[Congressional Record Volume 141, Number 153 (Thursday, September 28, 1995)]
[Senate]
[Pages S14566-S14568]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
TRUTH IN LENDING ACT AMENDMENTS
Mr. GRAMM. Mr. President, I ask unanimous consent that the Senate
proceed to the immediate consideration of H.R. 2399 just received from
the House.
The PRESIDING OFFICER. The clerk will report.
The assistant legislative clerk read as follows:
A bill (H.R. 2399) to amend the Truth in Lending Act to
clarify the intent of such act and to reduce burdensome
regulatory requirements on creditors.
The PRESIDING OFFICER. Is there objection to the immediate
consideration of the bill?
There being no objection, the Senate proceeded to consider the bill.
Mr. D'AMATO. Mr. President, I rise today to voice my support for the
Truth in Lending Act Amendments of 1995. Our colleagues in the House
recently passed this legislation. It is the product of bipartisan
cooperation between the Senate and the House. The broad bipartisan
support that this bill has attracted is evidence of the urgency of the
situation that it addresses. As chairman of the Banking Committee, I
believe that immediate action
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is warranted. I would therefore encourage my colleagues to immediately
consider and pass H.R. 2399.
Mr. President, H.R. 2399 is intended to curtail the devastating
liability that threatens our housing finance system in the wake of the
Eleventh Circuit Court of Appeals' recent decision in Rodash versus AIB
Mortgage Co. The Rodash case produced an onslaught of over 50 class
action suits. The majority of these suits demanded the most draconian
remedy available under Truth in Lending--rescission. When a loan is
rescinded, the borrower is released from the obligation under the
mortgage. Currently, there are dozens of Rodash-styled class action
suits pending. If rescission is granted in a class action lawsuit,
every class member would be entitled to reimbursement of all finance
charges, as well as other charges.
The threat of wholesale rescissions presents a real danger to our
modern system of home financing: potential liability that could reach
into the billions. Last spring we enacted H.R. 1380, a class action
moratorium. We enacted this moratorium to allow both Houses time to
craft a solution. The moratorium expires on October 1, 1995--so now is
the time to act.
Mr. President, I cannot overemphasize the threat to our mortgage
lending system and the secondary markets that provide the mortgage
market with liquidity. And we cannot forget that the liquidity of the
mortgage markets has helped millions of Americans obtain their dream of
home ownership at lower costs.
H.R. 2399 is the result of much hard work and represents a
commonsense compromise to a highly technical problem. H.R. 2399
provides greater certainty for lenders without eliminating the
substantive protection available to consumers. I would like to
summarize some of the important provisions of this bill:
First, this bill provides retroactive relief from Rodash-styled class
actions that are pending certification.
H.R. 2399 also clarifies the treatment of certain fees for the
purposes of the Truth-in-Lending disclosures.
This legislation provides greater flexibility, or tolerance, for
honest mistakes that result in technical violations and can produce a
litigation morass. The current tolerances provided under the law are
unreasonably low, especially in the context of the 3-year right of
rescission.
Two tolerances are established for rescission purposes. The tolerance
formulas are based on the size of the loan in question. A smaller
tolerance is established for standard nonpurchase money mortgages. If a
borrower receives money from a refinance, only that money is subject to
rescission. A larger tolerance is available in no new money
refinancings. No new money refinancings are used by consumers to take
advantage of declining interest rates. In these refinancings, no
advances--other than loan proceeds that might be used to finance
closing costs, which are not deemed to be new advances--are received by
the consumer.
H.R. 2399 clarifies the liability of assignees and loan servicers
under Truth in Lending. These clarifications will provide greater
certainty for the secondary market and help enhance liquidity of the
mortgage market in general.
H.R. 2399 also contains substantive protection for consumers. It
retains the 3 day right rescission, and creates a right of rescission
in the mortgage foreclosure context.
The Truth in Lending Act requires lenders to provide consumers with
notice of their right to rescind in certain transactions. However, the
requirements concerning the form of notice to be provided are
ambiguous. This bill eliminates liability when the incorrect form of
rescission notice was given to the borrower in a closed-end transaction
as long as the consumer received a completed form, whether the form was
one of the model forms published by the Federal Reserve Board or a
comparable form. The addition of the requirement that the lender
otherwise complied with all the requirements of this section regarding
notice is intended to make clear that the lender will continue to have
liability for any violation of this title that is unrelated to the form
of notice, such as a misdisclosure of the APR that exceeds the
tolerance. However, the lender will not be penalized for the form of
notice it provided.
While any of us might take issue with any of the particular
provisions in this bill, on balance it represents a workable solution,
and demonstrates congressional resolve in the face of a tremendous
problem. I urge all my colleagues to support this important legislation
and pass it immediately, without amendments.
Mr. SARBANES. Mr. President, I rise in support of H.R. 2399, the
Truth in Lending Act Amendments of 1995. This bill represents a
solution to the so-called Rodash problem.
I would like to begin by commending the chairman of the Senate
Banking Committee, Senator D'Amato, the chairman and ranking member of
the House Banking Committee, Representative Leach, Representative
Gonzalez, Representative McCollum, and Representative Vento for their
cooperation in working out a bipartisan resolution of this problem. In
my view, it responds to legitimate concerns raised by the financial
industry but preserves the basic consumer protections of the Truth in
Lending Act.
The Rodash problem arose from a court decision last year in which
small violations of the disclosure requirements of the Truth in Lending
Act triggered the right of rescission provided by the act. That
decision, in turn, resulted in the filing of class action lawsuits
against creditors for small violations of the disclosure requirements.
The Congress placed a moratorium on such lawsuits in order to provide
time to sort out this issue and clarify the statute. The moratorium
expires on October 1. It is therefore important for the Congress to act
expeditiously on a permanent solution to the Rodash problem.
The House Banking Committee included a response to the Rodash problem
in a larger banking bill reported out of the committee earlier this
year. That bill, in my view, went beyond fixing the Rodash problem. If
passed, it would have weakened the Truth in Lending Act and undermined
critical consumer protections.
In order to enact a solution to the Rodash problem before the
moratorium expires, agreement was reached to try to move the Rodash
package as a separate bill. Negotiations were undertaken between the
House and Senate, and a compromise was reached which is contained in
H.R. 2399. The House passed H.R. 2399 on Wednesday by unanimous
consent. The Senate will do so today.
The bill before the Senate today improves significantly the measure
passed by the House Banking Committee. Under the original House bill,
consumers would have lost the right of rescission for a whole class of
loans even if the most egregious violations of the Truth in Lending Act
were committed. The bill before the Senate preserves that vital
consumer protection.
The original House bill also would have eliminated, for an entire
class of mortgage loans, the borrower's right to a 3-day cooling off
period after closing on a loan. The bill before the Senate retains that
cooling off period.
Moreover, the bill before the Senate protects the most vulnerable
citizens from abusive lenders. It provides consumers with truth in
lending protections when faced with foreclosure. This bill will help
many elderly people keep their homes.
This bill increases the tolerance for statutory damages, lifting the
bar that determines what constitutes a violation. This bill does not
increase the tolerance as much as the original House bill. This is
important because a low tolerance is needed to ensure that consumers
are receiving accurate information about the cost of credit.
This increased tolerance for errors is intended to protect lenders
from the small errors in judgment that occurred in the Rodash case. It
is obviously not intended to give lenders the right to pad fees up to
the tolerance limit of $100. For example, if a delivery associated with
the closing cost on a home mortgage costs $30, $30 should be charged
and disclosed as part of the finance charge. A lender cannot
arbitrarily raise the charge an additional $70 simply because there is
a wider tolerance.
The purpose of the Truth in Lending Act is to require disclosure to
consumers of the cost of their credit. An outstanding problem remains
that there are too many exclusions and exemptions that blur the bottom
line. The
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bill directs the Federal Reserve to report to Congress and develop
regulations to ensure that all charges related to the extension of
credit are included in the finance charges. Lenders and consumers agree
that it is important to alleviate confusion over the treatment of fees
in the finance charge. The Federal Reserve has 1 year to develop these
regulations.
The bill specifically exempts certain charges from the finance
charge, including third party fees, taxes on security instruments, fees
for preparations of loan documents, and fees relating to pest
infestations. The purpose of the exemptions is to provide some clarity
on the treatment of those fees until the Fed acts to ensure that the
finance charge definition more accurately reflects the cost of
providing credit. The fact that these exemptions are included does not
create a presumption or requirement for the Fed to exclude them from
the definition of finance charges. The Fed should include all charges
in the finance charge unless those charges are not related to the
extension of credit. I look forward to the Federal Reserve's action and
I am hopeful this will lead to simpler and more common sense
disclosure.
Mr. President, I am pleased that a reasonable agreement, embodied in
H.R. 2399, has been reached to address the Rodash problem. I urge my
colleagues to support this bill.
Mr. MACK. Mr. President, the Truth in Lending Act Amendments of 1995
will finally bring an end to the massive potential liability facing the
mortgage industry as a result of extraordinary penalties under the
Truth in Lending Act [TILA] for technical errors. Recognizing the
threat to mortgage lending, we placed a moratorium on class actions for
certain technical violations under TILA to give us an opportunity to
develop a solution. The Truth in Lending Act Amendments of 1995 provide
that solution.
This bill does a number of important things. First, it provides
retroactive relief to the mortgage industry from the extreme potential
liability that was caused by the Rodash versus AIB Mortgage Co. case.
This problem, which seriously threatened the viability of residential
mortgage lending in this country including the mortgage-backed
securities markets, was caused by the ambiguity surrounding the proper
treatment of certain charges, and the extremely low tolerance for any
error in making disclosures. The current treatment of fees, such as
mortgage broker fees, has been challenged in litigation. It is not fair
to subject a lender to extreme penalties for their treatment of these
fees, which some are now trying to recharacterize as finder's fees. The
entire industry historically excluded these fees from the finance
charge, without regard to whether the broker received yield spread
premiums or other types of compensation from the lender--known or
unknown to the borrower--or whether the broker is acting as an agent of
the borrower, the lender or both. Based upon the preexisting language
of TILA, Regulation Z and the Federal Reserve Board commentary--
particularly 4(a)-3, this exclusion is manifestly correct. However, it
seems proper to eliminate any issue whatsoever. With this legislation,
lenders will now be able to get on with the business of making loans.
Second, the bill prospectively clarifies the treatment of specific
charges such as tangible taxes and courier fees. This gives creditors
greater certainty and provides consumers with more accurate disclosures
through uniform treatment of charges. The Federal Reserve is also
directed to review the finance charge disclosure and make
recommendations to improve it. Specifically we are looking for
recommendations that make the finance charge disclosure more accurately
reflect the cost of credit. In addition, we would like suggestions on
how to eliminate any abusive practices that have developed in the
reporting of the finance charge.
Third, recognizing the highly technical nature of the Truth in
Lending Act, the bill raises the tolerance level for understated
disclosures for all future transactions from $10 to $100 for civil
liability purposes. For errors which can lead to rescission of the
loan, which is a much more extreme penalty, the tolerance is \1/2\ of 1
percent of the loan amount. However, for certain refinance loans where
the refinancing borrower did not receive additional new advances from
the creditor, the tolerance is 1 percent of the loan amount. In
accordance with current Federal Reserve regulations, funds to finance
the closing costs of the transaction do not constitute new advances.
Fourth, the bill clarifies that loan servicers are not assignees for
purposes of Truth in Lending liability if they only own legal title for
servicing purposes.
Fifth, the bill raises the statutory damages for individual actions
from $1,000 to $2,000. Statutory damages are provided in TILA because
actual damages, which require proof that the borrower suffered a loss
in reliance upon the inaccurate disclosure, are extremely difficult to
establish.
Sixth, the bill preserves the consumer's 3-day rescission period for
all refinance loans with different creditors. As currently set forth in
the Truth in Lending Act, this cooling off period expires in 3 years.
Contrary to some court decisions which have allowed this rescission
period to extend for as long as 8 years after the loan was closed in
the context of recoupment, the existing statutory language is clear: 3
years means 3 years and the time period shall not be extended except as
explicitly provided in section 125(f).
Moreover, as is currently set forth in the Federal Reserve
regulations, when a borrower refinances an existing loan and takes out
new money, only the new money is subject to rescission.
This legislation is critical to avert what could be a financial
disaster in the mortgage industry. I appreciate the bipartisan effort
to fix the problems with the Truth in Lending Act while still
protecting the rights of the consumers and I urge the adoption of this
bill.
Mr. GRAMM. I ask unanimous consent that the bill be deemed read a
third time and passed, the motion to reconsider be laid upon the table,
and that any statements related to the bill appear at the appropriate
place in the Record as if read.
The PRESIDING OFFICER. Without objection, it is so ordered.
So the bill (H.R. 2399) was deemed read a third time and passed.
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