Partners (Winter 2000)

Highlights of Proposed HOEPA Changes

Congress enacted HOEPA in 1994 as a means to address predatory lending practices. HOEPA requires certain disclosures of high cost loans secured by home mortgages. Because these loans carry substantial costs (typically higher interest rates and fees), additional consumer protections and disclosures are required. In addition, given the potential for abusive lending practices and the possible loan performance volatility, HOEPA loans have increasingly limited liquidity. The proposal to increase disclosures, combined with additional regulatory and market pressures is designed to combat predatory lending practices.

Expanding Coverage of Loans Subject to HOEPA
Adjust the APR trigger from 10 percentage points to 8 percentage points above the rate for Treasury securities having a comparable maturity, the maximum amount that the trigger may be lowered by the Board. Adjust the fee-based trigger to include amounts paid at closing for optional credit life, accident, health, or loss-of-income insurance, and other credit protection products such as debt-cancellation coverage.

Increased Prohibitions against “Flipping”
Address some “loan flipping” within the first 12 months of a HOEPA loan by prohibiting the creditor or assignee (or an affiliate) that is holding the loan from refinancing it unless the refinancing is in the borrower’s interest.
Prohibit refinancing in the first five years of a zero interest rate or other low-cost loan (carrying a rate two percentage points or more below the yield on Treasury securities with a comparable maturity) by creditors seeking to replace that loan with a higher-rate loan, unless the refinancing is in the interest of the borrower. This rule is designed primarily to protect zero interest and other low-cost home loans offered through mortgage assistance programs that provide home loans to low- and moderate-income borrowers.
Prohibit creditors from including “payable on demand” or “call provisions” in HOEPA loans, unless the clause is exercised in connection with a consumer's default.
Prevent evasions of HOEPA, by prohibiting creditors from documenting a mortgage loan as open-end credit if it does not meet Regulation Z’s definition for open-end credit. (HOEPA covers only closed-end credit transactions.) For example, a high-cost mortgage could not be structured as a home-secured line of credit to evade HOEPA if there is no reasonable expectation that repeat transactions will occur under a reusable line of credit.

Tougher Stance Against “Equity Stripping”
Create a rebuttable presumption that a creditor has engaged in a pattern or practice of making HOEPA loans based on homeowners’ equity without regard to repayment ability, if the creditor generally does not document and verify consumers' repayment ability.

Improved Disclosures
Revise the HOEPA disclosures to alert consumers in advance of loan closing that the total amount borrowed may be substantially higher than the amount requested due to the financing of insurance, points, and fees.

Highlights of Proposed HMDA Changes

HMDA requires certain lending institutions to collect, report, and disclose data about loan originations and purchases of home mortgage and home improvement loans. It also requires reporting of loans that do not result in originations, such as loan denials or withdrawn applications. HMDA can be used to help determine whether institutions are serving the housing needs of their communities; it helps public officials target investments; and it assists in identifying possible discriminatory lending patterns. The proposed changes are designed to help combat predatory lending practices.

Identifying Subprime Lenders
Additional data items will be collected to help identify institutions engaged in subprime lending. These additional fields include annual percentage interest rates (APR), and manufactured home loans or applications. Further, lenders must identify and report all loans subject to HOEPA.

Expanding Coverage to include more Nondepository Lenders
Banks, thrifts, credit unions and other depository institutions are widely covered by HMDA. Under the proposal, nondepository lenders, particularly those that are active in the subprime market, will be subject to HMDA reporting because the regulation adds a dollar volume threshold whereby lenders whose loan activities exceed $50 million must file HMDA reports.

Reporting “Preapprovals” and “Home-Equity Lines of Credit”
Lenders are currently not required to report preapprovals, and reporting home-equity lines of credit was optional. Under the proposed regulation, both would be mandatory.

Defining “Refinance” and “Home Improvement Loan”
The current definitions offer lenders several reporting options. The proposed simplifications would apply to all lenders, and ensure more complete and consistent data.

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