Responding to vehement industry complaints, the Federal Reserve Board has backed off a plan to force banks to disclose debt-cancellation fees in loan finance charges.
The fees fund agreements to cancel all or part of a borrower's debt in the event of death or disability. The latest proposal, made May 9, would alter Regulation Z, which implements the Truth-in-Lending Act.
Under the plan, if someone knowingly bought the agreement, was told the fee amount, and signed something to confirm the fact, then the cost wouldn't need to be part of the finance charge.
This plan is a reversal of the Fed's Dec. 7 proposal to change the Truth-in-Lending staff commentary. That proposal would have allowed states to determine how the fees were disclosed.
The December plan angered bankers, who called for a single national policy. That's what the Fed has provided now, and the industry approves.
"The other proposal was going to create a lot of confusion and difficult compliance," said Steven I. Zeisel, senior counsel at the Consumer Bankers Association. "This is clear and straightforward across the board. People will be comfortable with this one."
Compliance with the rule has varied from state to state. That "drove nationwide creditors bonkers," said Edwin Schmelzer, a partner with the Bryan Cave law firm in Washington.
Several states treat the fees as finance charges that trigger additional disclosures. Others treat all debt cancellation agreement fees as insurance, a product that falls outside Truth-in-Lending's jurisdiction.
The new proposal incorporates the latter view, as the industry suggested.
"This is exactly what we told them they should do," Mr. Schmelzer said. "It's a step in the right direction."
The proposal also includes changes Congress made last year to the Truth-in-Lending Act. For example, all fees paid to a mortgage broker by a borrower would have to be included in the finance charge. Also, the finance charge for a loan secured by dwellings or other real estate would be considered accurate if overstated by any amount or understated by $100 or less.
Comments are due June 21, and a final rule is expected in September.
