Industry officials have a blunt message for Federal Reserve Board staffers revising the Truth-in-Lending Act rules: Propose substantial changes or don't bother at all.
"It can't be change for the sake of change," said Nessa Feddis, senior federal counsel at the American Bankers Association. "It has to be a simplification that is worth doing."
"If it is a minimal change, then don't do it," agreed Robert G. Rowe, regulatory counsel at the Independent Bankers Association of America.
What industry officials are concerned about is a report issued last week by the Fed's Consumer Advisory Council, a group that meets quarterly to help the central bank tackle regulatory issues.
The report recommends several ways to simplify the home buying process.
One proposal would eliminate duplicative closing-cost estimates. Currently, bankers must provide separate Truth-in-Lending and Real Estate Settlement Procedures Act disclosures when an application is approved and again when a loan is finalized. The new rule would allow a bank to make a single disclosure within three days of approving the loan. This estimate would be updated at closing.
The council also wants to make it easier for borrowers to learn their rights and responsibilities. Rather than four separate documents explaining this, the council recommended creating a single form with all the information.
The group also wants the Fed to require banks to list all of the closing costs on a single form. Many banks now use two sheets: one contains boiler-plate disclosures, and the second is customized for the particular loan.
Finally, the council recommended adding a summary sheet explaining every document included in the mortgage closing process.
These proposals will form the foundation of the Fed's recommendations to Congress on reforming the Truth-in-Lending Act and the Real Estate Settlement Procedures Act.
For reform to make sense, however, the savings from the changes must be greater than the cost of retraining loan officers and establishing new compliance procedures.
"In theory, it sounds like this will be good for banks," Ms. Feddis said. "Certainly simplification and abbreviation of existing disclosures is wanted. But the problem sometimes arises that while there can be some simplification, the change itself can be more burdensome than the existing regulations."
Mr. Rowe noted that a single list of disclosures could prove disastrous if it wound up being a dozen or more pages long.
"If you can put all that in one form and make it simple, that is great," he said. "But this might be a 20-foot form. Then I'm not so sure it would be helpful."
Also, Mr. Rowe questioned the need for a summary sheet, noting that the Department of Housing and Urban Development already produces a booklet explaining the closing process.
So what does the industry want? Ms. Feddis said the Fed should drop the annual percentage rate, which is difficult to calculate. Instead, banks would disclose the interest rate and all the fees charged.
Also, she said regulators should make it harder for consumers to use the right of rescission, which lets customers void their loans if they received inaccurate closing-cost disclosures. Neither of these items was included in the advisory committee's report.
Industry officials weren't the only ones questioning the impact of the proposed revisions. UMB Mortgage Co. president Reginald J. Smith, who chaired the committee that drafted the council report, urged the Fed to conduct a study to see if changes would really help consumers understand all the disclosures.