[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rescinded, the borrower is released from the obligation under the 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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