Lenders praised a Federal Reserve Board proposal giving them more leeway in calculating mortgage finance charges under Regulation Z.
But the change to Truth-in-Lending rules still won't eliminate the tidal wave of lawsuits charging bankers with violating the disclosure law, according to comment letters filed by June 21 with the Fed.
"It is a giant step forward," wrote Carroll F. Pribble, vice president in charge of lending at Mather Federal Credit Union in Rancho Cordova, Calif. "However, as long as there are loopholes, there will be attorneys to press the envelope."
Currently, a lender can be liable if the finance charge revealed at a mortgage closing is more than $10 off the actual amount. The proposal would eliminate liability for overstating the cost and would raise the ceiling for understating costs to $100 in most cases.
Many bankers welcomed the Fed's plan to remove penalties for overstating finance charges, saying the restrictions weren't serving any purpose.
"It's difficult to imagine how a consumer is harmed if a creditor overdiscloses the amount of the finance charge or APR," wrote John H. Huffstutler, chief regulatory counsel at Bank of America in San Francisco.
Bankers have long contended that the current tolerances are so low that a small miscalculation can cost them thousands of dollars in lawsuits. They point to the hundreds of suits that have been filed in the past few years against banks whose calculations were off by less than $100.
"These interpretations will provide relief to lenders that might otherwise have found themselves victimized by minor errors in the finance charge that resulted in overstatements, rather than providing windfalls to customers who have suffered no harm," wrote Sherwin F. Root, senior counsel at Home Savings of America in Irwindale, Calif.
The change contains a major exemption for borrowers who default on their loans. These borrowers can sue if the finance charges were off by more than $35.
Bankers complained that this loophole effectively dropped the threshold for suits to $35, because an institution cannot know in advance if a borrower will default.
Ken Weaver, compliance officer at Lockheed Federal Credit Union in Burbank, Calif., said this aspect of the proposal is unfair because it exposes bankers foreclosing on properties to increased liability.
"This seems to add insult to injury," Mr. Weaver said.
Other bankers complained that the Fed had not explained the rule well enough.
Becky Bockoven, lending compliance officer at American Federal Bank in Greenville, S.C., called the new proposal "undeniably complex" and asked the Fed to release additional guidance on the rules.