- The Washington Times - Thursday, December 14, 2000

The Federal Reserve Board yesterday proposed new rules to curb abusive mortgage-lending practices.

The agency was responding to a call for action by consumer advocates, borrowers and Congress.

The Fed's proposal that more home loans come under the Home Ownership and Equity Protection Act of 1994 (HOEPA) would subject them to greater regulation and scrutiny for "predatory" practices.

Board members were careful not to pronounce the new rules a cure-all for abusive lending, in which lenders target uneducated, elderly or minority borrowers with high loan costs, deceptive practices and unfair terms. They said a remedy should include cooperative efforts by Congress, federal and state agencies.

"This rule is primarily one of deterrence," said Jim Michaels, managing counsel for the Fed, during the meeting.

The proposal, which could go into effect after a 90-day public comment period, extends the reach of HOEPA and prohibits certain practices.

The act currently covers mortgage loans whose annual percentage rates exceed the interest rate on United States Treasury securities of comparable maturity by more than 10 points.

The proposal would increase the number of loans covered by lowering that to eight points, thereby making a higher number of loans subject to HOEPA requirements that include more disclosures, a longer waiting period between drawing up closing papers and signing them, and bans on such practices as short-term balloon loans.

The plan also would bring loans that include single-premium credit insurance within the reach of HOEPA. This insurance pays back the lender if a borrower dies or becomes disabled. It is frequently financed into the loan, meaning a consumer pays interest on it.

Mr. Michaels of the Fed said that according to the limited data available on "subprime," or high-cost, loans, about 1 percent are subject to the act. Under the proposal, 4 percent or 5 percent of subprime loans would be covered by HOEPA.

Sen. Phil Gramm, Texas Republican and chairman of the Senate Banking, Housing and Urban Affairs Committee, criticized regulatory agencies this fall for not providing an adequate definition of predatory lending, but had no comment on the proposal yesterday.

Consumer groups cautiously praised the proposal, while financial trade groups said it would be ineffective in combating predatory lending or detrimental to the availability of credit.

"We're happy that they finally listened to what we've been saying for over a year, that something needed to be done," said Valerie Coffin, a national researcher with ACORN, the Association of Community Organizations for Reform Now, a coalition of local activist chapters for low- and moderate-income people.

She and another consumer group spokesman, Josh Silver of the National Community Reinvestment Coalition, said the Fed proposal could have done more, such as strengthen restrictions on prepayment penalties, fees charged if borrowers refinance before they are a certain number of years into a loan.

Both consumer advocates and bank groups said the Fed and other regulatory agencies should be doing more to enforce anti-fraud laws already on the books.

"What we need is effective enforcement of existing laws," said Rod Alba, director of regulatory affairs for the Mortgage Bankers Association.

He added that education is the best measure to prevent predatory lending, and that the Fed could do more on that end as well.

"You have to engage in effective counseling of consumers at the front end" and give them simpler, binding disclosure documents, he said.

"Any time a consumer enters into any type of transaction, it's vital that they know what they're getting," said Catherine Pulley, a spokeswoman for the American Bankers Association.

The group's senior counsel, Joseph Pigg, said the Fed proposal goes too far in lowering the HOEPA threshold, because it will force legitimate lenders out of the subprime market.

"In the current environment where people are quick to level charges of predatory lending at people," legitimate lenders will not make any loan that might be construed as predatory, Mr. Pigg said.

He also said stronger enforcement and education programs would go further to address the problem than the Fed proposal does.

Each regulatory agency, including the Office of Thrift Supervision, the Office of the Comptroller of the Currency and the Fed itself, will police the financial institutions over which it has jurisdiction to look for abuses defined in the proposal.

The Federal Trade Commission oversees non-bank lending companies, which some consumer advocates accuse of the most serious abuses.

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