Federal Reserve Broadens HOEPA Coverage
of Mortgage Loans

In a long-anticipated move, the Federal Reserve Board voted unanimously in mid December to expand the number of loans covered by the Home Ownership and Equity Protection Act (HOEPA) of 1994. HOEPA is intended to reduce the incidence of predatory mortgage lending in which homeowners are victimized by mortgage contracts that contain excessive rates and fees or onerous contractual features. The FRB has regulatory power to enforce the act through its Truth in Lending (Regulation Z) rule-writing.

The amendments to Regulation Z passed in mid-December adjust the pricing triggers that determine coverage under HOEPA. Specifically, the FRB voted to lower the rate-based trigger by two percentage points for first-lien loans, but left untouched the rate-based trigger on second lien loans. Beginning October 1, 2002, lenders making first mortgages with interest rates 8 percentage points above the rates on Treasury securities of comparable maturity must adhere to the disclosure provisions and other conditions of HOEPA on all such loans. In a move hailed by the lending industry, the FRB departed from its initial proposal (December, 2000) and kept the existing trigger for second mortgages unchanged. The industry had argued that the lower rates would have a particularly chilling effect on second mortgages which tend to carry higher rates than first mortgages because of the higher risk associated with the subordinate lien position. The original (and current) HOEPA triggers treat first and second mortgages the same.

In addition, starting on October 1, 2002 a fee-based trigger for determining HOEPA coverage must include the premiums paid on single premium credit insurance products. Certain acts and practices in connection with mortgages are also affected by the FRB vote. Refinancing of high-cost loans within the first year is banned unless the lender can show that the refinancing is in the borrower's interest. Lenders will be required to document that the borrower can afford HOEPA loans, but the FRB chose not to prohibit the refinancing of low and zero-rate loans into higher rate loans because of the overly burdensome compliance requirements that would be placed on lenders.