WASHINGTON (12/18/07)—The Federal Reserve Board Tuesday unanimously agreed to issue for comment a set of proposals intended to better protect consumers from unfair or deceptive home mortgage lending practices and related advertising. Some are hopeful this effort will be sufficient to stave off Congressional intervention in the regulation of home mortgage lending. As anticipated, the Fed’s proposed rules address such subprime lending practices as prepayment penalties, failure to offer escrow accounts for taxes and insurance, stated-income and low-documentation lending, and the failure to give adequate consideration to a borrower's ability to repay. The consumer protections would be adopted under the Home Ownership and Equity Protection Act (HOEPA), which gives the Fed authority and responsibility to prohibit unfair or deceptive mortgage lending practices. The proposal includes four protections for “higher-priced mortgage loans” secured by a consumer’s principal dwelling. They are:
* Creditors would be prohibited from engaging in a pattern or practice of extending credit without considering borrowers’ ability to repay the loan; * Creditors would be required to verify the income and assets they rely upon in making a loan; * Prepayment penalties would only be permitted if certain conditions are met, including the condition that no penalty will apply for at least sixty days before any possible payment increase; and * Creditors would have to establish escrow accounts for taxes and insurance.
The rule would define “higher-priced mortgage loan” in a way intended to capture loans in the subprime market but generally would exclude loans in the prime market. A loan would be covered if it is a first-lien mortgage and has an annual percentage rate (APR) that is three percentage points or more above the yield on comparable Treasury notes, or if it is a subordinate-lien mortgage with an APR exceeding the comparable Treasury rate by five points or more, according to a Fed release. Also, the release noted the following protections would apply to all loans secured by a consumer’s principal dwelling, regardless of the loan’s APR: Lenders would be prohibited from compensating mortgage brokers by making payments known as “yield-spread premiums” unless the broker previously entered into a written agreement with the consumer disclosing the broker’s total compensation and other facts. A yield spread premium is the fee paid by a lender to a broker for higher-rate loans. The consumer’s written agreement with the broker must occur before the consumer applies for the loan or pays any fees. The comment period ends ninety days after publication of the proposal in the Federal Register, which is expected shortly. The CUNA Consumer Protection Subcommittee will be reviewing the proposal in detail to develop the Credit Union National Association’s (CUNA's) comment. The proposal quickly became the target of criticism by Rep. Barney Frank (D-Mass.) , who chairs the House Financial Services Committee. Frank said he and his committee staff have reviewed the Fed’s plan to crack down on abusive lending. “We now have confirmation of two facts we have known for some time: one, the Federal Reserve System is not a strong advocate for consumers, and two, there is no Santa Claus. People who are surprised by the one are presumably surprised by the other.” Last summer, Frank, frustrated with the pace the Fed was maintaining in implementing HOEPA, said he would want to redistribute the Fed’s power to forbid unfair or deceptive banking practices to the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. The Treasury Department, on the other hand, backed the Fed’s action. Treasury Under Secretary for Domestic Finance Robert K. Steel issued the following statement: "Treasury commends the Federal Reserve's efforts announced today to improve mortgage lending practices. The Federal Reserve has used its authority to restrict certain practices that are unfair or deceptive and to provide enhanced information to consumers. We support the development of such rules, which recognize the need to protect consumers without unnecessarily restricting their access to credit." However now, in the midst of the country’s subprime woes, criticism of Washington’s inaction is becoming more widespread. A Dec. 18 article in The New York Times
said that prior to hitting crisis proportions, it was all but impossible to get regulators’ attention focused on what some saw as a looming threat. The article noted, for instance, that the late Edward Gramlich, a former Fed governor, started nearly seven years ago to warn that there was a burgeoning mass of a new type of lender who were teasing people into loans they couldn’t really afford, but Gramlich’s concerns was rebuffed by the Fed. Also, Sheila C. Bair, when she was a senior Treasury official in 2001, worked to get subprime lenders to adopt best practices with outside monitoring for compliance, but with little effect. Bair is now chair of the Federal Deposit Insurance Corp. Use the resource link below for more on the Fed plan.