Consumers Union(1) appreciates the opportunity to testify today on S.1405, the Financial Regulatory Relief and Economic Efficiency Act of 1997.
S.1405 contains provisions that harm consumers by (1) lifting the prohibitions on the tying of
products and services; (2) allowing affinity groups to skirt the anti-kickback provisions of section
8 of the Real Estate Settlement Procedures Act; and (3) exempting certain debt collection
activities from the Fair Debt Collection Practices Act. We are also concerned about eliminating
disclosure elements of the Truth in Lending Act. These provisions would open the door to
deceptive and coercive practices, harassment of consumers, and higher costs for credit and home
S.1405 harms consumers and benefits banks. S.1405 gives banks interest on reserve deposits
held at the Federal Reserve. S.1405 allows banks to pay interest on business deposit accounts.
S.1405 lifts restrictions placed on special purpose, or "non-bank" banks. Additionally, banks
received major regulatory relief last Congress. Over the past few years, banks also got the green
light to expand insurance and securities activities, and their profits have soared, around $50
billion in 1997.(2)
Repeal of Anti-Tying Protections
Section 204 of the bill repeals section 106(b) of the Bank Holding Company Act(3). Section
106(b) prohibits banks from making credit or other bank services contingent upon the consumer
purchasing another product or service.
The tying of products and services is prohibited because Congress feared coercive practices resulting from tying could harm consumers by allowing banks to force consumers to buy a product they don't need or want to be able to secure credit. The Senate Report on the Bank Holding Company Act Amendments stated specifically that the purpose of section 106(b) is to prohibit anti-competitive practices.(4) This position was consistent with an earlier view of the Supreme Court which recognized that "tying agreements serve hardly any purpose beyond the suppression of competition."(5)
The reasons to prohibit tying are still compelling.
As banks sell more and more non-deposit products, it is essential that they not be permitted to
pressure consumers into purchasing products in order to secure credit or deposit services. For
example, an anxious home mortgage applicant should not be forced to buy what could be
overpriced home owners insurance to secure the mortgage. In the financial services
modernization battle, even the banks point to the anti-tying rules as adequate to protect against
coercive practices. As banks expand to provide a broader array of services, Congress should
provide consumer with more protections, not repeal the limited protections currently in place.
Tying prohibitions do not impair banks' ability to offer complementary services, but protects
consumers from being forced to give up their hard earned dollars to secure credit they are
otherwise entitled to.
The Federal Reserve Board has broad discretionary authority.
A repeal of section 106(b) is not necessary to ensure banks can engage in competitive activities
that benefit consumers. Section 106 specifically authorizes the Federal Reserve Board to permit,
by regulation, exemptions from its anti-tying provisions where the Board determines that an
exception will not be contrary to the purposes of the Bank Holding Company Act. The Board has
granted exemptions for a variety of bank practices.(6) Banks are permitted to offer a discount on a
traditional bank product it offers if the customer obtains another traditional bank product from an
affiliate of the bank, provided that all the products are available for separate purchase by the
customer. The Board has also provided an exemption that permits a bank or bank holding
company to offer a discount on securities brokerage services to a customer who obtains a
traditional bank product from an affiliate.
Exemptions should only be granted to enhance competition in banking and non-banking products
and where the purpose is to provide more efficient and lower-cost service to customers. Before
any exception is given, the efficiencies and costs savings to consumers by permitting the practice
must be fully examined.
Rollback of Anti-Kickback Protections
Section 206 would allow an affinity group to be established for a "common purpose" and permit
that affinity group to receive payments from service providers for endorsing their product or
service. Allowing such payments would effectively gut section 8 of the Real Estate Settlement
Procedures Act (RESPA) (7), which prohibits the payment of unearned referral fees, or kickbacks.
Congress specifically prohibited unearned fees because it determined that unearned referral fees
ultimately drive up the cost of buying a home:
In a number of areas of the country, competitive forces in the conveyance industry have led to the
payment of referral fees, kickbacks, rebates and unearned commissions as inducements to those
persons who are in a position to refer settlement business...the payment of a thing of value
furnished by the person to whom the settlement business is referred tends to increase the cost of
settlement business is referred tends to increase the cost of settlement services without providing
any benefits to the home buyer.(8)
Unearned referral fees harm consumers.
Under S.1405, an affinity group would be allowed to make endorsements of settlement service
providers and receive payment for the endorsements so long as disclosures are provided to
consumers. This disclosure may be inadequate to protect consumers from paying higher fees or
other costs. S. 1405 does not prohibit affinity groups from being established by affiliates,
subsidiaries or parent organizations of settlement service providers. This would allow the
payment of referrals to flow freely between affinity groups and service providers.
These payments could be made to the detriment of the consumer because there is no requirement
that the consumer receive the benefit of the referral made as the result of the endorsement of the
service provider by the affinity group. A settlement service provider could actually increase the
price charged to the consumer and split the increased price with the affinity group. Meanwhile,
the consumer is led to believe that the endorsed settlement service is the best one to use.
Endorsements that benefit consumers are allowed today.
Affinity groups can make endorsements of settlement services which are generally considered to
be allowable under current law when the consumer receives the benefit of the referral.(9) In turn,
affinity groups can be compensated for service provided, including for the use of mailing lists
and the like.
Consumers can be harmed by the payment of unearned fees. This loophole must not be opened.
Rollback of Loan Disclosure Requirements
Section 401 and 402 of S.1405 would amend the disclosure requirements under the Truth in
Lending Act(10) (TILA). Section 401 would allow creditors to substitute a statement that rates
may change for a 15 year historical table for variable rate, open-end home secured credit. The
intent of the historical table is to put consumers applying for variable-rate loans on notice that
substantial rate changes may result in changes in monthly payments. The historical example
shows how the APR and the minimum periodic payment were affected during the preceding
fifteen-year period by changes in the index used to compute the rate.
Section 402 would amend TILA requirements for closed-end credit advertising by reducing the
number of "triggering" terms and the amount of information that is required if a triggering term
is used. Currently there are four triggering terms for closed-end credit: any down payment, the
number or amount of payments or the period of repayment, the amount of any payment, and the
amount of any finance charge. If an advertisement contains a triggering term, creditors must
state the APR, the terms of repayment, and any down payment. Both of these sections are based
upon recommendations of the Board.(11)
Need for clarity rather than getting rid of useful information.
The clarity of plain English disclosures and segregation of critical information is preferable to
deleting important and useful information from the disclosure requirements. Any changes to
TILA must be made, not solely because of perceived "information overload," but because of
concrete analysis that the information contained in the disclosure term is truly irrelevant to
Congress must continue to send a clear message that false advertising and deceptive and unfair
practices will not be tolerated, and make changes to TILA only when it is determined that those
changes will lead to further clarity for consumers and will not contribute to deceptive practices.
Exemptions from Fair Debt Collection Practices Act
Section 207 amends the Fair Debt Collection Practices Act (FDCPA) by exempting
communications made under the federal or state rules of civil procedure, the collection of checks,
and collections made under the Higher Education Act, from the FDCPA and the consumer
Exempting broad collection activities from the FDCPA would open the door to abusive collection practices, therefore, Section 207 should be deleted from S.1405
Thank you, Mr. Chairman, for allowing Consumers Union to discuss our concerns with you
1 Consumers Union is a nonprofit membership organization, chartered in 1936 under the laws of the State of New York to provide information , education, and counsel about consumer goods and services and the management of family income. Consumers Union's income is derived solely from the sale of Consumers Reports, its other publications and films. Expenses of occasional public service efforts may be met, in part, by non restrictive, noncommercial contributions, grants, and fees. In addition to reports on Consumers Union's own product testing, Consumer Reports, with approximately 4.9 million paid circulation, regularly carries articles on health, product safety, marketplace economics and welfare. Consumers Union's publications carry no advertising and receive no commercial support.
2 Consumers paid over $16 billion in service charges on deposit accounts. Consumer Reports found in its March 1996 review that banks impose at least 100 separate fees on their deposit accounts. The size of the fees has increased dramatically, too. Deposit fees have been rising at better than twice the rate of inflation C jumping more than 50 percent since 1990. At the same time, banks have paid record low interest rates, less than a paltry two percent annually in 1994, for example.
3 Section 106(b) of the Bank Holding Company Act Amendments of 1970, Pub.L.No.91-6-7, 12 U.S.C. section 1972.
4 S. Rep. No. 1084, 91st Cong., 2nd Sess., 17 (1970).
5 Standard Oil Co. v. United States, 337 U.S. 293, 305-306 (1949).
6 12 CFR Sec. 225.7(b).
7 Pub. L. No. 93-553, 88 Stat. 1724 (1974), as amended (hereinafter cited as RESPA)
8 H.R. Rep. No. 1197, 93d Cong., 2d Sess. 7 (1974).
9 24 C.F.R. Section 3500.2(b).
10 Truth in Lending Act, 15 U.S.C. sections 1601-1666j, 82 Stat. 146, Pub. L.. No. 90-321 (May 29, 1968).
11 Report to the Congress: Rules on Home-Equity Credit under the Truth in Lending Act, Board of Governors of the Federal Reserve System, November 1996, and, Report to the Congress: Consumer Credit Advertising Under the Truth in Lending Act, September 1995.
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