Partners (Winter 2000)

Tougher Regulations Proposed to Fight Predatory Lending

The Federal Reserve Board has proposed amending two of its regulations in an effort to crack down on predatory lending practices. Proposed Changes to Regulation Z (Truth in Lending), which implements the Home Ownership and Equity Protection Act (HOEPA) of 1994, and to Regulation C, which implements the Home Mortgage Disclosure Act (HMDA), have been published in the Federal Register. Both proposals solicit public comment.

HMDA requires depository and certain for-profit, nondepository institutions to collect, report, and disclose data about originations and purchases of home mortgage and home improvement loans. Institutions must also report data about applications that do not result in originations. The proposed amendments are designed to strengthen efforts to combat predatory lending by requiring additional disclosures and reporting requirements. Institutions, examiners, and others can use the information to track the level, trend, and underwriting characteristics of high cost mortgage loans covered by HOEPA.

According to the federal register notice, “the HMDA amendments simplify the definition of a ‘refinancing,’ require lenders to report requests for preapproval, simplify the definition of a reportable home improvement loan, require lenders to report home-equity lines of credit, expand coverage of nondepository lenders, and require lenders to report the annual percentage rate of a loan, whether the loan is subject to the Home Ownership and Equity Protection Act, and whether the loan or application involves a manufactured home. The Board also proposes to reorganize the regulation and to make other changes.”

In 1994, Congress enacted the Home Ownership and Equity Protection Act (HOEPA). HOEPA amended the Truth in Lending Act (TILA) to impose substantive limitations, such as restrictions on short-term balloon notes and prepayment penalties, and additional disclosure requirements for closed-end, home-equity loans bearing rates or fees above a certain percentage or amount. These limitations were designed to help reduce and perhaps eliminate predatory lending practices. The Board held hearings this summer in Charlotte, Boston, Chicago, and San Francisco on possible ways to curb predatory lending using its regulatory authority. In addition, the Board solicited public comments on possible changes to HOEPA to combat predatory lending practices. The proposed changes are result of the Board's analysis following these public hearings and written comments.

Under the rate-based test, a loan is covered by HOEPA if the annual percentage rate (APR) at the time of consummation exceeds by more than 10 percentage points the yield on Treasury securities having a comparable maturity. Under the fee-based test, a loan is covered if the total points and fees exceed 8% of the loan amount, or $400, whichever is greater. HOEPA authorizes the Board to adjust both triggers. The 10% APR trigger may be increased or decreased by two percentage points, but not more often than every two years. The fee-based trigger may be adjusted by including additional fees, not by adjusting the percentage. The act also authorizes the Board, for all mortgage loans, to prohibit specific acts or practices that are unfair, deceptive, or designed to evade HOEPA. For refinancings, the Board is authorized to prohibit acts or practices associated with abusive lending practices or that are otherwise not in the borrower's interest.

The proposed amendments would broaden the scope of loans subject to HOEPA’s protections by adjusting the price triggers that determine coverage under the act. Interest rate triggers would be lowered by two percentage points and the fee-based triggers would now include optional insurance premiums and similar credit protection products paid at closing.

Certain acts and practices in connection with home-secured loans would be prohibited, including a rule to restrict creditors from engaging in repeated refinancing of their own HOEPA loans over a short time period when the transactions are not in the borrower's interest. HOEPA’s prohibition against extending credit without regard to a consumer’s repayment ability would be strengthened by requiring creditors generally to document and verify income for HOEPA-covered loans. HOEPA disclosures would include the total amount of money borrowed.

The term “predatory lending” encompasses a variety of practices. Often homeowners in certain communities-particularly, the elderly and minorities-are targeted with offers of high-cost, home-secured credit. The loans carry high up-front fees and may be based on the homeowners’ equity in their homes, not their ability to make the scheduled payments. When homeowners have problems repaying the debt, they are often encouraged to refinance the loan. Frequently this leads to another high-fee loan that provides little or no economic benefit to the borrower.

A copy of the proposed regulations is available by calling the Reserve Bank’s Community Affairs section at (404)-498-7242. The HMDA and the HOEPA comment periods expire March 9, 2001.

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