FRB Seeks Comments on Proposed
Predatory Lending Regs

On December 13, 2000 the Federal Reserve Board issued a four part proposal intended to restrict "predatory lending" practices. By modifying Regulation Z, the proposal relies heavily on additional disclosures to discourage lenders from engaging in certain tactics or including particularly onerous features in their mortgage loan products. The Fed is seeking comments on the proposed regulations through mid-March.

The most important proposed changes involve the loan terms that trigger the additional rules and disclosures specified under by the Home Ownership and Equity Protection Act (HOEPA). Originally passed in 1994, HOEPA was intended to provide additional protections for consumers taking closed-end, mortgage and home equity loans that carry high rates and fees. Currently HOEPA protections are triggered when the APR on a mortgage loan exceeds the interest rate on U.S. Treasury securities of equal maturity by more than ten percentage points. Additionally, loans with non-interest fees in excess of 8% of the loan amount will trigger HOEPA coverage. The Fed has proposed lowering the APR trigger to 8 percentage points above the comparable Treasury security. It has also proposed that the "non-interest fees" test include as fees premiums on single-premium credit insurance and related products. The number of loans that would be swept under HOEPA coverage as a result of these two proposals is unknown.

Additional changes under the proposed regulations include the following:

• Prohibit a creditor from refinancing its own HOEPA loan with another HOEPA loan within the first 12 months, unless it is clearly in the borrowers best interest.
• Prohibit "payable on demand" clauses and "call provisions" in HOEPA loans except in connection with default.
• Require creditors to assemble documents demonstrating the consumer's ability to repay a HOEPA loan to rebut a presumption that the absence of such information is indicative of an illegal pattern of making HOEPA loans without regard to repayment ability.