Federal Register: July 12, 2000 (Volume 65, Number 134)
DOCID: FR Doc 00-17520
FEDERAL RESERVE SYSTEM
Federal Reserve System
CFR Citation: 12 CFR Part 226
DOCUMENT ID: [Regulation Z; Docket No. R-1075]
NOTICE: PROPOSED RULES
ACTION: Truth in lending (Regulation Z):
DOCUMENT ACTION: Public hearings and request for comments.
Truth in Lending
DATES: Hearings. The hearings are scheduled as follows:
1. Charlotte, North Carolina, July 27, 2000, 9 a.m. to 4:30 p.m.
2. Boston, Massachusetts, August 4, 2000, 9 a.m. to 4:30 p.m.
3. San Francisco, California, September 7, 2000, 9 a.m. to 4:30 p.m.
Comments. Comments from persons unable to attend the hearings or wishing to submit written views on the issues raised in this notice must be received by Friday, September 1, 2000.
The Board will hold public hearings on predatory lending practices in the homeequity lending market, and invites consumers, consumer advocacy organizations, lenders, and other interested parties to attend and to provide written comments on relevant issues. The hearings will be held pursuant to the Home Ownership and Equity Protection Act of 1994, which amended the Truth in Lending Act to impose disclosure requirements and substantive limitations on certain closedend mortgage loans bearing rates or fees above a certain percentage or amount. The act directs the Board to examine the home equity loan market and the adequacy of existing Truth in Lending provisions in protecting the interests of consumers.
Home-equity lending market; predatory lending practices; hearings,
In 1994, the Congress enacted the Home Ownership and Equity Protection Act of 1994 (HOEPA) as an amendment to the Truth in Lending Act (TILA). HOEPA was a response to anecdotal reports of abusive lending practices whereby unscrupulous lenders made unaffordable home secured loans to ``houserich but cashpoor borrowers.'' These cases frequently involved elderly and sometimes unsophisticated homeowners who were targeted for loans with high rates and fees and repayment terms that were difficult or impossible for the homeowners to meet. Oftentimes the transactions involved fraud or unlawful
misrepresentations by lenders or brokers.
HOEPA does not prohibit creditors from making any type of home secured loan, nor does it limit or cap rates that creditors may charge. Instead, the act identifies a class of highcost mortgage loans through rate and fee triggers. For transactions covered by HOEPA, creditors must provide abbreviated disclosures to consumers at least three days before the loan is closed, in addition to the disclosures generally required by TILA. When combined with TILA's threeday right of rescission after the loan closing, the HOEPA disclosures afford consumers a minimum of six days to consider key loan terms before finally deciding to enter into a transaction. Transactions covered by HOEPA are also subject to substantive limitations that prohibit certain terms from being included in the loan agreement.
HOEPA directs the Board, in consultation with its Consumer Advisory Council, to conduct public hearings periodically to examine homeequity loans in the marketplace and consider the adequacy of federal laws (including HOEPA) in protecting consumersparticularly lowincome consumers. In June 1997, within two years after HOEPA became effective, the Board held hearings on homeequity lending and HOEPA. The results of those hearings were summarized and submitted to the Congress by the Board and Department of Housing and Urban Development (HUD) in July 1998, in a joint report concerning reform of TILA and the Real Estate Settlement Procedures Act.
Predatory lending practices in homesecured loans continue to
receive attention from the Congress and regulatory agencies. The
available information concerning predatory lending is essentially
anecdotal; there is no ready method for measuring the amount of
predatory lending or determining how prevalent a problem it represents.
There are enough anecdotal reports, however, to suggest that predatory
lending continues to be a problem. Abusive practices may involve, among
other things, excessive fees and interest rates, unnecessary insurance,
and fraud. Borrowers saddled with unaffordable payments can lose their
homes. Excessive upfront fees combined with frequent refinancings [[Page 42890]]
(often referred to as ``loan flipping'') may also strip the equity from consumers'' homes.
Given the wide range of practices that predatory lending may involve, a multifaceted approach to dealing with the problem, including both regulatory and nonregulatory strategies, is likely to be the most effective. This includes strengthening enforcement of current laws, voluntary industry action, community outreach efforts, and consumer education and counseling. Several bills taking different approaches to addressing predatory lending have been introduced in the Congress. Several states have enacted or are considering legislation. The Board has convened a nineagency working group, including the five federal agencies that supervise depository institutions, HUD, the Office of Federal Housing Enterprises Oversight, the Department of Justice, and the Federal Trade Commission. The aims of the group are to tighten enforcement of existing statutes and to establish a coordinated approach to addressing predatory practices.
On May 24, the Board presented testimony at a hearing held by the House Committee on Banking and Financial Services on predatory lending and possible remedial actions. HUD and the Department of the Treasury have convened a National Task Force on Predatory Lending. The primary mission of the Task Force has been to collect information about predatory lending, provide data on the impact of predatory practices, and comment on existing legislative proposals for reform in order to provide a basis for HUD and Treasury to make recommendations for legislation to the Congress. To solicit information about local and national aspects of the predatory lending problem, HUD and Treasury held five pubic forums in Los Angeles, Chicago, New York, Atlanta, and Baltimore. On June 20, HUD and Treasury issued a report on their findings, that discusses possible ways to curb predatory lending and contains recommendations to the Congress regarding possible legislative action and to the Board regarding the exercise of the Board's regulatory authority under HOEPA.
The Board's homeequity hearings under HOEPA will be primarily focused on the Board's regulatory authority under that act, and specific ways that the Board might consider exercising that authority. As described below, the Board is authorized to make some adjustments to HOEPA's highcost triggers that could affect the scope of the act's coverage. The Board is also directed by HOEPA to prohibit certain acts and practices in connection with mortgage loans if the Board makes the finding required by the statute. Based on information gathered during recent public hearings, the interagency discussions, and meetings with industry and consumer representatives, the Board has developed a series of questions for discussion at the HOEPA hearings and for public comment. These questions are intended to solicit views on the ways that the Board might exercise its authority, and will be used to focus the discussion at the HOEPA hearings on possible regulatory approaches to deter predatory lending.
The Truth in Lending Act and HOEPA
The Truth in Lending Act (TILA) (15 U.S.C. 1601 et seq.) is intended to promote the informed use of consumer credit by requiring disclosures about its terms and cost. The act requires creditors to disclose the cost of credit as a dollar amount (the ``finance charge'') and as an annual percentage rate (the ``APR''). Uniformity in creditors' disclosures is intended to assist consumers in comparison shopping. TILA requires additional disclosures for loans secured by a consumer's home and permits consumers to rescind certain transactions that involve their principal dwelling. The act is implemented by the Board's Regulation Z (12 CFR part 226).
The Home Ownership and Equity Protection Act of 1994 (HOEPA), contained in the Riegle Community Development and Regulatory Improvement Act of 1994, Pub. L. 103325, 108 Stat. 2160, amends TILA to impose disclosure requirements and substantive limitations on certain homesecured loans (closedend installment loans) with rates and fees above a specified amount. A loan is covered by HOEPA if (1) the APR exceeds the rate for treasury securities with a comparable maturity by more than 10 percentage points, or (2) the points and fees paid by the consumer exceed the greater of 8 percent of the loan amount or $400 (adjusted annually based on the consumer price index). HOEPA is implemented by section 32 of the Board's Regulation Z (12 CFR 226.32), effective in October 1995. 60 FR 15463, March 24, 1995.
HOEPA does not prohibit creditors from making any homesecured loan, nor does it limit or cap rates that creditors may charge. Instead, HOEPA layers disclosure and timing requirements onto the requirements already imposed for consumer credit transactions. Creditors offering HOEPAcovered loans must provide abbreviated disclosures to consumers three days before the loan is closed. The disclosures provide that consumers are not obligated to complete the closing, remind borrowers that they could lose their home if they fail to make payments, and state a few key cost disclosures, including the APR, the regular payment, and, if the loan has a variable rate, a ``worst case payment'' if rates increase as high and quickly as possible under the loan agreement.
In addition, creditors making HOEPAcovered loans are prohibited from including in their loan agreements, among other provisions: (1) Balloon payments in loans with maturities of less than five years, (2) payment schedules that result in negative amortization, (3) higher default interest rates, and (4) prepayment penalties in most instances. Consumers entering into a HOEPAcovered loan may rescind the transaction for up to three years after closing if creditors fail to provide the early disclosures or if they include a prohibited term in the loan agreement.
Homepurchase loans are not covered by HOEPA. Although reverse mortgages are exempt from the HOEPA requirements imposed for traditional mortgages, reverse mortgages are subject to an alternative detailed disclosure scheme under HOEPA (implemented by section 33 of Regulation Z). Homeequity lines of credit (openend credit) are also exempt from HOEPA, as congressional hearings preceding enactment did not reveal evidence of abusive practices connected with openend home equity lending.
In June 1997, the Board held hearings on homeequity lending and HOEPA in Los Angeles, Atlanta, and Washington, DC. Participants were asked to address several topics, including the effect of HOEPA on homeowners seeking homeequity credit and on credit opportunities in the communities targeted by the legislation (for example, whether there had been changes to the volume or cost of homeequity installment loans); the effectiveness of the disclosures and suggestions for improvements; and whether any exemptions or prohibitions would be appropriate for the Board to consider under its HOEPA rulemaking authority. 62 FR 23189, April 29, 1997.
Those testifying at the hearings generally concurred that it was
too soon after HOEPA's enactment to determine the effectiveness of the
new law. However, consumer representatives reported continuing abusive
practices by homeequity lenders of all degrees of sophistication. The
hearings formed the basis for a detailed analysis of the problem of
abusive lending practices in mortgage lending contained in a July [[Page 42891]]
1998 report to the Congress by the Board and HUD on possible reforms to TILA and the Real Estate Settlement Procedures Act regarding mortgage related disclosures. (The 1998 joint report is available at the Board's website address: www.federalreserve.gov/boarddocs/press/general/1998.) Chapter 6 of the report suggested a multifaceted approach to curbing predatory lending practices, including some legislative action, stronger enforcement of current laws, and nonregulatory strategies such as community outreach efforts and consumer education and counseling. (See also Chapter 2 at page 17, Chapter 7 at page 76, and Appendix D.) II. Public Hearings
Since HOEPA's enactment, the volume of homeequity lending has increased significantly. This overall growth in homeequity lending has been accompanied by a sharp boost in the subprime mortgage market. HUD reports that the number of subprime homeequity loans has increased from 80,000 in 1993 to 790,000 in 1998.
The growth in subprime lending brought a substantial increase in the availability of credit to borrowers having lessthanperfect credit histories and to other consumers who do not meet the underwriting standards of prime lenders. Because consumers who obtain subprime mortgage loans have, or perceive they have, fewer credit options than other borrowers, they may be more vulnerable to unscrupulous lenders or brokers. With the increase in the number of subprime loans, consumer advocates have been concerned for some time about the potential for a corresponding increase in the number of predatory loans. Some industry representatives have noted, however, that the trend toward securitizing subprime mortgages has served to standardize creditor practices and to limit the opportunity for widespread abuse.
To address concerns about predatory lending and consider approaches the Board might take in exercising its regulatory authority under HOEPA, the Board has scheduled three oneday hearings in Charlotte (Thursday, July 27), Boston (Friday, August 4), and San Francisco (Thursday, September 7). The hearings will seek statements from the public about homeequity lending in general, but will focus specifically on collecting testimony on the ways that the Board might use its rulewriting authority under HOEPA to address predatory lending practices in the homeequity market. To focus the discussion at the hearings, interested parties wishing to present oral statements at the hearings (and persons submitting written comments to the Board) are asked to address the issues set forth below, as applicable: A. Adjusting the HOEPA Triggers
HOEPA covers mortgage loans that meet one of the act's two ``high cost'' triggers. A loan is covered if (1) the APR exceeds the rate for treasury securities with a comparable maturity by more than 10 percentage points, or (2) the points and fees paid by the consumer exceed the greater of 8 percent of the loan amount or $400. The Board is required to adjust the $400 threshold annually, based on the consumer price index; for 2000 the amount is $451.
1. APR Trigger
HOEPA authorizes the Board to adjust the HOEPA trigger by 2
percentage points from the current standard of 10 percentage points
above the U.S. Treasury securities with comparable maturities. Some
consumer advocates and others have suggested that, based on the current
APR trigger, only a small percentage of subprime mortgage loans are
covered by HOEPA. They contend that lowering the APR trigger would
allow HOEPA's protections to be extended to a broader class of transactions.
The Board also solicits comment on any available data regarding the percentage of subprime mortgage loans covered under the existing APR trigger, and the percentage of transactions that would be affected by lowering the trigger by 2 percentage points.
2. Points and Fees Trigger
A loan is covered by HOEPA if the points and fees paid by the consumer exceed the greater of 8 percent of the loan amount or $400. For this purpose, ``points and fees'' include all items included in the finance charge and APR except interest, and all compensation paid to mortgage brokers. The act specifically excludes reasonable closing costs that are paid to unaffiliated third parties. HOEPA also authorizes the Board to add ``such other charges'' to the points and fees test as the Board deems appropriate. Accordingly, comment is solicited on what fees, if any, should be added to the calculation. In particular, comment is requested on the following:
a. Credit Insurance: Premiums paid for credit insurance that a borrower is required to purchase are finance charges that are currently included in both the APR and the points and fees test under HOEPA. But premiums paid for optional credit life insurance currently are not included in the points and fees test. Some consumer advocates assert that because these premiums are excluded, predatory lenders may avoid HOEPA coverage by ``packing'' loans with highpriced credit insurance that represents a significant source of fee income, in lieu of charging fees that would be included under the current HOEPA trigger.
b. Prepayment Penalties: In some cases, prepayment penalties may
provide fee income that is an additional incentive for creditors to
encourage frequent refinancings that are not in a consumer's interest.
If the consumer must pay a prepayment penalty to the same creditor that
is refinancing the loan, the prepayment fee could be viewed as a cost of the new transaction.
c. Points: Consumers who refinance their loans generally pay points on the entire refinanced amount.
The current points and fees test under HOEPA is complex. The statute allows many closing costs to be excluded from the calculation if they are reasonable and paid to third parties. The Board solicits comments on whether a better approach would be to recommend a statutory amendment that would include all closing costs in the points and fees test.
B. Restricting Certain Acts or Practices Under HOEPA
The hearings will explore how the Board's regulatory authority
under HOEPA to prohibit specific practices can be used to curb predatory lending.
Under HOEPA, the Board is authorized to prohibit acts and practices:
Comment is invited on the following specific approaches to dealing with predatory lending practices, and whether any new requirements or prohibitions should apply to all mortgage transactions, only to refinancings, or only to HOEPAcovered refinancings. Both regulatory and legislative proposals should be discussed.
1. Credit insurance. Premiums for credit insurance are often
collected from the borrower at closing and added to the loan amount,
increasing the total finance charges paid by the consumer. Consumer
advocates express concern about highpressure sales tactics, which may
mislead consumers about whether the insurance is required. The Board
previously recommended that the Congress consider prohibiting the
advance collection of premiums for credit insurance policies in
connection with HOEPA loans. If no statutory prohibition is adopted,
should the Board regulate the conditions under which such policies are sold or financed? For example:
2. Unaffordable loans. Under HOEPA a creditor may not engage in a
pattern or practice of extending credit based on the collateral if
(given the consumer's current and expected income, current obligations,
and employment status) the consumer will be unable to make the scheduled loan payments.
3. Refinancing lowerrate loans. When a consumer seeks a second mortgage to consolidate debts or to finance home improvements, some creditors also require the existing first mortgage to be paid off as a condition of providing the new funds. This ensures that the creditor will be the senior lienholder, but may increase significantly the points and fees paid for the new loan. Is regulatory action appropriate to protect consumers from abuses and, if so, what type of action could be taken without restricting credit in legitimate transactions?
4. Balloon Payments. Depending on the circumstances, mortgages with
a balloon payment feature may be attractive to some borrowers, but may
harm other consumers. HOEPA currently prohibits balloon payments for
highcost loans that have terms of less than 5 years. Lenders that
price their loans just below HOEPA's triggers, however, might include
balloon payments that force consumers to refinance the loan and pay additional points and fees.
5. Prepayment penalties. Prepayment penalties allow creditors to
recover their transaction costs if loans are prepaid earlier than
expected. That rationale may not be relevant in cases where high rates
and upfront fees are charged. In such cases, the penalty might be used
to deter the consumer from refinancing the loan on more favorable terms.
6. Foreclosures. Consumers who have been victims of abusive
practices must be afforded adequate opportunity to assert their rights
in order to avoid unwarranted foreclosures. State law and local
practice generally govern the procedures followed for foreclosures.
Some states require actual notice to the consumer, but in other states
notice by publication is sufficient. Even when consumers do receive
notice, they may not get adequate information about their legal options.
7. Misrepresentations regarding borrower's qualifications. There is some concern that many borrowers who obtain highcost loans may actually qualify for lower cost credit. Some brokers or creditors may provide consumers with false or materially misleading information that the consumer does not qualify for a lower cost loan based on the creditor's underwriting criteria. Such a practice generally would be illegal under state laws that protect against fraud and deception. What benefit to consumers might be achieved if the Board issued a rule that prohibited such misrepresentations as unfair and deceptive under HOEPA?
8. Reporting borrowers' payment history. Some creditors do not report to consumer reporting agencies subprime borrowers' good payment history in order to avoid having the borrowers solicited by competitors for a refinancing on more attractive terms. What would be the effect of requiring creditors that choose not to report borrowers' positive payment history to disclose that fact?
9. Referral to credit counseling services. What regulatory action would better enable consumers in general, or HOEPA borrowers in particular, to take advantage of any available credit counseling services?
10. HOEPA disclosures. In their 1998 report to the Congress, the
Board and HUD recommended amendments to the required disclosures, including adding references to the availability of credit
counseling, using more ``userfriendly'' text in the narrative reminders about the potential consequences for not making payments, and requiring the consumer's monthly income to be disclosed in close proximity to the consumer's monthly payment. Comment is requested on those recommendations. Comment also is solicited on whether additional information in the current HOEPA disclosures would benefit consumers. For example:
11. Openend home equity lines. HOEPA does not cover homeequity lines of credit. Is there evidence that lenders are using openend credit lines to evade HOEPA? If so, what benefit might be derived from prohibiting the practice of structuring a homesecured loan as openend credit in order to evade the provisions of HOEPA? How could such practices be identified and what limitations on these practices would be appropriate to effect the purposes of HOEPA?
Community Outreach and Consumer Education
In addition to issues concerning the Board's regulatory authority under HOPEA, views will also be elicited at the hearings about nonregulatory approaches to curbing predatory lending, such as community outreach and consumer education. Accordingly, the Board seeks comment on the following:
What community outreach activities and consumer education efforts are being pursued currently? Which types of products, programs, and delivery systems have been most effective? What other strategies might be implemented to reach the targeted populations? How might outreach and education efforts be tailored to address some lenders' and brokers' aggressive marketing practices? What role can government agencies play in increasing the effectiveness of these programs?
The Board seeks information about any studies or data pertaining to subprime lending or HOEPA loans that would be useful in determining how the Board might use its regulatory authority under HOEPA. For example, are there data regarding the percentage of HOEPA loans that result in foreclosures? Are there data regarding the effect of HOEPA disclosures showing the percentage of transactions cancelled by borrowers based on disclosures provided before closing?
III. Form of Statements and Comments
These hearings are open to the public to attend. Invited speakers will participate in panel discussions. In addition, about two hours is reserved for brief statements by other interested parties, starting at approximately 2:30 p.m. To allow as many persons as possible to offer their views during this period, oral statements should be brief (five minutes or less); written statements of any length may be submitted for the record. Interested parties who wish to participate during this ``openmike'' period are asked to contact the Board in advance of the hearing date, to facilitate planning for this portion of the hearings. The order of speakers generally will be based on their registration at the hearing site on the day of the hearing.
Comment letters should refer to Docket No. R1075, and, when possible, should use a standard typeface with a font size of 10 or 12. This will enable the Board to convert the text to machinereadable form through electronic scanning, and will facilitate automated retrieval of comments for review. Also, if accompanied by an original document in paper form, comments may be submitted on 3\1/2\ inch computer diskettes in any IBMcompatible DOS or Windowsbased format.
By order of the Board of Governors of the Federal Reserve System, July 6, 2000.
Jennifer J. Johnson,
Secretary to the Board.
[FR Doc. 0017520 Filed 71100; 8:45 am] BILLING CODE 621001P
FOR FURTHER INFORMATION CONTACT
Kyung Cho-Miller, Counsel, or Jane E. Ahrens, Senior Counsel, Division of Consumer and Community Affairs, at (202) 4523667 or 4522412; for the hearing impaired only, contact Janice Simms, Telecommunication Device for the Deaf, (202) 8724984.
For directions and other matters relating to the meeting facilities in Charlotte, contact Mary Chick, (704) 3582495; in Boston, Cynthia Reardon, (617) 9733512; in San Francisco, Lena Robinson, (415) 974 2422.