CUNA Regulatory Comment Call
May 18, 2006
Home Equity Lending Hearings
- The Home Ownership and Equity Protection Act (HOEPA) requires the Federal Reserve Board (Fed) to hold public hearings periodically on home equity lending and the adequacy of existing regulatory and legislative provisions in protecting the interests of consumers.
- The following are the dates, times, and locations for the next set of these HOEPA hearings:
- June 7, 2006 8:30 AM to 4:00 PM Chicago, Illinois
- June 9, 2006 8:30 AM to 4:00 PM Philadelphia, Pennsylvania
- June 16, 2006 8:30 AM to 4:00 PM San Francisco, California
- July 11, 2006 8:30 AM to 4:00 PM Atlanta, Georgia
- These meetings will be held at the Federal Reserve Banks in these respective cities and are open to the public. The public is also invited to send written comments on the issues that will be the focus of these hearings. These issues include:
- predatory lending and the impact of HOEPA and state and local predatory lending laws on the subprime market;
- nontraditional mortgage products and reverse mortgages; and
- consumer choice in the subprime market.
- Written comments must be submitted by August 15, 2006. Please submit your comments to CUNA by July 27, 2006.
Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Senior Vice President and Deputy General Counsel Mary Dunn at firstname.lastname@example.org and to Senior Assistant General Counsel Jeff Bloch at email@example.com; or mail them to Mary and Jeff in c/o CUNAs Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, DC 20004-2601. If commenting directly to the Fed, you must refer to Docket No. OP-1253. You may also contact us at 800-356-9655, ext. 6032, if you would like more information about these hearings or you may obtain additional information on the Internet at the following address:
Congress enacted HOEPA in 1994 out of concern about predatory home equity lending practices in underserved areas. HOEPA requires additional disclosures and imposes restrictions for high cost mortgages, defined as those in which the interest rate on a first lien mortgage is eight percentage points above comparable Treasury securities or ten percentage points above comparable Treasury securities for second lien mortgages. High cost mortgages also include those in which the total points and fees exceed the greater of $528 or eight percent of the loan amount.
HOEPA requires the Fed to hold public hearings periodically on the home equity lending market, including the adequacy of existing laws and rules for protecting the interests of consumers, specifically low income consumers. The Fed last held hearings in 2000, which focused on the Feds ability to use its rulemaking authority under HOEPA to address abusive lending practices.
INFORMATION ABOUT THE HEARINGS
The following are the four objectives of these hearings:
- To gather views on the effectiveness of the 2002 revisions to the HOEPA rules in protecting
consumers and the impact of the rules on the availability of credit in the higher-cost portion of
the subprime market. The link below provides more information about these HOEPA revisions:
- To gather information that will assist the Fed in its current review of Regulation Z, which implements the Truth in Lending Act and HOEPA. The link below provides more information about the Regulation Z review:
- To identify the matters in which the Fed and others can develop educational materials to help consumers make informed choices about mortgage loans.
- To identify matters in which additional research about the mortgage lending market would be helpful.
The following topics will be discussed at the hearing:
Topic 1 Predatory Lending: The Impact of HOEPA and State and Local Predatory Lending Laws
The Fed is interested in how the HOEPA rules have improved consumers understanding of their mortgage terms and have curbed abusive practices, while preserving access to subprime credit. The Fed is also interested in gathering information about any new abusive practices that have developed since the 2000 hearings and other practices that still raise concerns, such as the amount and prevalence of prepayment penalties, as well as whether creditors make loans with the proper evaluation of the borrowers repayment ability.
The Fed also wants to gather information about how state and local laws have affected abusive lending practices and access to credit, especially those that have been enacted after the 2000 hearings that are more restrictive than the federal HOEPA requirements. The Fed wants to asses whether these laws have been effective in protecting consumers from abusive lending, as well as whether they have affected access to legitimate subprime loans.
For this topic, the Fed has requested comments in response to the following questions:
- Have the 2002 revisions to the HOEPA rules been effective in curtailing predatory lending practices? What has been the impact of the changes on the availability of subprime credit? What other, if any, abusive practices have emerged since these revisions were enacted?
- What has been the impact of state and local predatory lending laws on curbing abusive practices? Have they adversely affected access to legitimate subprime lending?
- Since the 2002 HOEPA revisions, what efforts to educate consumers about predatory lending have been successful? What is needed to help such efforts succeed?
- How should the HOEPA disclosures required under Regulation Z be changed to improve consumers understanding of high-cost loans?
Topic 2 Nontraditional Mortgage Loans and Reverse Mortgages
Nontraditional mortgage loans - In recent years, rising home prices have led to an increase in nontraditional mortgage loans, in which consumers have the option of paying only the interest on the loan for a certain period of time or paying less than the interest owed, resulting in negative amortization. Some institutions have combined these loans with other practices, such as making simultaneous second-lien mortgages and allowing for reduced documentation.
The Fed and other regulators are concerned that these loans will lead to defaults for marginally qualified borrowers if housing prices subside or when the interest rates on these loans increase substantially. Some believe that more disclosures are needed for these types of loans.
The Fed, the National Credit Union Administration, and the other federal financial institution regulators have recently proposed guidance in an effort to address these concerns. The link below provides additional information about the proposed guidance
For nontraditional mortgage loans, the Fed has requested comments in response to the following questions:
- Do consumers have sufficient information about nontraditional mortgage loans to understand the risks?
- Should any current disclosures required under Regulation Z be eliminated or changed because they are confusing to consumers, unduly burdensome to creditors, or are not relevant to nontraditional mortgage loans? Do the current disclosures provide information about nontraditional mortgage loans in an understandable manner?
- Are there Regulation Z disclosures that should be provided earlier in the mortgage shopping and application process to help consumers understand the cost and terms of these types of loans?
Reverse mortgages Reverse mortgages, which have increased in popularity in recent years, allow borrowers to convert equity in their homes to a loan, which does not need to be prepaid until the borrower dies or sells the home. These types of loans are complicated and can have high up-front fees. Although Regulation Z requires special disclosures for reverse mortgages, there is still a concern that consumers do not understand these products.
For reverse mortgages loans, the Fed has requested comments in response to the following questions:
- Are the current Regulation Z disclosures adequate to inform consumers about the costs and terms of reverse mortgages?
- Has counseling, as required for reverse mortgages insured by the Department of Housing and Urban Development (HUD), been effective in educating consumers about reverse mortgages and preventing abuse?
- Is counseling offered for mortgages that are not insured by HUD? Do borrowers of these loans have difficulty understanding the loan terms or encounter other problems? Have lenders used alternative disclosure approaches that have proven effective?
Topic 3 Informed Consumer Choice in the Subprime Market
The growth in the subprime market in recent years has expanded access to credit by helping to increase homeownership and provide opportunities for consumers to use the equity in their homes. However, this growth has also raised policy concerns, such as whether these consumers are informed about mortgage products and options and whether they can effectively shop for the best rates and terms within the subprime market in order to find the best available mortgage that meets their needs.
There have also been concerns that pricing disparities may reflect illegal discrimination, rather than being based on costs or risk related factors. Recent loan price data released in 2005 for the first time under the Home Mortgage Disclosure Act show that African Americans and Hispanic borrowers have obtained higher priced loans more frequently than White or Asian borrowers. There is a debate as to whether or not this reflects legitimate credit distinctions among these groups, such as credit scores, incomes, or the value of the collateral.
The role of mortgage brokers has also raised concerns. Some believe that since brokers fees are based on the amount of the loans, broker may encourage consumers to obtain mortgage products that enable them to obtain larger loans without providing information about the risks of these products or information about other products that may better meet the consumers needs.
For this topic, the Fed has requested comments in response to the following questions:
- How do consumers who get higher priced loans shop for these loans and how do they select a particular lender?
- What do consumers understand about the role of mortgage brokers? Has this understanding been furthered by state-required mortgage broker disclosures?
- What strategies have been helpful in educating consumers about their options in the mortgage market? What efforts are needed to educate consumers about the mortgage credit process and how to shop and compare terms and fees?
- What are some of the best practices that lenders, mortgage brokers, consumer advocates, and community development groups have used to help consumers understand the mortgage market and their loan choices?
Eric Richard General Counsel (202) 508-6742 firstname.lastname@example.org |
Mary Mitchell Dunn SVP & Deputy General Counsel (202) 508-6736 email@example.com
Jeffrey Bloch Assistant General Counsel (202) 508-6732 firstname.lastname@example.org
Lilly Thomas Assistant General Counsel (202) 508-6733 email@example.com
Catherine Orr Senior Regulatory Counsel (202) 508-6743 firstname.lastname@example.org