CUNA Regulatory Comment Call
December 21, 2000
Fed Proposal Revises Disclosure Requirements Under the Home Ownership and Equity Protection Act
(MAJOR RULE)EXECUTIVE SUMMARY
- The Federal Reserve Board (Fed) is requesting comments on revising the disclosure requirements under the Home Ownership and Equity Protection Act (HOEPA), which imposes specific requirements for certain high-priced loans. The HOEPA requirements are incorporated in Regulation Z, the Truth in Lending Act (TILA). The proposed revisions are intended to address the problem of predatory lending.
- The following are the proposed revisions that will apply to loans covered under HOEPA:
- A loan is currently covered under HOEPA if the annual percentage rate (APR) exceeds comparable Treasury securities by more than ten percentage points. The proposed rule will lower this threshold to eight percentage points.
- A loan is also covered under HOEPA if points and fees exceed 8 percent of the loan amount or $451 (this will be increased to $465 on January 1, 2001). Points and fees will now include amounts paid at closing for optional credit life, accident, health, or loss-of-income insurance, as well as other similar products, such as debt cancellation coverage.
- “Due-on-demand” clauses will be prohibited, unless the clause is exercised in connection with a default.
- Lenders will be prohibited from refinancing a loan within the first twelve months, unless it is in the borrower’s best interest.
- Currently, lenders that make HOEPA loans are prohibited from engaging in a pattern or practice of making such loans without considering the ability to repay. The proposed rule will presume a “pattern or practice” if the lender does not document or verify repayment ability. For adjustable rate loans, the ability to repay must take into consideration the loan payments that may result if interest rates are increased to the maximum possible extent, as allowed under the loan terms.
- Clarification that revised disclosures are required when borrowers accept and finance credit and other optional products if this changes the monthly payment.
- Clarification that the additional disclosures required under HOEPA will include voluntary items if the borrower previously agreed to such items. For refinancings, this additional disclosure must reflect the total amount that the consumer will borrow.
- Clarification that lenders cannot evade HOEPA by trying to document a loan as open-end credit when the features do not meet the requirements of open-end credit.
- For zero or other “low cost” loans that are available through mortgage assistance programs, lenders may not replace those with higher rate loans, unless the refinancing is in the borrower’s best interest.
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:
- Lenders must provide borrowers with an abbreviated disclosure statement at least three business days before the loan is closed, in addition to the other TILA disclosures that must be given before or at closing. This statement informs borrowers that they are not obligated to complete the transaction and could lose the home if payments are not made. The statement also includes the loan APR.
- Restrictions on certain loan terms, such as short-term balloon notes, prepayment penalties, non-amortizing payment schedules, and higher interest rates upon default.
- Lenders are prohibited from engaging in the practice of making HOEPA loans without regard to the borrower’s ability to repay.
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:
- The Fed held hearings on predatory lending in 1997 and 2000. The Fed also issued a request for written comments in connection with the 2000 hearings.
- The Fed and the Department of Housing and Urban Development (HUD) submitted a report to Congress in 1998 regarding mortgage-related disclosures.
- HUD and the Department of Treasury held public forums on predatory lending this year and issued a report in June.
- The Fed also recently convened a task force of ten federal agencies in order to coordinate a response to predatory lending.
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.)- Do you support all of the changes in the proposed rule? Are there any other changes that should be included? For example, should some of the practices that will be further restricted under the proposed rule actually be banned, such as single premium credit insurance and balloon payments? The Fed will not ban balloon payments without evidence that there is a particular problem. Do you believe there is such evidence?
- If the HOEPA APR trigger is lowered from ten to eight percentage points above comparable Treasury securities, will this capture some of your loans that should not come under HOEPA?
- For certain loans, lenders may require that consumers borrow additional amounts in order to pay off the existing first mortgage. Although this ensures that the lender is the senior lien-holder, the borrower will pay higher fees and points and may be replacing a first mortgage that has a low rate. To encourage lenders to offer subordinate-lien mortgages, rather than to refinance existing first-lien mortgages, the Fed is requesting comment on whether the APR trigger for first-lien mortgages should be lowered to eight percentage points above comparable Treasury securities while keeping the trigger at 10 percentage points for subordinate-lien mortgages. Do you support this approach?
- Should consumers who agree to purchase additional products and services in connection with the loan be required to provide this agreement in writing?
- The lender must provide revised disclosures if the terms to a loan agreement have been changed after the original disclosures were provided to the borrower. Would it be appropriate to provide an exception if the changes to the amount borrowed are “insignificant?” What would be a suitable threshold for what would be considered “insignificant?”
- For HOEPA loans, should lenders be required to provide a disclosure advising borrowers to seek independent advice or credit counseling regarding the merits of the loan? Would this help counteract predatory lending? Would this provide the necessary encouragement for borrowers to seek credit counseling?
- Should it be assumed that a lender violated HOEPA if a borrower applies for a closed-end mortgage loan, but receives an open-end line of credit that is priced above the HOEPA triggers for APR, points, and fees?
- To help members who are facing financial difficulties, some credit unions restructure risk-based non-mortgage loans and add a lien on a home, commonly referred to as a “courtesy lien.” Will the lowering of the HOEPA thresholds result in more of these loans being covered under the HOEPA provisions?
- Other comments?
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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 |
