The Federal Trade Commission Comments to the Board of Governors of the Federal Reserve System Regarding Proposed HOEPA Rules
March 14, 2001
The Commission has approved two comments to the Board of Governors of the Federal Reserve System. The first provides the Commission's views on Amendments to the provisions of Regulation Z, which implements the Home Ownership and Equity Protection Act ("HOEPA"). The second provides views on the proposed Amendments to the provisions of Regulation C, which implements the Home Mortgage Disclosure Act ("HMDA"). In the comments, the Commission supports the Boards' proposals to strengthen HOEPA and HMDA and provides additional views.
The first comment provides the Commission's views on the Board's proposed amendments to HOEPA. HOEPA provides special protections for certain mortgage loans in the highest-cost end of the subprime lending market. Subprime lending refers to the extension of high-rate, high-fee loans to persons who are considered to be higher-risk borrowers. As the Board noted in its proposed rule to amend the regulation, lending in the subprime industry has escalated dramatically since the enactment of HOEPA in 1994, with subprime lenders in the United States originating more than $140 billion in home equity loans in 2000 alone. The Commission enforces HOEPA, and over the past year has provided comments on predatory lending practices to the Board, along with its recommendations for curbing such conduct.
In its comment to the Board, the FTC strongly supports amendments to Regulation Z proposed by the Board to expand and strengthen HOEPA. The Commission comment states that the Board's proposals are "necessary and appropriate given the serious problems many consumers still encounter in the subprime home-equity market."
The first of these proposals concerns expanding the scope of HOEPA. The Board recommends price trigger revisions, including amendments to both the rate-based and fee-based standards that trigger HOEPA protection. Specifically, the proposals would lower the annual percentage rate ("APR") trigger from the current 10 percent to eight percent (above the rate for comparable Treasury securities). As explained in the comment, the FTC supports the Board's proposal to lower the APR trigger to eight percent, which would apply HOEPA's protections to more high-cost loans, therefore protecting more borrowers in the highest-cost segment of the subprime market. The Board also proposes expanding the "points-and-fees trigger" for HOEPA to include the cost of credit insurance and related products. The Commission supports this proposed change to the points-and-fees trigger. The Commission explains that this proposal will eliminate the incentive for lenders to shift fees to insurance and other "extra" to stay below the trigger, and will ensure that consumers who pay high costs for home-equity loans receive equivalent consumer protections.
The comment also addresses other Board proposals, including the following: The Board proposes prohibitions or limitations on practices that are unfair, deceptive or abusive regarding "loan flipping;" "payable on demand" or "call" provisions; and asset-based lending. Loan flipping is a practice by which a lender convinces a consumer to repeatedly refinance a loan. Borrowers are harmed each time a loan is "flipped" because new points and/or fees are charged, often without regard to the borrower's ability to repay this additional amount. The Board proposes limitations on the refinancing of HOEPA loans and certain other low-rate loans. The Commission's comment supports the proposal to restrict the refinancing of HOEPA loans within the first 12 months and suggests that additional guidance be provided concerning the proposal that a "tangible benefit" standard be applied to such refinancing. The Commission also supports the Board's proposal to prohibit for five years the refinancing of certain lower-rate loans with higher-cost loans unless the refinancing is in the interest of the borrower.
The Board proposes prohibiting payable on demand or call provisions in HOEPA loans at any time, unless invoked in connection with the borrower's default on the loan. The Commission supports what it calls this "common sense" proposal, and stresses that it is consistent with the Truth in Lending Act's ("TILA") treatment of home-equity lines of credit.
The Board also proposes that creditors generally document and verify consumers' current or expected income, existing obligations and employment to help reduce the incidence of "asset-based lending," which the Commission calls "among the most harmful of predatory lending practices." The Board also proposes more specific amendments to address this problem. The Commission, in its comment, supports the Board's proposals in these areas, and notes that it has specifically addressed the practice of asset-based lending as part of its HOEPA enforcement agenda.
The Board proposes a change that would "clarify" that assignees of HOEPA loans are subject to all claims and defenses, including, but not limited to, violations of TILA and HOEPA, that the borrower could bring against the originating creditor. The Commission, believing that the existing law clearly establishes this principle, comments that such a clarification is unnecessary.
Finally, the comment addresses several Board suggestions regarding enhancing the disclosure requirements for HOEPA loans set forth in statute. Specifically, the FTC states (with limited qualifications) its support of an amendment requiring affirmative written consent of borrowers to purchase voluntary items before those items are included in the regular disclosed payment. Without such a requirement, the comment states, a creditor may quote a monthly payment that accurately reflects the loan terms contemplated by the creditor, but that includes charges that the consumer never agreed to. The Commission also addresses the Board's proposal to include a new item, the "total amount borrowed" in the HOEPA advance disclosures, stating that, notwithstanding the disclosures required under TILA, deceptive sales techniques may successfully confuse borrowers about the TILA-required terms. Accordingly, the Commission contends, the inclusion of the "total amount borrowed" as a discrete term will at least alert borrowers to the fact that the financing of high points and fees may substantially increase the loan amount.
The Commission vote to approve the comment for transmission to the Board of Governors was 5-0. (FTC File No. V010004; staff contact is Peggy Twohig, 202-326-3224.)
In the second comment, the Commission strongly supports the Board's proposed amendments to the provisions of Regulation C, which implements the HMDA, because they will enhance the FTC's ability to monitor trends in the mortgage lending market and to identify and investigate abusive lending and other practices that violate fair lending laws.
As the primary federal agency tasked with enforcing consumer credit laws with respect to nondepository institutions, the FTC has a strong interest in HMDA data that reflect important market changes, including those in the subprime markets where abusive lending practices continue to be a concern (see comment above). These data help the FTC enforce a variety of laws governing lending practices, including TILA, which incorporates HOEPA, and the Equal Credit Opportunity Act ("ECOA"), as well as prohibitions against unfair or deceptive acts or practices under the FTC Act. The Commission's comment to the Board addresses a number of proposed revisions to Regulation C that would expand its coverage to include nondepository lenders, require additional information about each loan and simplify some aspects of its reporting requirements.
The Board first proposes to require financial institutions to report (for each loan subject to TILA) whether every loan is subject to HOEPA, as well as the loan's annual percentage rate. The FTC supports this proposal because it would enhance understanding of mortgage lending patterns, especially in the subprime market, and would facilitate fair lending and other lending enforcement activities. The comment also recommends that the Board consider requiring lenders to report the sum of points and fees charged upon loan origination.
Next, the Board proposes expanding the coverage of Regulation C to include nondepository institutions that originate at least $50 million in home purchase loans or refinancing of home purchase loans. The Commission also supports this proposal, as the addition of this dollar-volume approach would make HMDA data more complete and would similarly enhance understanding of the market while facilitating law enforcement by providing data on loans from a greater number of nondepository institutions. In addition, the comment states, this change would be consistent with the Board's goal of achieving HMDA coverage for lenders significantly engaged "in the busines" of mortgage lending.
Third, the Board proposes changes to certain "loan purpose" definitions and solicits comments on other possible changes, including a broader reorganization of "loan purpose" reporting. The FTC's comment observes that the current subcategories of "loan purpose" are complex and notes that they omit certain mortgage transactions, leading to inconsistent data. In its comment, the FTC therefore encourages the full reorganization of "loan purpose" reporting because it would incorporate key segments of the mortgage market while simplifying the reporting process for lenders.
The Board next proposes to cover certain requests for the preapproval of home purchase loans. Lenders are not currently required to report preapprovals, although originations that result from preapprovals are reported. In its comment, the Commission supports this proposal, stating that adding preapproval requests to HMDA reporting would provide information that more accurately reflects mortgage market activity and would also bring Regulation C further in line with HMDA's statutory language, which requires that lenders report "loan applications."
Finally, the Board proposes requiring lenders to report as a separate category home equity lines of credit - open-end credit secured by a lien on a dwelling - and solicits comment on whether to require reporting of the reasons that a loan application was denied. Regarding the proposal, the comment states the FTC's support, saying that these transactions, which are currently optional to report, are an important way for consumers to borrow against their home equity. Reporting them, therefore, is essential to understanding the mortgage market. Regarding the comment solicitation, the Commission stated its support for mandatory reporting of loan denial reasons (such reporting is currently voluntary), as this would allow more complete information to be made available regarding borrowers' access to credit, would facilitate the identification of potential discrimination and would allow for the provision of equal access to such information for both depository and nondepository lending institutions.