August 30, 2012

The Honorable Richard Cordray

Director

Consumer Financial Protection Bureau

1700 G Street NW

Washington, DC 20006-4702

Re:       Integrated Mortgage Disclosures under the Real Estate Settlement Procedures Act (Regulation X) and the Truth in Lending Act (Regulation Z)

Dear Mr. Cordray:

The Office of Advocacy of the U.S. Small Business Administration (Advocacy) submits this comment on the proposed rule on Integrated Mortgage Disclosures under the Real Estate Settlement Procedures Act (Regulation X) and the Truth in Lending Act (Regulation Z).¹  This comment is on the proposed amendment to 12 CFR § 1026.4.  Advocacy has no comment on 12 CFR § 1026.1(c).  Advocacy reserves the right to file comments on the remainder of the proposal by November 6, 2012.

Advocacy Background

Advocacy was established pursuant to Pub. L. 94-305 to represent the views of small entities before federal agencies and Congress. Advocacy is an independent office within the U.S. Small Business Administration (SBA), so the views expressed by Advocacy do not necessarily reflect the views of the SBA or the Administration. The RFA,² as amended by the Small Business Regulatory Enforcement Fairness Act (SBREFA),³ gives small entities a voice in the rulemaking process.  For all rules that are expected to have a significant economic impact on a substantial number of small entities, federal agencies are required by the RFA to assess the impact of the proposed rule on small business and to consider less burdensome alternatives.

The Small Business Jobs Act of 2010 requires agencies to give every appropriate consideration to comments provided by Advocacy.⁴  The agency must include, in any explanation or discussion accompanying the final rule’s publication in the Federal Register, the agency’s response to these written comments submitted by Advocacy on the proposed rule, unless the agency certifies that the public interest is not served by doing so.⁵

In July 2010, the United States Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Act).⁶  Section 1011 of the Act establishes the Consumer Financial Protection Bureau (CFPB) to supervise certain activities of financial institutions.  Section 1100G, entitled “Small Business Fairness and Regulatory Transparency,” amends 5 U.S.C. § 609(d), 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.  

The SBREFA panel process requires the CFPB to conduct special outreach efforts to ensure that small entity views are carefully considered prior to the issuance of a proposed rule, if the rule is expected to have a significant economic impact on a substantial number of small entities. This outreach is accomplished through the work of small business advocacy review panels, often referred to as SBREFA panels, consisting of a representative or representatives from the rulemaking agency, the Office of Management and Budget’s Office of Information and Regulatory Affairs (OIRA) and the Chief Counsel for the Office of Advocacy. The panel solicits information and advice from small entity representatives (SERs), who are individuals who represent small entities affected by the proposal. SERs help the panel better understand the ramifications of the proposed rule. The product of a SBREFA panel’s work is its panel report on the regulatory proposal under review.  The CFPB convened a SBREFA panel for this rulemaking.

The Office of Advocacy performs outreach through roundtables, conference calls and other means to develop its position on important issues such as this one.  Advocacy held a small business roundtable on this issue on July 31, 2012.  Subsequently, Advocacy hosted a conference call to further solicit small entity input on August 9, 2012.

The Notice for the Proposal Was Inadequate

The proposed rule was posted on Regulations.gov on July 9, 2012.  However, the proposal was not published in the Federal Register until August 23, 2012.⁷   As such, a small entity that relies on the Federal Register for regulatory information would be unaware of the proposal and have only 10 business days to prepare a response.  Section 553 of the Administrative Procedure Act specifically states that the general notice of proposed rulemaking shall be published in the Federal Register.  In addition, the Regulatory Flexibility Act (RFA) states that the initial regulatory flexibility analysis (IRFA) shall be published in the Federal Register.⁸ The intent of both is to assure that the public has adequate notice and an opportunity to comment on rulemakings. Advocacy asserts that 10 business days to review and develop a public comment is inadequate.  

The Rulemaking

On August 23, 2012, the Consumer Financial Protection Bureau (CFPB) published in the Federal Register a proposed rule to amend Regulation X, the Real Estate Settlement Procedures Act (RESPA), and Regulation Z, the Truth in Lending Act (TILA), to establish new disclosure requirements and forms in Regulation Z for most closed-end consumer credit transactions secured by real property. In addition to combining the existing disclosure requirements and implementing new requirements in the Dodd-Frank Act, the proposed rule provides extensive guidance regarding compliance with those requirements.⁹

At a minimum, the CFPB should postpone any decisions on this issue until it has sufficient economic data on the impact and until it has made the decisions on other regulatory proposals involving a more inclusive definition of APR.¹⁸   In the initial regulatory flexibility analysis (IRFA), the CFPB states that it does not have the data to model the impact of the proposed more expansive definition of finance charge.¹⁹  Advocacy encourages the CFPB not to make any changes until it can fully assess the economic impact of the changes.  A full understanding of the impact will assist the CFPB in developing a less costly alternative.

In the IRFA, the CFPB also discusses the other rulemakings that it is considering to address the issue of a more inclusive finance charge.  The CFPB states that the impact of this proposal would be muted if the CFPB adopts those changes.  The real estate industry has undergone numerous changes over the last few years which have been costly for small entities.  Since the CFPB is considering other proposals that involve this same issue, it may be prudent to wait until the decisions are made on the other proposals before instituting this change.

Conclusion

Advocacy encourages the CFPB to give full consideration to the concerns of small banks and settlement service providers regarding the proposed changes.  Small banks provide a valuable service to lower income and rural areas where banking options are sparse. This proposal for a more inclusive APR could potentially lead some small businesses to leave the marketplace.  In addition, Advocacy reiterates its concern about the inadequate notice for small entities about this important proposal.

Thank you for the opportunity to comment on this important proposal and for your consideration of Advocacy’s comments.  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.