FTC Staff Comment Before the Federal Reserve Concerning Proposed Revisions to the Regulation of Home Equity Lines of Credit Under TILA

BUREAU OF
CONSUMER PROTECTION
UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580
V920007
.COMMISSION AUTHORIIED
February 	28, 	1992
William W. 	Wiles, 	Secretary
Board 	of 	Governors 	of 	the 	Federal 	Reserve 	System
Washington, 	D.C. 	20551
Dear Mr. 	Wiles:
The 	staff 	of 	the 	Division 	of 	Credit 	Practices, 	Bureau 	of
Consumer 	Protection 	of 	the 	Federal 	Trade 	Commission 	(FTC)
appreciates 	this 	opportunity to 	comment 	on 	the 	Federal 	Reserve
Board's 	(Board) 	proposed 	revisions 	to 	RegUlation 	Z, 	the
implementing 	regulation 	for 	the 	Truth 	in Lending Act 	(TILA),
regarding 	home 	equity 	lines 	of 	credit. 1 	The 	Board 	requested
comment 	on 	possible 	changes 	to 	these 	requirements 	in view of 	the
united 	States 	Court 	of Appeals' 	examination 	of various home
equity 	credit 	line 	issues 	raised 	in 	recent 	litigation, 	in
Consumers Union v. 	Federal 	Reserve 	Board, 	938 	F.2d 	266 	(D.C.
Cir.). 	Our comments 	focus 	on proposed 	revisions 	to 	the 	teaser
rate 	and 	payment 	example 	requirements 	of Regulation 	Z.
1 	The 	Commission 	enforces 	the 	Truth 	in 	Lending Act 	and
its 	implementing Regulation 	Z 	for 	finance 	companies, 	mortgage
companies, 	retailers, 	and 	the vast majority 	of 	other non-
federally 	chartered 	or 	federally 	insured 	financial 	entities. 	See
section 108(c) 	of 	the 	TILA. 	In conjunction with 	its 	enforcement
experience, 	the 	Commission 	and 	its 	staff 	have 	submitted comments
to 	the 	Federal 	Reserve 	Board on many 	prior 	occasions 	and have
commented to 	numerous 	state 	agencies 	on 	proposed 	legislation.
These 	comments 	represent 	the 	views 	of 	the 	Division of
Credit 	Practices 	of 	the 	Federal 	Trade 	Commission. 	They 	do 	not
necessarily 	represent 	the 	views 	of 	the 	Commission 	or 	any
individual 	Commissioner.

William W. 	Wiles, 	Secretary 	-- 	Page 	Two
I. 	Teaser Rate 	Requirement
The 	Home 	Equity 	Loan 	Consumer 	Protection Act, 	amending the
TILA, 	provides 	that 	creditors must 	state 	any 	initial 	"teaser" 	or
discounted 	rate 	in 	preapplication 	disclosures. 	More
specifically, 	if 	an 	initial 	annual 	percentage 	rate 	is 	offered
that 	is 	not 	based 	on 	an 	index, 	creditors 	must 	disclose 	a
"statement of 	such 	rate 	and 	the 	period 	of 	time 	such 	initial 	rate
will 	be 	in 	effect." 	section 	l27A(a) (2) (C) (i) 	of 	the 	TILA •
. , )
In 	implementing 	this 	requirement, 	the 	Board 	did 	not 	require
that 	the 	rate 	itself be 	stated. 	Rather, 	the 	Board 	required
creditors 	to 	disclose 	the 	fact 	that 	the 	initial 	rate 	is
discounted, 	state the 	period 	of time 	the 	discounted 	rate will 	be
in 	effect, 	and 	alert 	consumers 	to 	"ask about" 	the 	current
discount 	rate value. 	In 	promulgating this 	provision, 	the 	Board
relied 	on 	its 	broad 	implementing 	authority granted 	by 	section 	105
of 	the 	TILA,2 	duly 	recognized 	by 	the United states 	Supreme
Court. 3
The 	Board now 	asks 	whether 	this 	regulatory 	language 	should
be 	retained 	or 	revised. 	If 	revised, 	the 	Board 	asks 	whether the
regulatory 	language 	should more 	closely track the 	statutory
language, 	requiring 	creditors 	to 	state 	the 	discounted 	rate 	itself
and 	deleting 	the 	statement 	telling 	consumers 	to 	"ask about" 	the
current 	discount. 	.
In 	our view, 	amending Regulation 	Z to mandate 	disclosure of
the 	specific 	teaser 	rate 	associated with 	an 	offer 	of 	a 	home
equity 	line 	of credit 	is 	unnecessary 	and 	is 	likely 	to 	impose
costs 	on 	creditors 	that 	are 	not 	offset by 	any 	consumer gains. 	As
the 	Board 	noted 	in 	its 	request 	for 	comments, 	it 	is 	in 	the
interest 	of 	lenders 	to convey 	these 	promotional 	rates 	to
potential 	borrowers. 	Because 	the 	discounted 	rate 	may change
frequently, 	requiring 	disclosure 	of 	this 	particular value 	could
obligate 	creditors 	continually 	to 	revise 	preprinted 	forms 	or
update 	inserts. 	Lenders 	apparently 	find 	it 	less 	costly to 	convey
such 	information 	orally 	(or 	in 	other manners) 	rather 	than 	to
revise 	preprinted 	forms 	each 	time 	the 	discounted 	rate 	changes.
2 	Under Section 	105 	of 	the 	TILA, 	regulations 	may 	contain
such 	classifications, 	differentiations, 	or other provisions, 	and
may 	provide 	for 	such 	adjustments 	and 	exceptions 	for 	any 	class 	of
transactions, 	as 	in 	the 	judgment of 	the 	Board 	are 	necessary or
proper 	to 	effectuate 	the 	purposes 	of 	the 	TILA to 	prevent
circumvention 	or evasion 	thereof, 	or to 	facilitate 	compliance.
3 	Anderson 	Bros. 	Ford v. 	valencia, 	452 	U.S. 	205 	(1981);
Ford 	Motor 	Credit 	Co. 	v. 	Milhollin, 	444 	U.S. 	555 	(1980).

· I
William' W. 	Wiles, 	Secretary 	-- 	Page 	Three
Under 	these 	circumstances, 	permitting 	lenders 	to 	disclose 	this
information 	orally 	(or 	in 	other manners) 	appears 	more 	efficient
and 	unlikely 	to 	disadvantage 	consumers.
As 	noted, 	Section 	lOS 	of 	the TILA confers broad 	authority 	on
the 	Board 	to 	implement 	the 	statute 	to 	prevent 	circumvention or
evasion 	as 	well 	as 	to 	facilitate 	compliance. 	Therefore, 	and 	for
the 	above 	reasons, 	we 	believe 	that 	the 	Board's 	approach 	to 	this
issue 	is 	reasonable 	and 	that 	the 	current 	language 	of 	the
Regulation 	on 	this 	issue 	should 	stand.
II. 	Payment 	Examples 	Requirement
Under 	Section 	127A of 	the 	TILA, 	three 	types 	of payment
examples 	must 	be 	provided 	for 	home 	equity plans: 	1) 	an 	example
showing 	the 	minimum periodic payment 	and 	amount 	of 	time 	needed 	to
repay 	the 	line, 	based 	on 	a 	$10,000 	balance 	and 	a 	recent 	annual
percentage 	rate 	(the minimum payment 	example); 	2) 	a 	statement 	of
the minimum periodic payment based 	on 	a 	$10,000 	balance when 	the
maximum 	annual 	percentage 	rate 	is 	in 	effect 	(the worst 	case
example); 	and 	3) 	an 	historical 	table, 	based on 	a 	$10,000
extension 	of 	credit 	showing how annual 	percentage 	rates 	and
payments 	would 	have 	been 	affected 	by 	index value 	changes 	over the
most 	recent 	IS-year period 	(the 	historical 	example). 	Under the
statute, 	the 	worst 	case 	example 	and 	the 	historical 	example must
be 	stated 	"for each 	repayment 	option" 	under the 	plan.
In 	implementing these 	requirements, 	the 	Board allowed
creditors 	to 	provide 	representative 	examples 	of 	the various
payment 	options 	offered, 	rather 	than 	requiring 	separate 	examples
for 	each 	payment 	option. 	More 	specifically, 	the 	Board 	created
three 	categories 	of payment 	options: 	1) 	plans 	that 	permit
minimum payment 	of 	only 	accrued 	finance 	charges 	(interest-only
plans); 	2) 	plans 	in which a 	fixed 	percent 	or 	fraction 	of 	the
outstanding balance 	is used 	to 	determine 	the 	minimum 	payment; 	and
3) 	all 	other 	types 	of minimum payment 	options. 	In 	this 	manner,
no 	matter 	how many 	payment 	options were 	offered, 	creditors would
never have 	to 	state more 	than 	three minimum payment 	examples,
three 	worst 	case 	examples, 	and 	three 	historical 	examples.
(Creditors 	must 	also 	narratively describe 	all 	their 	payment
choices). 	The 	Board developed 	this 	approach 	to 	avoid
"information 	overload" 	to 	consumers, 	and 	it 	requests 	comment 	on
whether 	the 	payment 	example 	rules 	should be 	retained 	or 	revised.
We 	do 	not 	believe the 	Board's 	requirements 	for 	home 	equity
payment 	examples 	should be 	expanded. 	Many 	creditors 	offer a 	wide
variety 	of 	payment 	options. 	It would 	be 	unreasonable 	-- 	and
highly 	costly 	-- 	to 	require 	lenders 	to 	disclose 	the 	details 	of
each 	of 	these 	plans 	in 	these 	disclosures. 	As 	the 	Board has
noted, 	requiring a 	worst 	case 	example 	and 	an 	historical

· ~.
'j
William W. 	Wiles, 	Secretary 	-- 	Page 	Four
example 	for 	every payment 	option 	could 	provide more material 	than
consumers 	could 	reasonably 	digest 	regarding 	the 	plans 	available.
It 	could 	also 	prove 	so burdensome 	that 	lenders might 	narrow 	the
payment 	plans 	offered to consumers, 	which may 	not 	serve
consumers' 	interests. 	The variety 	of payment options 	on 	the
market 	at 	present 	benefits 	consumers 	and 	enables 	consumers 	to
select 	the 	plan 	that 	is 	best 	tailored 	to 	their 	individual 	needs.
The 	Board's 	reliance 	on Section 	105 	of 	the 	TILA 	to 	support
this 	approach 	is 	appropriate. 	The 	Board has 	sought to 	ensure
disclosure 	of 	information that will 	facilitate 	the 	home 	equity
line 	choice 	and 	that 	at 	the 	same 	time 	is 	reasonable 	and
practicable 	for 	lenders 	to provide.
Thank you 	for 	consideration 	of 	these 	views.
Sincerely,
(;~he~/)Division 	of 	Credit 	Practices
Bureau 	of 	Consumer 	Protection