March 9, 2001

The Hon. Alan Greenspan

Chairman

Board of Governors of the Federal Reserve System

20th and C Streets NW

Washington, DC 20551

RE: Docket No. R-1090

On behalf of ACORN's 150,000 low- and moderate-income member families, I write to express our view that the Board should make full use of the authority Congress gave it under the Home Ownership Equity Protection Act (HOEPA) to protect consumers against predatory mortgage lending practices that are draining wealth from our neighborhoods and robbing families of their homes.

The dramatic increase in subprime loan originations in the last decade and the concurrent rise in the incidence of abusive lending practices have created a crisis of epidemic proportions for and communities of color, elderly homeowners, and low-income neighborhoods - the plague of predatory mortgage lending.

Nationally, the level of subprime lending has skyrocketed, growing 900% from just over 100,000 home purchase and refinance loans in 1993 to almost a million loans in 1999. During this same period, all other home purchase and refinance loans have declined 10%. The rise in subprime and predatory lending has been most dramatic in minority communities. Subprime lenders now account for half, 51 percent, of all refinance loans made in predominantly black neighborhoods, compared to just 9 percent of the refinance loans made in predominantly white neighborhoods. Subprime lending, with its higher prices and attendant abuses, is becoming the dominant form of lending in minority communities. At the same time, although minority communities suffer from an extreme concentration of higher cost, harmful loans, the problem should not be viewed as one that only affects minorities, for the vast majority of subprime borrowers, and thus predatory lending victims, are white.

Serious abuses that strip equity from people's homes and force others into foreclosure are too widespread in the subprime market, and the extremely limited nature of existing regulations leaves consumers with little protection. Without additional regulation and legislation, abusive lending threatens to reverse the progress that has been made in increasing homeownership, and thus wealth, in minority and low income communities. This is a real, and potentially devastating threat. We are therefore pleased to see that the Federal Reserve has proposed to take some action to address predatory lending practices. It is critical to our communities that the Board moves forward with consumer protections.

It is absolutely in the best interests of our communities to limit abusive mortgage lending practices. Such protections need to be made more extensive, and they need to be extended to more loans. We firmly reject the notion that lenders must be allowed to sell abusive products in order to meet the credit needs of people with impaired credit records. There are other and better alternatives for people in those situations. For those borrowers who cannot qualify for 'A' loans, there is an important place for legitimate subprime lending; curtailing abuses will only make this market function better. At the same time, through our sister organization, ACORN Housing Corporation, we know very well that much progress has been made, and much more can be made, in opening up prime loans to a broader segment of the population. AHC's (and other counseling agencies') loan counselors work with families to fix errors in their credit reports, set up repayment plans to pay off back debt, and then develop financial plans to ensure that they will be able to afford loans when they qualify.

We commend the Board for issuing a proposed regulation that addresses some key issues around predatory lending, and urge the Board to move forward with its consideration of comments and the issuance of a final rule that will better protect more consumers entering into high-cost home loans. If the Board's new rule is to make a real difference in protecting borrowers, it is especially important that it extend HOEPA coverage by lowering the APR trigger, and including more of the real 'fee' costs of loans in its definition of loan fees, and that it discourage the practice of 'packing' loans with additional sources of income by the lender by defining financed credit insurance premiums as fees.

Adjusting the Points and Fees Trigger

Single premium credit insurance

ACORN strongly agrees with the Board's recognition that single premium credit insurance policies effectively function as fees in proposing to count those policies toward the points and fees threshold. Properly counting these policies as fees will have a tremendously positive effect in discouraging lenders from selling these abusive, high-profit products.

A close analysis of the characteristics of single premium credit insurance policies and the manner in which they are sold makes clear that they do function as fees. Many subprime creditors use their own subsidiaries or affiliates to sell the credit insurance. Thus, when a person who is taking out a loan with such a creditor is sold credit insurance on their loan, they are effectively paying the premium to that same creditor. If the borrower ever actually makes a claim on their insurance policy, the credit insurance does not pay the borrower - it pays the company that made the loan. So the creditor basically pays the insurance claim to itself.

ACORN and many others have found repeated cases where creditors have told borrowers that in order to get a loan, they would have to take out credit insurance, even where this is prohibited by law. In other cases, borrowers are not even aware that their loans include credit insurance policies. A former loan officer with Associates, which was absorbed into Citigroup last year said that many customers did not or could not read the forms disclosing the fees, and that thousands of dollars in credit insurance were often added into the loan without asking the borrower if they needed or wanted it. His supervisors told him, "If you don't have to tell 'em and they don't ask, don't tell 'em. Just get 'em to initial it." Just as loan officers are sometimes paid extra for putting people in higher rate loans, many subprime lenders provide substantial financial incentives for loan officers to sell high volumes of these high-profit products.

It is both further evidence that the product is sold deceptively, and a further problem with the product that it is so expensive compared to other possible forms of insurance, like term life, and that it is sold almost exclusively on high cost loans. Credit insurance policies are extremely expensive for consumers as compared to other forms of insurance. Group life and group accident and health insurance have historically had loss ratios of 75 percent. The National Association of Insurance Commissioners determined that 60 percent is the minimum loss ratio that should be allowed for credit life and credit disability insurance. The actual loss ratios for credit insurance are far below even this low threshold. Consumers Union reported in 1999, that for every dollar taken in with credit insurance premiums, insurers paid out less than thirty-nine cents, for a loss ratio below 39%. We have also attached a comparison of the costs of term life insurance policies with examples we have seen of single premium credit insurance policies- the credit life policies are often many times more expensive for inferior coverage.

Structuring credit insurance policies as lump sums paid up front is especially abusive because such policies directly strip equity from a family's home and then rack up interest charges, which escalate at the high rates on many subprime loans. Over the life of a 30-year loan, single premium policies can cost borrowers around four times more than credit insurance policies paid off monthly.

Take the example of a St. Louis borrower. She has a 30-year mortgage for an initial amount of $46,983 at a 12% interest rate with a 5-year, single premium credit insurance policy for $3,705. Her monthly payments of about $483 will total $173,981 over the life of her loan. Of the amount that is insured on her loan, 15% ($6,984 of $46,983) covers the cost of the origination fee (not including 3rd party fees) and the credit insurance policy itself.

For that same loan, if the credit insurance had been paid monthly for the first 60 months of the loan (the term of the credit insurance policy), the principal would have started at $43,279. Her payments would have been $506.91 monthly for the first five years ($3,704 divided by 60 months) and then $445.17 monthly for the remaining 25 years. Her total payments would have been $163,967 - over $10,000 less than on the single premium policy.

When pressed to defend single premium policies, the industry points to a hypothetical family that could afford, for example, an extra $40 on their monthly payments over the thirty years of a mortgage but not an extra $60 monthly in the five years where they actually receive coverage. That highly questionable benefit for a minute number of families, if such households exist at all, would be dramatically outweighed by the number of households who would save tens of thousands of dollars on policies paid off monthly.

In addition to the direct cost savings, encouraging credit insurance policies to be paid off monthly has a number of other benefits for consumers. A credit insurance policy paid off monthly is listed on the borrower's monthly statements so consumers have a better sense of how much their policy actually costs and what benefits it provides. Listing the policy and the amount on the monthly statements will also remind borrowers about their ability to cancel their policies if that is what they feel serves their financial interest.

In the proposed regulation, the Board properly recognizes the abusive nature of single premium credit insurance policies and their practical function as fees on home loans. Counting single premium policies as fees under HOEPA would have a tremendously positive impact on consumers, protecting the equity in their homes and lowering their monthly payments. We urge the Board to include this step in the final rule.

In addition to counting single premium credit insurance toward the points and fees threshold, ACORN believes the Board should similarly count prepayment penalties toward the trigger.

Prepayment penalties

We urge the Board also to recognize the role that prepayment penalties play in so many subprime loans, and to count these charges as well towards the point and fee threshold. For the large proportion of subprime mortgages being refinanced within the first five years, prepayment penalties amount to a direct fee. For all borrowers with such penalties, the penalties and prevent borrowers from enjoying the full benefits of rate competition amongst lenders, and they trap many in loans at rates higher than they would otherwise pay.

Moreover, in our experience, subprime borrowers are not in fact offered a choice between loans with and without prepayment penalties. Instead, the penalty is simply included in the loan, and too often the borrower is not even aware that it is there. We have seen repeated instances of borrowers forced to lose thousands of dollars in equity when they refinance to a lower rate - even where they could have qualified for such a lower rate when they received the first loan. And we have also seen borrowers unable to refinance into better rate and more affordable loans because the payment of the penalties on the old loan pushed them beyond acceptable loan to value ratios. In these situations, prepayment penalties provide a perverse reward which protects lenders who have charged uncompetitively high rates. The penalties function as fees.

We do recognize that prepayment penalties play a role in covering costs on loans held for a short period of time; in this regard, they are a 'special' kind of fee. We would argue in the long term that a more truly competitive subprime market, and a reduction in abusive loan terms, and in abusive sales and marketing practices, will reduce the rate of extremely short turnover over all. In the immediate term, if the Board will not include all prepayment penalties as points and fees, it should as a minimum recognize prepayment penalties which extend beyond a short initial period, and or which are higher than 3% of the loan value as such. In addition, a prepayment penalty charged when a lender refinances its own loan should clearly be recorded as a fee.

Third-party fees

The proposed regulation solicits comment on whether it should recommend a statutory change to include third party fees toward the 'points and fees' trigger. We believe that such a recommendation would have the significant merit of providing for a much clearer and easier to understand definition, which would allow borrowers and lenders alike to evaluate whether the loan they are contracting is or is not a high cost loan.

Lowering the APR Trigger

ACORN strongly supports the Board's proposal to use the authority Congress granted it to lower HOEPA's APR threshold for high-cost home loans from the comparable Treasury bond rate plus ten percentage points to Treasury plus eight. As you know, the threshold level is not a ceiling on rates that can be charged by creditors. Instead, it is a recognition by Congress that, in light of the frequent occurrence of abusive and deceptive practices on high-cost loans, consumers entering into such loans need additional protections. One of the central problems with HOEPA is that so few borrowers in high-cost home loans receive the law's protections. According to then-HUD Assistant Secretary for Housing William Apgar at last year's House Banking Committee hearing on predatory lending, less than one percent of what HUD considers subprime loans are covered by HOEPA.

The current standard of the comparable Treasury rate plus ten percentage points translates into an absurdly high threshold of around 15.5%. Assuming that the origination fee accounts for about 1% of the APR, the interest rate threshold for a high-cost loan is effectively set at around 14.5% at current rates. This threshold is about 750 basis points higher than 'A' mortgage rates, which currently are running at about 7%. As an increase of a single percentage point on a $100,000, 30-year subprime mortgage translates into extra costs of $75-80 on each monthly payment and $25-30,000 over the term of the loan, we strongly urge the Board to follow through on lowering the threshold to Treasury plus eight. There can be no justification for withholding high-cost loan protections, given current market conditions, for loans with APRs above 13.5% when the creditor maintains a security interest in the borrower's home in case of default.

We would also note that the anti-predatory lending legislation introduced last year by the Ranking Democrats on the House and Senate Banking Committees, Senator Sarbanes and Representative LaFalce, would lower the APR thresholds on first mortgages to Treasury plus six and on junior mortgages to Treasury plus eight.

The Board specifically asks whether it makes sense to set separate thresholds for first mortgages and junior mortgages. ACORN agrees with the rationale behind setting different thresholds - to provide an incentive for creditors to simply provide a cash-out when that is desired and not refinance the entire loan - but strongly believes that such a discussion only makes sense when considering an APR threshold below Treasury plus eight, the Board's statutory floor. We urge the Board to maintain the APR threshold of Treasury plus eight in the final rule.

Loan Flipping

At 15 USC 1639(l)(2), HOEPA directed that "[t]he Board, by regulation or order, shall prohibit acts or practices in connection with ... refinancing of mortgage loans that the Board finds to be associated with abusive lending practices, or that are otherwise not in the interest of the borrower."

Loan flipping is one of the most common and devastating predatory practices. After taking out a subprime home loan, borrowers are bombarded with solicitations to refinance their loans, with promises of lower payments or additional cash-outs. Homeowners with less sophisticated understandings of finances are quickly sucked in, losing thousands of dollars of equity through the fees and other charges assessed on refinancing that provide them with no benefit. Even those homeowners with a better understanding of the market are often worn down by the constant promises of easy credit and eventually give in, allowing the creditors to trap them in a downward financial spiral, as they slowly lose the wealth in their homes they've worked hard for so many years to build.

The Board proposes to prohibit creditors holding a HOEPA loan from refinancing that loan within one year if it is not in the borrower's interest. In light of the continuing abuses in this area, we see no reason for the limitation at one year and urge the board to extend it to at least two or three years. In addition, the impact on a consumer of having your mortgage flipped is the same for a household regardless of whether the creditor doing the flipping was the creditor on your previous mortgage or not. ACORN recommends that the Board recognize this fact and extend the loan flipping prohibition to all creditors within the first two or three years of the loan.

The Board also recognizes the outrageous cases of flipping on zero- or low-interest rate loans by proposing to prohibit creditors from refinancing such loans to higher rates in the first five years. Many cities around the country have instituted down payment assistance programs to enable more families to buy their own homes and home repair loan programs in recognition that such loans are often needed to maintain homeownership and that the private market has not been meeting the demand for quality home repair loans. These programs have been critical in supporting efforts to expand and preserve homeownership opportunities. As the only rationale behind the refinancing of zero- or low-interest rate loans is the creditor's desire to turn a quick profit, we see no reason why the prohibition should be limited to five years.

In regard to the refinancing of low-interest rate loans, we would just ask that it be clarified in the final regulation that the ceiling of the comparable Treasury rate minus 2% is applied at the date of origination, not at the date of the refinancing.

Prohibiting Specific Acts or Practices

At 15 USC 1639(l)(2), HOEPA states that "[t]he Board, by regulation or order, shall prohibit acts or practices in connection with ... mortgage loans that the Board finds to be unfair, deceptive, or designed to evade the provisions of [HOEPA]."

Spurious open-end home-equity loans

Through our conversations with borrowers in subprime home loans, we have seen many loans structured as open-end lines of credit which are not in fact open ended, and which would otherwise be HOEPA covered, and where borrowers are sorely in need of HOEPA's protections. On these loans, it is unfortunately common for the initial loan amount to be made up to the maximum credit limit, contrary to the basic idea in these loans that additional amounts will be extended in the future. In some of those cases where the initial loan amount was up to the credit limit, open-end loans have been refinanced to increase the credit limit and provide an additional amount, allowing the creditor to rack up additional fees. Again, this is in direct conflict with the rationale for open-end credit.

We strongly urge the Board to prevent the abuse of this loophole by requiring open-end loans to live up to the definition established in 15 USC 1602(i): "The term 'open-end credit plan' means a plan under which the creditor reasonably contemplates repeated transactions, which prescribes the terms of such transactions, and which provides for a finance charge which may be computed from time to time on the outstanding unpaid balance." To accomplish this, we recommend that the Board include in the final rule its proposal from December 1997 to set a clearer standard on what is required for the creditor to be judged to "reasonably contemplate future transactions." The December 1997 proposal, which was withdrawn after the Board received objections from creditors that were (and still are) exploiting the loophole, would set real standards to help protect consumers by setting a standard that would consider:

whether the credit line is limited to items that are unlikely to be purchased on repeated occasions,
where the plan is established to finance the purchase of a designated item, the amount of the purchase compared to the credit line, and
whether the creditor has data showing that customers actually make repeated purchases.

Call Provisions

No case can be made that call provisions, or "payable on demand" clauses, are ever in the interest of borrowers. These provisions, which allow the creditor to call in the loan at any time, directly conflict with the basic idea of a home loan. We recommend that the Board use its authority to prohibit call provisions on all home loans, not just HOEPA loans.

Lending without regard to repayment ability

Despite lenders' repeated comments that it is not in their best interest to make loans that they know borrowers cannot afford to repay, we see significant numbers of such loans and they have been devastating to our neighborhoods. In some cases, creditors make loans they know borrowers cannot afford because they are able to charge such high fees and interest rates. By the time the borrower defaults on the loan, the lender has made enough profits on the fees and interest to more than cancel out any losses that might be incurred through selling the home after foreclosing. And despite the industry's protestations, if the loan-to-value ratio is low enough when a loan goes into foreclosure, the lender absorbs very few, if any, costs in the foreclosure process.

But probably more often, these loans get made because the institutions setting the terms of the loans - whether lenders or mortgage brokers - are not the people who end up holding the loans. The people at the so-called street level make their profit from the fees, yield-spread premiums, and incentives for selling credit insurance policies and other high-profit products and, after selling the loans, bear none of the costs of default. When these loans are sold on the secondary market, the high risk of the loan going into foreclosure is typically priced into the larger pool of mortgage-backed securities in which the loan is placed.

And even in cases where lenders hold onto the loans after originating them, employees' compensation systems can provide incentives for unaffordable loans to be made. Loan officers may be compensated for their volume of business they bring in, regardless of performance of the loans they run through the system.

In light of all these abuses, the law's current standard, which requires demonstrating a "pattern or practice" of lending without regard to repayment ability on HOEPA loans, has proven virtually impossible to meet. The proposed regulations would create a rebuttable presumption that lenders are engaging in such a pattern or practice if they do not document and verify the ability of their borrowers to repay their loans. The problem is that in the absence of any definition on what document and verify means, and of what ability to repay means, we suspect that this new standard also will prove largely ineffectual. Our sense is that the problem with proving these cases has not been the failure to retain documentation, so much as the current interpretation of what constitutes evidence of a pattern and practice. We see no problem with proceeding with this proposed change, but we are not convinced that it will be effective.

The problem of making loans where it is clear that a borrower will not be able to repay is however an important and damaging one. We would urge the Board to take steps to really address it by substituting the RICO standard for determining what constitutes a "pattern or practice" in place of the current employment discrimination law standard. The RICO standard would require that lending without regard to repayment ability would have to be established as an ongoing practice engaged in by the creditor - compared to the unreasonably difficult standard of employment discrimination law that the victim has to prove that the abuses were the result of an established policy. The RICO standard would improve legal remedies available to victims of asset-based lending while still requiring a very high burden of proof.

ACORN endorses the proposed rule's requirement that creditors ignore introductory or teaser rates in figuring whether an applicant can repay a loan and instead base their calculations on the maximum possible interest rates for variable rate and teaser rate loans.

On such loans, the interest rates will go up. And for those borrowers - especially so for those on fixed incomes or with no prospects for increased income - it is critical that they be able to afford what will become the "normal" rate of the loan. This becomes even more important in consideration of the fact that many borrowers are unaware that their loan's initial rate is only an introductory rate and that it will increase in the future.

Single premium credit insurance

We have outlined above why we believe single premium credit insurance policies are unfair to borrowers and how they are sold through a range of deceptive practices. In the interests of establishing stronger protections for consumers from such abusive products, we recommend that the Board also use its authority to outlaw the financing of single premium credit insurance policies as unfair and deceptive, or at least to prohibit such policies on HOEPA loans.

Excessive prepayment penalties

We discussed earlier our view that excessive prepayment penalties clearly constitute unfair loan terms. We ask the Board to prohibit the collection of prepayment penalties of more than 3%, and which extend for longer than 3 years, and when the creditor refinancing the loan is the same creditor that originated the previous loan.

Live checks

Soliciting loans by mailing 'live checks' to borrowers who upon depositing them are in fact mortgaging their homes is an extraordinarily deceptive and destructive practice. It is also unsafe and unsound; the checks are typically sent out based on lists of credit scores - which have a limited value in assessing an applicant's entire credit situation, and which may in any case have changed since the credit score was calculated. The checks typically come with outrageously high interest rates, and given the extremely limited information the creditor possesses about the potential borrower, no case can be made that these rates are offered because they are commensurate with the risk that borrowers represent. Instead, the rates appear to be simply as high as the lender can get away with ACORN urges the Board to prohibit the mailing of live checks that convey a security interest in the signer's home. If the Board chooses not to go that far, we would recommend that such checks be prohibited if they would be HOEPA loans. The Board should also investigate how consumers would benefit from a prohibition on live checks that are unsecured loans.

Mandatory arbitration clauses

These clauses set unreasonable financial obstacles for borrowers - especially those with low or moderate incomes - who seek to pursue claims against a creditor that broke the law. Arbitration proceedings are heavily biased in favor of creditors and provide virtually none of the protections of their rights that consumers are granted in court. At a minimum, the Board should prohibit these clauses on HOEPA loans.

Enhancing Disclosures

While disclosures are of limited value to many consumers, we do believe that improving the quality of disclosures could benefit many others. Including the total loan amount in the HOEPA disclosures, as the Board proposes, would be a useful step in this direction..

Also, as the Board noted, there is widespread support for broader information on the availability of housing counseling services. For consumers considering whether to enter into a HOEPA loan, the benefit of being notified of any nearby counseling agency greatly outweighs any distress that might be imposed on a consumer who does not have access to an agency in their area. Perhaps it would also have the long-term effect of encouraging local authorities in areas without such services to focus on bringing counseling agencies into the community. But again, it should be noted that many applicants will never be reached by this disclosure and are in need of legal protections from the Board on HOEPA loans.

Thank you for your consideration. America's current and potential homeowners - especially those in low and moderate income neighborhoods and communities of color - are counting on the Board to help protect them from abusive lending practices.

Sincerely,

Maude Hurd

National President, ACORN

cc: Ms. Jennifer J. Johnson

Secretary, Board of Governors of the Federal Reserve System