The Federal Reserve yesterday proposed simplifications in the Truth in Lending Act that it claims will benefit both consumers and credit grantors.
Since the law was passed a little more than a decade ago, its scope has enlarged to include not only required disclosure of finance charges on credit purchases, but also the issuance of credit cards, liability for their loss, resolution of billing errors, disclosures for leases and other consumer protections.
The statute, as amended over the years, runs more than 153 pages and 15,000 words, yet remains ambiguous. Consequently, it has spawned 13,000 lawsuits and more than 1,500 interpretations of regulations by the Fed staff. It is still so complicated that a survey done two years ago showed that 80 percent of the nation's banks were not in compliance with the law.
The proposed modifications are intended to reduce litigation and creditors' costs, which are eventually passed on to the consumer. The basic changes are the following:
The regulation will contain precise language indicating which creditors must make disclosures. Moreover, the requirements will apply only to written contracts, not informal arrangements. An exemption will be made for "points;" the lender will no longer have to include these up-front fees in calculating the true finance charges on a home mortgage.
It will allow for a margin of error of 1/8 of 1 percent in determining the annual percentage rage on ordinary credit transactions. For those involving irregular payments, the tolerance is raised to 1/4 of 1 percent. This is intended to remove a lender's liability for slight errors.
Requisite information will be limited to that necessary for the consumer to compare credit costs before making the initial transaction. The creditor won't have to bother with calculating items such as how prepayment penalties or refinancing costs, for example, affect a loan. One exception is assumption of a residential mortgage that does require a new disclosure statement of rates.
The regulation will no longer cover such unusual credit transactions as utility budget plans to level out payments, layaway plans or pawn shop loans.
Creditors will be allowed some flexibility in choosing a disclosure statement that best explains their own terms. For example, automobile sellers will have the option of figuring factory or dealer cash rebates into the finance charges on a car.
Comments will be accepted until Jan. 19. The Fed will also draw up model forms for creditors to use and issue periodic commentaries on the rules in layman's language.
The Fed also proposed yesterday to speed up the process of reviewing protested applications for new bank branches. The protests come from groups arguing that a bank that has discriminated in its lending practices against a certain community should not be allowed to establish business operations elsewhere. The process now takesd more than six months. The Fed would accelerate it by enforcing the time limits allowed groups for comment and permitting review by district Federal Reserve Banks.
In a related development, the Federal Home Loan Bank Board yesterday approved regulations allowing savings and loan associations to offer trustee services to their customers starting Jan. 1.