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Letter dated 12/23/10 - Board of Governors of the Federal Reserve System

Fact Sheet Summarizing Advocacy's Letter

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The Honorable Jennifer J. Johnson
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, NW
Washington, DC 20551

Re: Regulation Z; Docket R-1390 Truth in Lending

Dear Secretary Johnson:

The Office of Advocacy of the U.S. Small Business Administration (Advocacy) submits this comment on the Board of Governors of the Federal Reserve System’s (hereinafter, “the Board”) proposed rulemaking on Regulation Z; Docket No R-1390 Truth in Lending.(1) Advocacy is concerned that the proposal may be extremely burdensome on small entities and that Federal Reserve has not analyzed properly the full economic impact of the proposal on small entities as required by the Regulatory Flexibility Act (RFA).(2) Advocacy recommends that the Board postpone the proposed rule until the Real Estate Settlement Procedures Act- Truth in Lending (RESPA-TILA) issues can be resolved by the Consumer Financial Protection Bureau (CFPB) in order to avoid duplicative and burdensome regulations.

Advocacy Background

Congress established the Office of Advocacy under Pub. L. 94-305 to represent the views of small business before Federal agencies and Congress. Because Advocacy is an independent office within the Small Business Administration (SBA), the views expressed by Advocacy do not necessarily reflect the views of the SBA or of the Administration. Section 612 of the RFA requires Advocacy to monitor agency compliance with the Act, as amended by the Small Business Regulatory Enforcement Fairness Act.(3)

In September 2010, section 604 of the RFA was amended when Congress passed the Small Business Jobs Act.(4) Section 1601 of the Small Business Jobs Act amends section 604 by requiring a federal agency to include, in any explanation or discussion accompanying the final rule’s publication in the Federal Register, the agency’s response to any written comments submitted by Advocacy on the proposed rule and provide a detailed statement of any changes made in response to the comments.

Requirements of the RFA

The RFA requires agencies to consider the economic impact that a proposed rulemaking will have on small entities. Pursuant to the RFA, the federal agency is required to prepare an IRFA to assess the economic impact of a proposed action on small entities. The IRFA must include: (1) a description of the impact of the proposed rule on small entities; (2) the reasons the action is being considered; (3) a succinct statement of the objectives of, and legal basis for the proposal; (4) the estimated number and types of small entities to which the proposed rule will apply; (5) the projected reporting, recordkeeping, and other compliance requirements, including an estimate of the small entities subject to the requirements and the professional skills necessary to comply; (6) all relevant Federal rules which may duplicate, overlap, or conflict with the proposed rule; and (7) all significant alternatives that accomplish the stated objectives of the applicable statutes and minimize any significant economic impact of the proposed rule on small entities.(5) In preparing the IRFA, an agency may provide either a quantifiable or numerical description of the effects of a proposed rule or alternatives to the proposed rule, or more general descriptive statements if quantification is not practicable or reliable.(6) The RFA requires the agency to publish the IRFA or a summary of the IRFA in the Federal Register at the time of the publication of a general notice of proposed rulemaking for the rule.(7)

Pursuant to section 605(a), in lieu of an IRFA, the head of the agency may certify that the proposed rule will not have a significant economic impact on a substantial number of small entities. A certification must be supported by a factual basis.

The Proposed Rule

On September 24, 2010, the Board published in the Federal Register a proposed rule on Regulation Z: Truth in Lending. The proposal implements the Truth in Lending Act (TILA). The purpose of the proposal is to revise the rules for the consumer’s right to rescind certain open end and closed-end loans secured by the consumer’s principal dwelling.(8) The proposed regulations would revise and enhance disclosure requirements of Regulation Z for transactions secured by a consumer's principal dwelling and the consumer’s right to rescind open- and closed-end loans. The amendments are proposed in furtherance of the Board's responsibility to prescribe regulations to carry out the purposes of TILA, including promoting consumers' awareness of the cost of credit and their informed use thereof. The proposal would also revise the rules for determining whether a closed-end mortgage is a higher-priced mortgage loan subject to special consumer protections, to ensure that prime loans are not incorrectly classified as higher-priced loans. Finally, the Board is proposing rules to mandate reverse mortgage counseling and prohibit reverse mortgage cross-selling. These restrictions are proposed pursuant to the Board's statutory responsibility to prohibit unfair and deceptive acts and practices in connection with mortgage loans.

Compliance with the RFA

In the RFA section of the preamble, the Board acknowledges that the proposed rule will have a significant economic impact on a substantial number of small entities and prepared an IRFA. (9)However, the Board states that there is not a reliable source for the number of small entities that will be impacted. It also states that the effect of the revisions on small entities, including the costs of updating the specifications on current systems, is unknown.(10)

The Proposal Will Be Burdensome

Advocacy is concerned with this proposal going forward when so little is known about its potential costs, at a time when other major changes to the industry are on the horizon. Advocacy had a conference call with representatives from the industry on this proposal and according to the industry representatives, the industry is being inundated with regulatory changes. These burdensome changes may lead to small entities leaving the mortgage industry which could have a negative impact on the availability of mortgages, competition and the consumer.

Moreover, on November 10, 2010, several banking organizations submitted a letter to the Board, the Department of Treasury, and the Department of Housing and Urban Development requesting a comprehensive and integrated approach to TILA and the Real Estate Settlement Procedures Act (RESPA) reform. They stated that the changes to TILA, the new RESPA disclosures, and other compliance requirements were stretching the compliance capabilities of financial institutions and could possibly threaten the availability of housing finance options. They further stated that since additional changes to RESPA and TILA may considerably revise TILA, a postponement of this rulemaking was warranted.(11)

Matter Should be Postponed until RESPA-TILA Issues Are Resolved by the Consumer Financial Protection Bureau

In July 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Act).(12) Section 1011 of the Act establishes the Consumer Financial Protection Bureau (CFPB) to supervise certain activities of financial institutions. Pursuant to Section 1032, the new CFPB will have the authority to prescribe rules for consumer financial products and services. Section 1032(f) states that not later than year after the designated transfer date, the Bureau shall propose for public comment rules and model disclosures that combine the disclosures required under TILA and sections 4 and 5 of RESPA into a single, integrated disclosure for mortgage loan transactions covered by those laws, unless the CFPB determines that any proposal issued by the Board and HUD carry out the same purpose. As such, this issue will be revisited again in the near future.

In addition, Section 1100G, entitled “Small Business Fairness and Regulatory Transparency,” amends 5 U.S.C. § 609(d) of the RFA, to require the CFPB to comply with the Small Business Regulatory Enforcement Fairness Act (SBREFA) panel process, making it the third agency with this responsibility, joining EPA and OSHA. When Congress amended the Regulatory Flexibility Act (RFA) in 1996, it created a requirement that EPA and OSHA conduct special outreach efforts to ensure that small entities’ views are carefully considered prior to the issuance of a proposed rule. This outreach is accomplished through the work of small business advocacy review panels, often referred to as SBREFA panels. A SBREFA panel consists of a representative from the rulemaking agency, the Office of Management and Budget’s Office of Information and Regulatory Affairs (OIRA) and the Chief Counsel for Advocacy. The panel solicits information and advice from small entity representatives (SERs), who are individuals that represent small entities affected by the proposal. SERs help the panel better understand the ramifications of the proposed rule. Invariably, the participation of SERs provides extremely valuable information on the real world impacts and compliance costs of agency proposals and viable alternatives. The product of a SBREFA panel’s work is its panel report on the regulatory proposal under review.

The panel process achieves several objectives. First, it ensures that small entities that would be affected by a regulatory proposal are consulted about the pending action and offered an opportunity to provide information on its potential effects. Second, a panel develops and recommends less burdensome alternatives to a regulatory proposal when warranted. Past panels have recommended alternatives that have saved small entities billions of dollars. Finally, the panel provides the rulemaking agency with input from both real world small entities and the panel’s report and analysis prior to publication.

Postponing this rulemaking until after TILA is transferred to the CFPB will not only minimize the potential of conflicting cumulative rulemakings, it will also allow for an opportunity to examine less burdensome alternatives. The CFPB will need to conduct a panel for the RESPA –TILA rules. That panel may provide information about the industry and real world implications of the changes to the regulations that may be useful in reducing the economic impact of this action on small entities.

The additional time would also allow the agency to perform the necessary outreach and research to garner a better understanding of the economic impact of this action. Once the economic impact is fully understood, the agency may be able to develop less burdensome alternatives which would be beneficial to the industry. In addition, it may also help the agency understand the real world implications of this action which would be beneficial to consumers.


Over the past few years, the mortgage industry has been inundated with changes to TILA, RESPA, and other mortgage-related laws. These constant changes are economically burdensome to the industry and confusing to the consumer. Postponing this rulemaking until after the upcoming RESPA-TILA proposals will allow an opportunity to fully analyze the impact of this proposal in light of the changes to the industry. In addition, since the issue would then be transferred to the CFPB, the agency would be able to obtain meaningful information from the SERs so that the economic impact could be fully ascertained and less costly alternatives could be developed.

Thank you for the opportunity to comment on this important proposal and for your consideration of Advocacy’s comments. Advocacy is available to assist the agencies in their RFA compliance. If you have any questions regarding these comments or if Advocacy can be of any assistance, please do not hesitate to contact Jennifer Smith at (202) 205-6943.



Winslow Sargeant, Ph.D.
Chief Counsel for Advocacy


Jennifer A. Smith
Assistant Chief Counsel
For Economic Regulation & Banking

Cc: The Honorable Cass Sunstein, OIRA/OMB


1. 75 Federal Register 58539.

2. 5 U.S.C. §§ 601-612.

3. Pub. L. No. 96-354, 94 Stat. 1164 (1980) (codified at 5 U.S.C. §§ 601-612) amended by Subtitle II of the Contract with America Advancement Act, Pub. L No. 104-121, 110 Stat. 857 (1996). 5 U.S.C. § 612(a).

4. Public Law 111-240.

5. 5 USC § 603.

6. 5 USC § 607.

7. 5 USC § 603.

8. 75 Federal Register 58539.

9. Id at 58685.

10. Id at 58686.

11. Letter from American Bankers Association, American Financial Services Association, Community Mortgage Banking Project, Consumer Bankers Association, Consumer Mortgage Coalition, Housing Policy Council, Independent Community Bankers of America, Mortgage Bankers of America to the Honorable Timothy Geithner, The Honorable Shaun Donovan, and The Honorable Ben Bernake, November 10, 2010.

12. Public Law 111-203.