CUNA Regulatory Comment Call


December 21, 2000

Fed Proposal Revises Disclosure Requirements Under the Home Ownership and Equity Protection Act

(MAJOR RULE)

EXECUTIVE SUMMARY

Comments on the proposal are due by March 9, 2001. Please submit your comments to CUNA by March 2, 2001. Please feel free to fax your responses to CUNA at 202-371-8240; e-mail them to Associate General Counsel Mary Dunn at mdunn@cuna.com or to Assistant General Counsel Jeffrey Bloch at jbloch@cuna.com; or mail them to Mary or Jeff in c/o CUNA’s Regulatory Advocacy Department, 805 15th Street, NW, Suite 300, Washington, DC 20005. If commenting directly to the Fed, you must refer to the Docket Number, which is R-1090. You may also contact us if you would like a copy of the proposed rule or you may access it on the Internet at the following address:
http://www.federalreserve.gov/boarddocs/meetings/2000/20001213/20001213-OpenMemo2-1.pdf

BACKGROUND

In 1994, Congress enacted HOEPA, which sets forth limitations and additional disclosure requirements for certain closed-end mortgage loans. A loan is covered under HOEPA if: 1) the APR exceeds the rate for Treasury securities with a comparable maturity by more than ten percentage points; or 2) the total points and fees payable by a borrower exceed the greater of $451 or eight percent of the total loan amount. (The $451 threshold is adjusted annually and is scheduled to increase to $465 on January 1, 2001.) The Fed amended Regulation Z, TILA, in 1995 to implement the HOEPA statute. The Fed also has authority under HOEPA to prohibit specific loan practices.

The following are the significant restrictions contained in HOEPA:

HOEPA was enacted in response to evidence of abusive predatory lending practices in the home-equity lending market. The volume of subprime lending has increased significantly since the enactment of HOEPA in 1994, and there has been concern that with this increase in the number of subprime loans, there has also been a corresponding increase in the number of predatory loans.

The following are the significant initiatives that been undertaken by the federal regulators in recent years:

CUNA has supported initiatives to revise HOEPA to address predatory lending and recently joined more than 160 consumer groups in signing a letter to Fed Chairman Alan Greenspan urging the Fed to take action against predatory lending. The letter was drafted by Eric Stein from Self-Help CU, Durham, North Carolina.

BRIEF DESCRIPTION OF THE PROPOSAL (This description tracks the provisions in the order that they appear in the proposed rule.)

Timing of Disclosures

HOEPA includes a three-day “cooling off” period between the time the borrowers are furnished with disclosures and the time that they are obligated under the terms of the loan. During this time, borrowers may re-evaluate their decision to accept the loan. If the lender changes any terms that make the disclosures inaccurate, new disclosures must be given and borrowers then have another three-day “cooling off” period.

The official staff commentary to Regulation Z will clarify that this redisclosure requirement and new waiting period will apply in situations in which borrowers accept and finances credit insurance and other optional products if the new monthly payment is different than what was previously disclosed.

HOEPA Coverage

A loan is currently covered under HOEPA if the APR exceeds the rate for Treasury securities, with a comparable maturity, by more than ten percentage points. Under TILA, the Fed may adjust this “APR trigger” by up to two percentage points.

The proposed rule will lower this APR trigger by two percentage points. HOEPA will then cover loans if the APR exceeds comparable Treasury securities by more than eight percentage points. Under the current interest rate environment, HOEPA will cover loans with APRs of about fourteen percent or higher.

A loan is also covered under HOEPA if the points and fees payable by the borrower exceed the greater of 8 percent of the loan amount or $451. (The dollar amount is adjusted annually and will be $465 in 2001.) The proposed rule will include as points and fees the costs associated with optional credit life, accident, health, or loss-of-income insurance, and other similar products that are paid by the borrower at or before closing, such as debt-cancellation coverage. Premiums for required credit insurance policies are already included. The costs to be included under the proposal include single premium insurance. For insurance with periodic premiums, only the initial premium paid at or before closing would be included under the HOEPA “points and fees” test.

HOEPA-Specific Disclosures

For loans covered under HOEPA, lenders must provide additional, abbreviated disclosures to borrowers at least three days before the loan closing. This is in addition to the disclosures that are otherwise required under TILA. These abbreviated disclosures inform the borrowers that they are not obligated to complete the transaction and that they could lose their home if they fail to make the loan payments. These disclosures also include the loan APR and the regular monthly or other periodic payments.

The official staff commentary will be clarified to allow lenders to include voluntary items in the monthly or periodic payment disclosure if the borrower has previously agreed to such items. The official staff commentary already reflects that lenders disclose any balloon payment, along with the regular payment, but the proposal will move this requirement from the commentary to the rule itself. The model form that is provided in the rule will be revised to include a sample clause regarding balloon payments.

The proposed rule will require that for mortgage refinancings, this additional disclosure must reflect the total amount of the loan. This is intended to alert borrowers in advance of the loan closing that the amount of the loan may be substantially higher than requested due to the financing of points, fees, and insurance.

Due-on-demand Clause

The proposed rule will prohibit provisions that reserve the right to demand repayment of the entire outstanding balance at any time, unless the clause is exercised in connection with a consumer’s default. TILA has a similar prohibition for home-secured lines of credit, and the proposed rule will include official staff commentary that will provide guidance similar to the guidance that accompanies the existing TILA provisions. For example, the commentary will indicate that a due-on-demand clause cannot be exercised merely because the borrower sends the payment to the wrong office within the financial institution.

Refinancing Within a Twelve-month Period

Under the proposed rule, a lender holding a HOEPA loan will be prohibited from refinancing that loan within the first twelve months, unless the refinancing is in the borrower’s best interest. This requirement is intended to address “loan flipping,” which refers to the practice of frequently refinancing loans in order to generate fee income, even though it is not in the borrower’s best interest.

The rule also specifically prohibits lenders from engaging in acts to evade this new rule. Examples given include the lender arranging for a refinancing of its own loan with an unaffiliated lender or modifying a loan agreement and charging a fee, regardless of whether the existing loan is satisfied and replaced with a new loan.

The official staff commentary will indicate that the determination of whether the refinancing is in the borrower’s best interest must be based on the totality of the circumstances. For example, consideration should be given to the total loan charges in comparison with the amount of new funds that is advanced.

Repayment Ability

Lenders that make HOEPA loans are prohibited from engaging in a pattern or practice of extending such credit that is based on the borrower’s collateral without considering the borrower’s repayment ability, including the borrower’s income, current obligations, and employment.

The proposed rule will create a presumption, which can be rebutted, that the lender has engaged in a “pattern or practice” of making HOEPA loans based on the collateral and without ability to repay if the lender does not document and verify the borrower’s repayment ability.

The official staff commentary will clarify that the determination of whether there is a “pattern or practice” depends on the totality of the circumstances. Here, the commentary refers to case law that interprets the pattern or practice provisions that are in TILA, the Equal Credit Opportunity Act, the Fair Housing Act, and the equal employment opportunity provisions of the Civil Rights Act of 1964. The commentary will also clarify that for adjustable rate loans where there is a discounted introductory interest rate, the consideration of the borrower’s ability to repay must take into consideration the increases in the loan payments that may result when the rate is increased to the maximum possible extent within the shortest possible time frame.

Other Prohibited Acts or Practices

The proposed rule will prohibit lenders in the first five years of a zero interest rate or other low-cost loan from replacing that loan with a higher-rate loan, unless the refinancing is in the borrower’s best interest. For fixed rate loans, “low cost” will be defined as a loan that carries a rate that is at least two percentage points below the yield of Treasury securities with a comparable maturity. For variable rate loans, “low cost” will be defined as a loan in which the current rate is at least two percentage points below the index or formula used to make the rate adjustments. These provisions are designed primarily to protect low-cost home loans that are offered through mortgage assistance programs that give low and moderate income borrowers the opportunity to own a home.

As stated above, HOEPA applies to closed-end loans. The proposed rule will clarify that lenders cannot evade HOEPA by trying to document a loan as open-end credit when the features and terms do not meet the requirements of open-end credit. For example, a loan cannot be structured as open-end credit if there is no reasonable expectation that repeat transactions will occur under a reusable line of credit.

Model Form

HOEPA currently provides a model form for the disclosures that need to be provided at least three days before the borrower is obligated under the terms of the loan. The model form will be revised to include the changes described above regarding refinancings and balloon payments.

QUESTIONS TO CONSIDER REGARDING THE FED’S HOEPA PROPOSAL

(The Fed has specifically requested comment on most of the issues raised in these questions.)
Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com
Mary Mitchell Dunn • SVP & Associate General Counsel • (202) 508-6736 • mdunn@cuna.com
Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com
Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 • corr@cuna.com