This change should provide more accurate information for an important segment of the market, and enable us to better gauge the growth of this type of credit and the effect it is having on other consumer borrowing. In addition, the Board has conducted consumer surveys this year to gather information that will allow us to better understand consumer usage of home equity lines of credit. During the past year, the Board has received inquiries from financial institutions, trade associations, consumer groups, and the Congress concerning home equity lines of credit.
Nuch of the debate has focused on the current disclosure requirements for these loans, and Virginia cash loans whether these requirements are adequate. At the same time, the Board has been reviewing its current regulatory requirements, with the goal of ensuring that consumers receive sufficient information prior to contracting for this type of credit. Currently, the Truth in Lending Act and Regulation Z treat home equity lines of credit like other types of open-end credit plans. The proposed bill would require creditors to give more extensive and detailed disclosures. For example, it would require more disclosures concerning the annual percentage rate, including, if applicable, a statement that no limit on annual rate increases exists. Creditors would also be required to give consumers a pamphlet that is to be prepared by the Board. These additional disclosures would generally have to be given at the time of application, which is earlier than current requirements, and would have to be segregated from other information, which is once again a departure from current Truth in Lending requirements for open-end credit.
The proposed legislation would also add a new advertising section to the Truth in Lending Act for home equity Digitized by VjOOQIC 4 - lines.
The bill would add a reference to a periodic payment amount as a term that requires the advertisement to include additional disclosures. The bill also would require, under certain circumstances, a disclosure regarding the tax-deductibility of interest paid on home equity lines, and would prohibit creditors from referring to home equity loans as "free money" or a "loan at prime. Board staff has been considering the issue of home equity lending within the context of Truth in Digitized by VjOOQIC 70 Lending disclosure requirements. Specifically, the staff has focused on the content, timing, and format of the disclosures required under Regulation Z as possible candidates for regulatory change. Board staff is preparing a proposal that would amend Regulation Z to address these issues and expects Virginia cash loans to present their recommendations to the Board sometime next month. Although the review is still in process, and neither Virginia cash loans the staff nor the Board has made any firm decisions about what can and should be done, I would like to share with you some of the particular issues we have been con elder ing. Under current requirements, when a home equity plan is opened, a creditor need only give those general disclosures that I previously outlined. Creditors are not required to disclose certain items, such as their right to unilaterally change the terms and conditions of the plan, or the possibility that a balloon payment may be required as part of the plan. It is conceivable that Regulation Z could be amended to require disclosure of these features.
There also may be a need to require more disclosures in home equity line advertisements. Some questions raised in this regard include whether "teaser" Digitized by Virginia cash loans VjOOQIC 71 6 - rates are adequately disclosed as only lasting for a limited time period and whether disclosing a payment term in an advertisement should require disclosure of other material terms, such as the annual percentage rate or fees to be charged under the plan.
Another area we have identified as one to look into concerns the timing of disclosures. Regulation Z currently permits open-end credit disclosures Virginia cash loans to be given anytime prior to the first transaction.
In the case of home equity lines of credit, therefore, consumers, in many cases, do not receive disclosures about the terms and conditions of the plan until closing. Since most home equity credit plans involve large up- front fees Virginia cash loans and tend to be more complex than other types of open-end credit, an argument can be made for requiring disclosure of the fees, terms, and conditions of such plans at an earlier time in the credit process. Finally, concern has been expressed that consumers may not fully understand the terms and conditions of the programs. This concern may be due, in part, to the complexity of these plans and the fact that the underlying contracts could run several pages in length.
Currently, Regulation Z does not require any special format for open-end disclosures.
As a Digitized by VjOOQIC 72 7 - result, in most cases, the disclosures given for these plans are not segregated from the contractual provisions or highlighted in any standard manner. We believe that consumers should be aler-ted to the most important terms and conditions of the plans for which they contract. To the extent that the current regulatory requirements fail to meet this goal, it might be necessary to require that disclosures about these plans be segregated from other information. The Federal Reserve Board shares the goal that consumers receive adequate information at a relevant stage of the credit process when they contract for home equity loans.
Therefore, we look forward to working with you on this Important subject. Home equity loans and lines of credit are proving to be ftmcmg the niost popular and useful financial products In A genera tion. Is that overly restrictive new legislation on home equity credit Is unneeded.
At best, congressional consideration should be limited to minor modlficfl ions of the existing disclosure scheme, such as are proposed fn H,R 3011 introduced by Congressman David Price of North Carolina.