Fed Issues Final Rule Aimed at Curbing Predatory Lending

April 01, 2002

The Federal Reserve Board will scrutinize more loans for predatory terms under changes to Regulation Z, Truth in Lending, implementing the Home Ownership & Equity Protection Act (HOEPA). The revisions adjust the price triggers that determine coverage under the act.

The rate-based trigger has been lowered by two percentage points for first-lien loans, thus lowering the interest rate trigger from the current 10 percent above Treasury securities to 8 percent. Beginning in October, lenders making first mortgages will be required to adhere to stricter consumer protections and disclose more information to borrowers before making these "high-cost" loans. As a result of the change, 38 percent of first mortgages will fall under the high-cost category, compared with 12 percent now.

The Fed kept the existing trigger for second mortgages because nearly half of them are already covered.

The fee-based trigger has been lowered to include the cost of credit life and similar kinds of insurance in the mandatory disclosures regarding a loan's cost. Points and fees charged by lenders will be added to the loan amount, which will trigger predatory lending reviews if they cause mortgages to fall under the definition of high-cost loans. HOEPA's protections and reporting requirements will kick in if the loan's points and fees exceed 8 percent of the loan amount or $400, whichever is higher.

The rule also addresses some loan flipping within the first year of a HOEPA loan. Except in limited circumstances, lenders will be prohibited from refinancing their own high-cost loans for 12 months unless the refinancing is in the borrower's interest.

Lenders also will be required to prove that a borrower can afford a loan. HOEPA's prohibition against extending credit without regard to a consumer's repayment ability is strengthened because creditors will be required to document and verify income for HOEPA-covered loans. Disclosures received by consumers before closing must include the total amount of money borrowed and whether that amount includes optional credit insurance or similar products paid at closing.

Compliance with the amendments becomes mandatory Oct. 1, 2002. More information on the HOEPA final rule is available on the Board's web site at www.federalreserve.gov/regulations.

Bridges is a regular review of regional community and economic development issues. Views expressed are not necessarily those of the St. Louis Fed or Federal Reserve System.

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