Sen. Chris Dodd, the Connecticut Democrat who chairs the Senate Banking Committee, wants the Federal Reserve to use its rule-making authority to require that mortgage loan originators fully evaluate a borrower’s ability to make loan payments, restrict the use of low- and no-doc loans, and establish escrow accounts to make tax and insurance payments.
In a letter to Dodd, Federal Reserve Chairman Ben Bernanke said regulators have already strengthened the Home Ownership and Equity Protection Act (HOEPA), and that he is reluctant to draft rules that would restrict the use of loans that, while harmful for some borrowers, may be suitable for others. But Bernanke said the Fed will consider further changes to HOEPA and other rules for lenders, and has scheduled a June 14 public hearing on the issue.
Bernanke said that because borrowers can sue lenders for violating HOEPA rules, “any new rules should also be crafted in a manner that avoids creating uncertainty regarding lender compliance.”
The Fed chairman made similar points in a May 17 speech delivered at a conference for bankers in Chicago.
The mortgage lending industry has also warned lawmakers against amending HOEPA, saying they could frighten away investors who buy mortgage-backed securities on Wall Street. That would reduce the flow of investment capital into mortgage lending and increase the cost of borrowing for home buyers, they warn.
“Any federal law that begins with amendments to existing HOEPA likely will be freighted with HOEPA’s effects,” industry lawyer and lobbyist Donald Lampe told members of the House Financial Services Committee earlier this month. “Hardly anyone … in the secondary market funds or purchases HOEPA loans.”
An amendment to the Truth in Lending Act, HOEPA sets rules for certain loans that carry high rates or fees. Consumer groups such as the Center for Responsible lending have called for lawmakers to strengthen HOEPA by lowering the thresholds for triggering its requirements, and increasing penalties for violations.
In his letter to Dodd, Bernanke noted that the Fed revised its HOEPA rules in 2001 to “adjust price triggers and address abusive lending practices.” To discourage loan flipping, the Fed prohibited lenders from refinancing HOEPA loans with another high-cost HOEPA loan inside of a 12-month window. “Due on demand” and “call” clauses were banned, preventing lenders from terminating a loan without cause. The Fed also closed a loophole that allowed lenders to falsely classify some loans as open ended to evade HOEPA requirements.
The 2001 revisions also addressed the practice of packaging fees and credit insurance premiums into loans without borrowers’ knowledge or consent by requiring additional disclosures, Bernanke said. The rules made it clear that lenders would be considered in violation of HOEPA if they routinely made loans without verifying borrowers’ income and ability to make payments.
“With respect to the recent problems in the subprime mortgage market, the board plans to consider how it might further use its rulemaking authority … to address particular lending practices,” Bernanke told Dodd. “We are mindful, however, that loan terms that may be harmful to some borrowers may provide benefits in other transactions.”
In a statement, Dodd said the Fed’s upcoming HOEPA hearing “is simply a first step in the (Federal Reserve Board) fulfilling its obligation under HOEPA to protect consumers from abusive lending practices. It is my hope that the Board will move quickly to meet that obligation and promulgate a regulation that, at a minimum, requires originators to fully evaluate a borrower’s ability to repay; requires escrows for taxes and insurance; and restricts the use of low- and no-documentation loans.”