no good reason for excluding the collection of bad checks from coverage under the FDCPA. Many courts have considered the issue, and have held that dishonored checks are debts covered by the Act. Moreover, even if one could distinguish between a check and a debt, there is no good policy reason not to prohibit abusive practices in the collection of bad checks.

Given the high potential for abusive practices during the collection efforts for bad checks, it is particularly important that FDCPA protections apply. For example, a well known, but troublesome collection tactic is to threaten consumers with prosecution under criminal bad check statutes. Some collectors even solicit checks from financially distressed consumers, with complete indifference to the sufficiency of funds to cover the check, knowing that the possibility of a bad check prosecution provides the collector with powerful collection leverage.

There are a variety of situations in which bad checks are written. They vary from the professional criminal check kiter, to the embezzling employee, to the financially desperate parent buying food without funds, to the consumer who gives a check not expecting it to be cashed, to the consumer who made an inadvertent error in balancing the checkbook and cannot immediately cover the check, to the person who expected their check to be covered by a deposited check that bounced. Surely, this Congress does not want to condone abusive collection tactics against all of these consumers.

Also, it is a violation of the FDCPA for a debt collector to collect "any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law." One example of a potentially illegal charge that is disallowed by this provision is a dishonored check fee. Despite the provision in the FDCPA, there are numerous cases holding collection agencies violated the law by attempting to collect illegal fees when collecting on dishonored checks. Should that activity now be made legal? Consumers would be considerably harmed if this amendment passed.

3) Section 207(c) would add language to the FDCPA specifying that collection activities and communications can continue during the 30-day period during which the consumer has the right to request verification of the debt. This amendment is the same as was added to and then deleted from the "regulatory relief" bill introduced in 1995 (S.650) and there are still the same problems with it. The proposed language is subtle but bad for consumers.

Currently, the FDCPA provides consumers the essential right to ensure that the debt which the collector is seeking them to pay is really owed by that consumer, or has not already been paid. This right is referred to as "the right to validation." The law requires that in the initial communication with the consumer, the debt collector must provide consumers with a statement that the consumer has thirty days to notify the collector and request verification of the debt. This is intended to minimize instances of mistaken identity of a debtor or mistakes over the amount or existence of a debt.

The problem arises when the information providing the consumer notice of this important right is accompanied by insistent demands for payment of the debt within that 30 days. In many cases, the overriding message the consumer receives is that the debt must be paid immediately, not that the consumer has 30 days in which to request verification of the debt to assure that the consumer really owes the requested amount.

In the leading case on the placement of a validation rights notice, the U.S. Court of Appeals required that the validation notice "must be large enough to be easily read and sufficiently prominent to be noticed--even by the least sophisticated debtor. Furthermore, to be effective, the notice must not be overshadowed or contradicted by other messages or notices appearing in the initial communication from the collection agency."

In that case the validation rights notice failed these tests because it was dwarfed and contradicted by the dunning message. As the court said:

Other examples in the courts of overshadowing and misleading notices include:

The effect of the amendment in S. 1405 would be to overrule these cases prohibiting the overshadowing. The collection activities would proceed in such a way as to obliterate the consumers’ notice of the essential right to obtain validation.

While it would clearly be preferable for there to be no amendments to this section of the FDCPA, there is, however, a compromise possible. The debt collectors want to be able to continue to collect a debt during the 30 day waiting period. Consumer advocates want to ensure that while the debt collectors are pursuing these debt collection efforts, the notice of the right to validation is not overshadowed. Both these goals can be accomplished by rewriting the new subparagraph (d) of § 1692g as follows:

4) Section 207(d) would exclude from the FDCPA all communications to collect debts owed under the Higher Education Act. This proposed amendment to the Fair Debt Collection Practices Act (FDCPA) would exclude from coverage any collection abuse relating to a student loan made pursuant to the Higher Education Act (HEA), no matter how egregious that practice and even when the abuse is perpetrated by a private for-profit collector hired by a private enterprise.

Student loan debtors in default are many types of people with many reasons for their default. Perhaps the most common category is low income consumers who went to for-profit trade schools that swindled them and then closed down, leaving the students without any of the promised job skills and thus with no financial ability to repay the loans. Other borrowers in default are those who have become disabled, lost their job, or who are otherwise financially unable to keep up with loan payments. Those financially able should repay their student loans, but no American should be subjected to illegal debt collection harassment.

Private student loan collectors generally engage in some of the worst collection abuses. Consumers from all over the country report some of the worst collection abuses by private collectors hired on a commission basis to collect on student loans. These private bill collectors can have portfolios exceeding 100,000 loans; their only interest is to recover as much money at as little cost to them as possible.

Collectors are already flaunting congressional directives. The last reauthorization of the Higher Education Act and subsequent Congressional legislation created mechanisms to reduce defaults and also provided students in default with various rights, protections, and repayment plans. Private collectors typically are the only entities providing initial information to students about these rights and repayment plans. Unfortunately, we have seen evidence that private collectors are systematically misrepresenting and concealing these basic rights -- reasonable and affordable payment plans, closed school and false certification discharges, consolidation loans, the ability to avoid garnishment and tax intercepts through repayment plans, and the like. This is not surprising because collectors make little money if a student makes small affordable payments over a period of years or if the student receives a loan discharge because the school defrauded the student. These collectors instead try to squeeze out unaffordable amounts right away.

The effect of the amendment in S. 1405 would not be to protect the Student Loan Program, only abusive private debt collectors. Already the FDCPA does not apply to federal or state agencies, and there is thus no question of the FDCPA applying to the Department of Education or a state-run guaranty agency. The only parties who would profit by this amendment would be private entities who are in the business of collecting debts in default and who violate the standards set out in the federal statute. 31 United States Code § 3718(a)(2) requires that all private collectors hired by executive or legislative agencies of the United States must be subject to all federal laws relating to debt collection. There is no reason to provide special treatment to collectors hired by the Department of Education, when private collectors hired by other federal agencies must comply with the FDCPA. In addition, all private collectors in their contracts with the Department of Education agree to be bound by the FDCPA, and the Department has had no difficulty in finding collectors to sign such contracts. Why deprive Americans of this important protection from debt collection harassment when collectors readily agree to this liability?

There are a number of rationales offered for exempting communications made to collect loans made under the Higher Education Act, none survive close scrutiny:

It would be unseemly for the United States to sanction worse collector behavior when these collectors represent the United States or a state guaranty agency then when these collectors represent credit card issuers, finance companies, and banks. The United States certainly wants to recover on defaulted student loans, but it need not do so by encouraging private entities to lie and harass America's youth and others seeking to improve themselves through education.

The FDCPA is the only federal control over private collectors collecting on student loans. The exclusion proposed in S. 1405 would provide carte blanche to these collectors. Even if the Department of Education could effectively regulate the collectors the Department hires when they collect on millions of accounts, the amendment also gives free reign to the even larger group of collectors hired by guaranty agencies, schools, and lenders.

The proposed amendment would exempt all private collectors collecting under the HEA, even those working for private entities. The exemption would insulate from liability for abusive, harassing, deceptive or unfair collection activities:

• the illegal practices of private for-profit collection agencies hired by trade schools and other schools to collect on Perkins Loans;
• the illegal practices of private for-profit collection agencies hired by lenders and other private investors to collect Family Federal Education Loans (FFEL) (the new name for guaranteed student loans) that have lost their guaranteed status because of lender impropriety;
• the illegal practices of private for-profit collection agencies that are hired by such private entities as USA Funds to collect on FFEL loans;
• the illegal practices of private for-profit collection agencies hired by state guaranty agencies and the Department of Education; and
• the illegal practices of private guaranty agencies.