December 12, 2001
Federal Reserve Board Adopts Final rule on Regulation
Z (Truth in Lending)
The Federal Reserve Board on Wednesday approved the
issuance of a final rule that amends [PDF] its regulations aimed at curbing predatory
lending.
Compliance with the amendments becomes mandatory on
October 1, 2002.
The amendments to Regulation Z (Truth in Lending)
broaden the scope of loans subject to the protections of the Home
Ownership and Equity Protection Act (HOEPA) of 1994 by adjusting the
price triggers that determine coverage under the act. The rate-based
trigger is lowered by two percentage points for first-lien loans and
the fee-based trigger is revised to include optional insurance
premiums and similar credit protection products paid at closing.
Certain acts and practices in connection with home-secured loans are
prohibited, including a rule to restrict creditors from engaging in
repeated refinancings of their own HOEPA loans over a short time
period when the transactions are not in the borrower's interest.
HOEPA's prohibition against extending credit without
regard to a consumer's repayment ability is strengthened by
requiring creditors to document and verify income for HOEPA-covered
loans. Disclosures received by consumers before closing for
HOEPA-covered loans would include the total amount of money borrowed
and whether that amount includes optional credit insurance or
similar products paid at closing.
HOEPA was enacted in response to anecdotal evidence of
predatory lending practices in the home-equity lending market. HOEPA
imposes additional disclosure requirements. It also imposes
substantive limitations, such as restrictions on short-term balloon
notes, on certain home-equity loans with rates and fees above a
certain percentage or amount.
HOEPA authorizes the Board to expand HOEPA's coverage
and prohibit certain acts and practices in connection with mortgage
lending generally. The Board published proposed amendments in
December 2000, after holding public hearings on possible ways to
curb predatory lending using its regulatory authority.
The term "predatory lending" encompasses a variety of
practices. Oftentimes homeowners in certain
communities-particularly, the elderly and minorities-are targeted
with offers of high-cost, home-secured credit. The loans carry high
up-front fees and may be based on the homeowners' equity in their
homes, not their ability to make the scheduled payments. When
homeowners have problems repaying the debt, they are often
encouraged to refinance the loan. Frequently this leads to another
high-fee loan that provides little or no economic benefit to the
borrower.
Additional Documents:
Source:
Federal Reserve Board |