ALTA® Letter Federal Reserve: RE" "High Cost Mortgages"
August 30, 2000
August 30, 2000
Ms. Jennifer J. Johnson,
Board of Governors of the Federal Reserve System,
20th Street & Constitution Avenue, N.W.
Washington, D.C. 20551
Re: Regulation Z; Docket No. R-1075
Dear Ms. Johnson:
These comments are submitted on behalf of the American Land Title Association (ALTA) in connection with the Board?s request for comments on predatory lending practices in the home-equity lending market, and on certain issues relating to the Home Ownership and Equity Protection Act of 1994 (HOEPA) and the Board?s regulations thereunder. ALTA represents the interests of 2,400 title insurance companies, agents, independent abstractors and attorneys who search, examine, and insure land titles to protect owners and mortgage lenders against losses from defects in titles. ALTA members employ nearly 100,000 people, and operate in every county in the country. As the Board noted in its invitation for public comment (65 Fed. Reg. 45547 (July 24, 2000), the HOEPA amendments to the Truth in Lending Act (TILA) define a high cost loan subject to the HOPEA requirements to include loans where "the total points and fees payable by the consumer at or before closing will exceed the greater of (i) 8 percent of the total loan amount; or (ii) $400." TILA, §103(aa)(1)(B). (This $400 threshold is adjusted annually by the Board based on the Consumer Price Index and is currently $451.) In determining what constitutes "points or fees" for purposes of this provision, §103(aa)(4)(C) provides that points and fees shall include "the charges listed in section 106(e)" ? which, in turn, includes "[f]ees or premiums for title examination, title insurance, or similar purposes" ? but such fees shall be excluded if:
the charge is reasonable; the creditor receives no direct or indirect compensation; and the charge is paid to a third party unaffiliated with the creditor.
In other words, reasonable charges by independent title entities who are not affiliated with the lender, and where the lender does not receive direct or indirect compensation in connection with the charge, are not counted toward the 8%/$400 "points and fees" threshold that can turn a mortgage loan into a HOEPA-covered loan. On the other hand, if the provider of title services is affiliated with the lender, or if the lender receives direct or indirect compensation in connection with the charge, or the provider?s charges are unreasonable, the amount of the title-related charges is counted toward the 8%/$400 threshold.
The Board has asked whether it should recommend a statutory amendment that would replace the current provision with an approach that would include all closing costs in the "points and fees" trigger. ALTA believes that the current approach of HOEPA is both reasonable and appropriate, and that the Board should not make such a recommendation.
As the Senate Banking Committee report on the 1994 HOEPA legislation made clear, the purpose of imposing a trigger based on points and fees charged in the transaction is to "prevent unscrupulous creditors from using grossly inflated fees and charges to take advantage of unwitting customers." Accordingly, if the lender stands to benefit from "grossly inflated fees," it is reasonable to use a trigger based on the amount of such fees to determine when HOPEA coverage should apply. On the other hand, if the lender is not benefiting from the charge, the charge is made by an unaffiliated third party, and the charge is reasonable, the charge does not affect in any way whether the loan is "predatory." In that situation, as Congress correctly concluded in 1994, there is no reason why such charges should be included in determining the trigger for HOEPA coverage.
The current exclusion for reasonable charges by independent providers that are not shared with the lender has been workable and not unduly complex to apply in the real world. No purpose would be served by bringing such charges into the trigger except that more "non-predatory" loans to borrowers with less-than-perfect credit histories will be subject to the HOEPA regime. As the Board undoubtedly recognizes, extending HOEPA?s reach to cover non-abusive loans (i.e., to loans where the lender is not taking advantage of the borrower) will only deter lenders from lending funds to subprime borrowers. Such a result would not serve the goal of expanding the availability of mortgage loans to all Americans.
In sum, if the lender does not benefit from the title-related or other settlement service charge and the charge is reasonable, there is no reason why it should be included in the "points and fees" that trigger HOEPA coverage. That decision was correct when made by Congress in 1994, and there is no reason to revise it today.
There are two further comments that we would like to make. First, the Board has asked for comments on whether lump-sum premiums collected at closing for optional credit insurance should be included in HOEPA?s points and fees. While we have no view to express on that issue, we do want to bring to the Board?s attention the fact that such fees are not always collected in connection with the closing and may be paid by the borrower at a time or in a manner that avoids the charge being reflected on the closing statement. The Board should take this into account in any approach it adopts with regard to lump-sum credit insurance premiums.
Second, in other regulatory proceedings on predatory lending the Mortgage Bankers Association of America has suggested that the problems posed by predatory lending practices could be significantly ameliorated by having the lender guarantee the maximum amount of settlement costs that would be paid by borrowers, in return for which the lender would be exempted from the anti-kickback and unearned fee prohibitions of section 8 of the Real Estate Settlement Procedures Act. Such a proposal may be discussed in comments filed in this proceeding.
We believe such a proposal is basically irrelevant to the problems of predatory lending and, in any event, is beyond the authority of the Board to implement under current law. As the MBA has recognized, new legislation would have to be considered to implement the concept. Moreover, we believe that there are significant potential problems with the proposal that have not been fully explored, including potential adverse impacts on (a) consumer choice and shopping for settlement service providers, (b) the quality of services provided, (c) the ability of independent companies not affiliated with lenders to compete for business, and (d) the continued development of new methods and technologies for marketing and delivering settlement services to consumers.
Ann vom Eigen
American Land Title Association