Senate Banking, Housing and Urban Affairs Committee

Hearing on S.1405
"The Financial Regulatory Relief and Economic Efficiency Act of 1997"

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 purchases.

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 consumer decisions.

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 protections provided.

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 today.

Notes:

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, 91^st Cong., 2^nd 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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