MADISON, Wis.-Credit unions are being cautioned that despite the Consumer Financial Protection Bureau's efforts to streamline lending disclosures, at least initially the regulatory burden may not be so simple.
Bill Klewin, lending product compliance leader for CUNA Mutual Group, has suggested that some of the lending disclosure form changes the CFPB is piloting with its "Know Before You Owe" initiative may result in CUs initially doing more staff training and member education.
One big change being presented by the CFPB is eliminating APR as the focus in mortgage disclosures, said Klewin, which he expects will confuse borrowers. "It feels like its back to the future. Current disclosures have tried to make people understand that APR is the best way to understand the true value of a loan, and now the CFPB says 'maybe not.'"
During a recent Discovery Webinar, Klewin reiterated that one of the basic tenants of Truth In Lending has been APR.
"APR was intended to make it easier for consumers to shop for credit," said Klewin, who said that under the proposed new mortgage disclosures that interest rate sections are blown out. "The proposed documents are very different from Truth In Lending. This means you will have to retrain staff on what the mortgage lending documents mean and say. You will also likely be spending more time with borrowers to explain the difference between interest rates, fees, charges, and other costs they may pay. The proposed disclosure changes are radical."
Proposed mortgage rules are expected to be released in July with final rules next January, Klewin explained. Mandatory compliance is January 2014.
Credit Card Disclosures
It is a little less clear what financial institutions can expect to see with credit card disclosures, said Klewin. Overall, the CFBP is moving toward one simplified agreement. "The CFPB is making it as simple as possible for people to understand credit card disclosures, rather than having them seem opaque and full of text. When the CFPB took over these rules, they said people are confused by what they are reading and there is a way to make credit card disclosures better."
Klewin shared that the CFPB is proposing streamlining credit card disclosures to make the most important aspects of the documents stand out, moving much of the legal text and detailed definitions regarding aspects of credit card lending, such as cash advances, from the main body of the disclosure to secondary pages linked to on an electronic document. "So the term cash advance will be highlighted and you will click on it for the detailed explanation. This will make the documents less cluttered."
However, with paper disclosures, the CU will have to print out the pages that carry the explanations of terms and some of the legal text. "But if you eliminate a lot of legal text from the contract, will the contract be enforceable by a court? Lawyers will have to go at this. This is an interesting concept."
Klewin acknowledged that compliance is expensive and time consuming.
"It can wake you up in the middle of the night wondering if you made a mistake and will get sued. That is not the approach we should be taking going forward. Executives and boards must be made aware of the importance of regulatory compliance, and that this can be a differentiator for the credit union. Don't find a way around compliance, but embrace it as something you can do to protect your members, and let them know that."
A 'Higher Priority'
However, to fully embrace compliance, especially with the focus from the CFPB, will likely require adding staff and improving the skills of compliance staff already on board-as well as changing who the compliance department reports to, noted Klewin. "That's the most important step. Compliance should report into a part of the organization that will help them make an impact. Compliance needs to become a higher priority."
