WASHINGTON - Consumer advocates and bankers, who have long argued that credit card and other lending disclosures are flawed but disagreed about how to fix them, now have a chance to present arguments to regulators.
The Federal Reserve Board launched a review this month of disclosures and protections for credit card borrowers. The review is the first part of an expansive overhaul of Truth-in-Lending rules, which is expected to take several years; in addition to credit cards, it will cover mortgage lending, other types of closed-end credits, and home equity lines of credit.
"There are some basic philosophical issues about whether there is information overload at the consumer level," said former Delaware Bank Commissioner Timothy R. McTaggart, now a partner in the Washington office of Willkie Farr & Gallagher LLP. "I think there is a frustration on the consumer side, as well as the industry side, that there is a wide variety of obligatory disclosures that might not be meaningful."
The Fed has not taken such a broad look at its Truth-in-Lending rules, known as Regulation Z, since 1981. Consumer advocates are expected to argue for stronger consumer protection, while bankers are expected to argue for less burdensome disclosures. The Fed will probably look for common ground.
"In reviewing Regulation Z, the Board's primary goal is to improve, if possible, the effectiveness and usefulness of open-end disclosures and substantive protections," the Fed said when it announced its review.
The purpose of the Truth-in-Lending Act, which was enacted in 1968, was to provide meaningful disclosure of credit terms and to protect consumers, the Fed said. Though it does not regulate the bank subsidiaries of most major credit card lenders, it has sole discretion to write regulations that implement the law and has prescribed standards for disclosure, resolving errors, and computing credit costs.
Bankers and consumer advocates have occasionally disagreed with the Fed over its enforcement of the law, and the review is expected to spark additional debate about the law's application.
In May the Fed proposed changes to its policies on overdraft protection; the proposal would have required banks and thrifts to give customers more disclosures on fees for such services. The Fed proposed issuing those disclosures under the Truth-in-Savings Act; issuing them under Truth-in-Lending would have required the bank or thrift to disclose the fees in a way similar the way it discloses loans. (For example, the disclosure would have had to include annual percentage rates for the fees.)
Comments on that proposal were due in August, but the Fed has yet to finalize it.
Much of the dissatisfaction with Truth-in Lending concerns its credit card requirements.
"The Truth-in-Lending Act plays an important role, but the disclosures required in credit card lending are not adequate to protect consumers," said Edmund Mierzwinski, the consumer program director at the U.S. Public Interest Research Group. "They have become boilerplate, and consumers' eyes glaze over when they see them."
Many consumer advocates have been critical of open-end credit disclosures, which, they say, do not alert customers as to how long it might take to pay off revolving debt. Lenders have countered that card payments are not easy to predict, because debt levels change with each purchase or payment.
"The fundamental problem" with Truth-in-Lending when it comes to credit cards will be solved only when the Fed realizes that "open-ended credit needs the same kinds of disclosures as closed-end credit," like mortgages and auto loans, Mr. Mierzwinski said.
Aside from some of the broader issues, the Fed's review will probably tackle disagreements that have emerged as technology and lending practices have changed since the 1981 review.
L. Richard Fischer, a partner with Morrison & Foerster LLP, said banks and consumer advocates have disagreed about how to categorize fees that card companies charge for online bill payment - particularly whether the fees should be included in the annual interest rate disclosure.
"Technology has kind of gone past the requirements," Mr. Fischer said.
The Fed also said it would examine the usefulness of the Schumer Box, a mandatory statement of terms and conditions required by the Fair Credit and Charge Card Disclosure Act of 1988, which was authored by Sen. Charles E. Schumer, D-N.Y.
Last year the Fed seemed ready to revamp disclosure requirements for a number of its regulations. It proposed a uniform standard for "clear and conspicuous" disclosure that would have applied under regulations for the Truth-in-Lending Act, the Truth-in-Savings Act, the Equal Credit Opportunity Act, and electronic fund transfers, among other things. However, the Fed withdrew that proposal in June and said it would instead address disclosures specific to each area. Regulation Z is the first rule it has addressed since that decision.
The Fed signaled the broad scope of the changes it is considering to the Truth-in-Lending Act regulation by issuing an advance notice of proposed rulemaking, and it asked for comments by March 28.
But the Fed also said that it has authority to change only the regulations interpreting Truth-in-Lending, and that those advocating sweeping changes must look to Congress.
