Bureau's efforts mostly endorse HUD's concepts--so you'd better comment now

*   *   *

Ah, the evolution of Truth in Lending ...

 

Recent news from the Consumer Financial Protection Bureau takes one back ...

 

In the beginning ...

We started out in the late 1960s with Truth in Lending and Regulation Z. When it was printed, the entire publication--regulation and statute--totaled fewer than 30 pages.

 

Short as it was, that first version of Regulation Z was never easy to understand or work with.

 

There were several reasons why this first version of Reg Z was confusing. It was the first time that the Federal Reserve Board staff had worked with consumer protection regulations. Sorting out and organizing the issues was not easy. And the statute itself didn't help.

 

Creditors asked lots of questions and Fed staff answered them--letter by letter by letter. Fed staff kept these letters neatly organized in three-ring binders. But there was no systematic way for providing these interpretations to creditors.

 

So a decade later, along came Truth in Lending simplification, affectionately known as "Simp." 

 

Life with "Simp"

Simp was a big improvement on the previous regulation. For one thing, it was better organized. Open-end and closed-end rules were treated separately. This separation made the regulation easier to understand and the rules easier to follow. When a question came up, one knew where to look for an answer.

 

Along with Simp came the Official Staff Commentary (OSC). The OSC was based on all those letters issued over the previous decade and nicely organized into units that referred to the part of the regulation being interpreted.

 

With Simp came clarity.

 

Unsimping Simp

And then, Congress got into the act, adding new provisions to the act that effectively de-simplified Truth in Lending.

 

There were new rules on home equity loans and credit cards. There were even more new rules addressing mortgage lending, ranging from pricing to permitted and prohibited practices.

 

Truth in Lending had been Unsimped. Finding answers is no longer easy. As was the case before Simp, creditors must wade and wander through several or all parts of Regulation Z to find answers.

 

But compared to the Department of Housing and Urban Developments RESPA regulations, Reg Z was a cakewalk.

 

At least Z had clear definitions. (OK--figuring out what is or isn't a finance charge has never been easy.) Z was organized--more or less--by type of credit or activity.

 

RESPA,  the Real Estate Settlement Procedures Act, on the other hand, has murky definitions, sections that don't talk to each other, and only sporadic interpretations. RESPA lacks any underlying organization.

 

Enter the Bureau

Several years before CFPB was created by the Dodd-Frank Act, both HUD and the Federal Reserve conducted studies with consumers to understand how consumers would react to and use different disclosure formats. The results were quite different.

 

• HUD produced the new good faith estimate (GFE), which worked so "well" that lenders had to simultaneously produce an old-format "worksheet of settlement costs" to help consumers understand the new GFE. Great! Three pages of disclosures instead of one . . . and consumers understood less.

 

• The Federal Reserve's research resulted in a very different approach. Disclosures were displayed in boxes that could be organized to clearly present the key terms of the loan. While fairly detailed and complicated, consumers liked the results. And the research produced formats that they could and would use and understand.

 

So guess which regulation the CFPB is using to merge TILA and RESPA disclosures?

 

Déjà vu all over again, for HUDspeak

The proposed disclosure formats look strikingly like the GFE--the new one that consumers don't like and don't understand--with a few TILA items included.

 

Like the Fed and HUD, the CFPB used a research firm to help with development of the merged disclosure form. Of course, since they used the same firm that HUD had used, it should come as no surprise that the result looks an awful lot like HUD's GFE and is missing some of the best features that the Fed's research firm had developed.

 

As for changing Regulations X and Z, it looks like the Regulation X concepts were pushed into Regulation Z rather than the other way around. The proposed changes to Regulation Z are massive, compared to a few little edits of Regulation X.

 

Clearly CFPB is having a love affair with HUD's work and is rejecting the work done by the Fed. Since the Fed tested consumer understanding as well as consumer preferences on format, it is a shame to have the Fed's work thrown out.

 

And Simp? 

 

Gone, simply gone.

 

So now what? 

 

This process is open for comment and it is time to have your say. 

 

Disclaimer: Lucy Griffin's views are her own, and not necessarily those of the American Bankers Association.

 

• About Lucy Griffin "Lucy and Nancy's Common Sense Compliance" is blogged by both Lucy Griffin and Nancy Derr-Castiglione, both longtime ABA Banking Journal contributing editors on compliance.

• Lucy, a Certified Regulatory Compliance Manager, has over 30 years experience in compliance. She began as a regulator, including stints with the Federal Reserve Board, the Federal Trade Commission, and the Federal Home Loan Bank Board. For many years she managed the ABA Compliance Division. Since 1993 she has served as a compliance consultant as president of Compliance Resources, Inc., Reston, Va. She is also editor of Compliance Action newsletter and senior advisor with Paragon Compliance Group, a compliance training firm. 
   
  In addition to serving as a Contributing Editor of ABA Banking Journal, Lucy serves on the faculty of ABA's National Compliance Schools board. For more than a decade she developed and administered the case study at ABA's National Graduate School of Compliance Management. She can be reached at lucygriffin@earthlink.net