[Federal Register Volume 71, Number 87 (Friday, May 5, 2006)]
[Notices]
[Pages 26513-26516]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-6803]


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FEDERAL RESERVE SYSTEM

[Docket No. OP-1253]


Home Equity Lending Market; Notice of Public Hearings

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Public hearings; request for comment.

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SUMMARY: Section 158 of the Home Ownership and Equity Protection Act of 
1994 (HOEPA) \1\ directs the Board to hold public hearings periodically 
on the home equity lending market and the adequacy of existing 
regulatory and legislative provisions (including HOEPA) in protecting 
the interests of consumers. Consequently, the Board will hold hearings 
on the home equity lending market and invites the public to attend and 
to comment on the issues that will be the focus of the hearings. 
Additional information about the hearings will be posted to the Board's 
Web site at http://www.federalreserve.gov.
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    \1\ Pub. L. 103-325, 108 Stat. 2160.

DATES: The dates of the hearings are:
    1. June 7, 2006, 8:30 a.m. to 4 p.m., Chicago, IL.
    2. June 9, 2006, 8:30 a.m. to 4 p.m., Philadelphia, PA.
    3. June 16, 2006, 8:30 a.m. to 4 p.m., San Francisco, CA.
    4. July 11, 2006, 8:30 a.m. to 4 p.m., Atlanta, GA.
    Comments. Comments from persons unable to attend the hearings or 
otherwise wishing to submit written views on the issues raised in this 
notice must be received by August 15, 2006.

ADDRESSES: The locations of the hearings are:
    1. Chicago--The Federal Reserve Bank of Chicago, 230 South LaSalle 
Street, Chicago, IL 60604.
    2. Philadelphia--The Federal Reserve Bank of Philadelphia, 10 
Independence Mall, Philadelphia, PA 19106.
    3. San Francisco--The Federal Reserve Bank of San Francisco, 101 
Market Street, San Francisco, CA 94105.
    4. Atlanta--The Federal Reserve Bank of Atlanta, 1000 Peachtree 
Street, NE., Atlanta, GA 30309.
    You may submit comments, identified by Docket No. OP-1253, by any 
of the following methods:
     Agency Web site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: [email protected]. Include the 
docket number in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Address to Jennifer J. Johnson, Secretary, Board of 
Governors of the Federal Reserve System, 20th Street and Constitution 
Avenue, NW., Washington, DC 20551.
    All public comments will be made available on the Board's Web site 
at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, comments 
will not be edited to remove any identifying or contact information. 
Public comments may also be viewed electronically or in paper in Room 
MP-500 of the Board's Martin Building (20th and C Streets, NW.) between 
9 a.m. and 5 p.m. on weekdays.

FOR FURTHER INFORMATION CONTACT: Kathleen C. Ryan, Counsel, Minh-Duc T. 
Le, Senior Attorney, or Ellen A. Merry, Economist, Division of Consumer 
and Community Affairs, Board of Governors of the Federal Reserve 
System, Washington, DC 20551, at (202) 452-2412 or (202) 452-3667. For 
users of Telecommunications Device for the Deaf (TDD) only, contact 
(202) 263-4869.

SUPPLEMENTARY INFORMATION:

I. Background

    In 1994, Congress enacted the Home Ownership and Equity Protection 
Act (HOEPA) as an amendment to the Truth in Lending Act (TILA), in 
response to testimony before Congress of predatory home equity lending 
practices in underserved markets, where some lenders were making high-
rate, high-fee

[[Page 26514]]

home equity loans to cash-poor homeowners. HOEPA identifies a class of 
high-cost mortgage loans through criteria keyed to the loans' rates and 
fees and requires creditors to provide enhanced disclosures of, and to 
comply with substantive restrictions on, the terms of those loans. 
Section 158 of HOEPA also directs the Board to hold public hearings 
periodically on the home equity lending market and the adequacy of 
existing regulatory and legislative provisions for protecting the 
interests of consumers, particularly low income consumers.
    The Board last held hearings under HOEPA in 2000, at a time when 
heightened concerns were being expressed about predatory lending. The 
2000 hearings focused on the Board's ability to use its regulatory 
authority under HOEPA to address abusive lending practices. Following 
those hearings and the receipt of public comment, the Board amended the 
provisions of Regulation Z that implement HOEPA. The revisions took 
effect in October 2002.

II. Information About and Goals of the Hearings

    The 2006 hearings are open to the public to attend. Seating will be 
limited, however. Further information about the hearings, as it becomes 
available, will be posted on the Board's Web site at http://www.federalreserve.gov.
    The Board will invite persons to participate in panel discussions 
on the topics discussed below. In addition to the panel discussions, 
the Board intends to reserve about one hour at the end of each hearing 
to permit interested parties other than those on the panels to make 
brief statements. To allow as many persons as possible to offer their 
views during this period, oral statements will be limited to five 
minutes or less; written statements of any length may be submitted for 
the record. Interested parties who wish to participate during this 
``open-mike'' period may contact the Board in advance of the hearing 
date at the telephone numbers provided in this notice, to facilitate 
planning for this portion of the hearings.
    The Board's hearings will examine developments in the home equity 
lending market, with a focus on four objectives. First, the Board 
wishes to gather views on the effectiveness of the 2002 revisions to 
the HOEPA rules in protecting consumers and on the rules' impact on the 
availability of credit in the higher-cost portion of the subprime 
market. Second, the Board would like to gather information that will 
assist its review of Regulation Z, which implements TILA and HOEPA. In 
particular, the Board anticipates that the hearings will provide 
information that would help in its review of the rules governing home 
mortgage loans under Regulation Z. Third, the hearings may help 
identify matters for which the Board or other entities can develop 
educational materials to help consumers make informed choices about 
mortgage loans. Fourth, the Board anticipates that the hearings may 
help identify matters for which additional research about the mortgage 
lending market would be beneficial.

III. Hearing Topics

    The Board consulted with its Consumer Advisory Council (CAC), 
lenders and their trade associations, consumer advocacy groups, 
secondary market participants, and other federal agencies to identify 
issues the Board might address at the hearings. The following three 
topics will be discussed at the hearings.

Topic 1: Predatory Lending: The Impact of HOEPA Rules and State and 
Local Predatory Lending Laws

    For loans covered by HOEPA, creditors must provide enhanced 
disclosures to consumers three days before consummation of the 
transaction, in addition to the disclosures required by TILA for all 
home mortgage loans. HOEPA also prohibits lenders from including 
certain terms in their loan agreements with borrowers and bars certain 
acts or practices in connection with HOEPA-covered loans.
    One of the goals of the hearings is to help the Board assess the 
impact of the HOEPA rules on improving consumers' understanding of 
their mortgage loan terms, and on curbing abusive practices, while 
preserving access to subprime credit. The Board is also interested in 
gathering information about any new practices that have developed since 
the 2000 hearings that may be abusive, and other practices in the 
subprime market that continue to raise concerns, such as the amount and 
prevalence of prepayment penalties, as well as whether creditors make 
loans with appropriate evaluation of each borrower's repayment ability.
    In addition, the Board wishes to gather information about how state 
and local laws that address predatory lending have affected abusive 
lending practices and access to credit. Since the 2000 hearings, 
numerous state and local governments have enacted laws to address 
predatory lending practices, some of which are modeled on HOEPA, but 
with stricter terms. Consumer advocates generally assert that these 
laws are effective in protecting consumers from abusive lending, while 
lenders, mortgage brokers, and investors have expressed concerns that 
these laws have adversely affected consumers' access to legitimate 
subprime loans. Available research is not definitive regarding whether 
these laws have been effective in eliminating abusive practices and 
whether they have reduced the availability of legitimate high-cost 
credit.
    The Board invites comment on the following questions related to 
HOEPA and predatory lending practices:
    1. Have the revisions to the HOEPA regulations (12 CFR 226.32 et 
seq.) been effective in curtailing predatory lending practices? What 
has been the impact of these changes on the availability of subprime 
credit? Have other abusive practices emerged since the 2002 revisions? 
If so, what are they?
    2. What has been the impact of state and local anti-predatory 
lending laws on curbing abusive practices? Have these laws adversely 
affected consumers' access to legitimate subprime lending? Have certain 
provisions been particularly effective, or particularly likely to 
negatively affect credit availability?
    3. Since the 2002 revisions to HOEPA, what efforts to educate 
consumers about predatory lending have been successful? What is needed 
to help such efforts succeed?
    4. Should the existing HOEPA disclosures in Regulation Z be changed 
to improve consumers' understanding of high-cost loan products? If so, 
in what way?

Topic 2: Nontraditional Mortgage Products and Reverse Mortgages 
Interest Only Loans and Payment Option Adjustable Rate Mortgages

    In recent years, rising home prices and marketing activities have 
led to growing consumer demand for mortgage products designed to 
minimize initial monthly mortgage payments. As a result, nontraditional 
mortgage products have become more prevalent in the market, including 
interest-only mortgage loans, for which a borrower pays no principal 
for the first few years of the loan, and ``payment option'' adjustable 
rate mortgages, for which a borrower has flexible payment options, 
including a payment choice that results in negative amortization. Some 
institutions also increasingly combine these nontraditional mortgages 
with other practices, such as making simultaneous second-lien mortgages 
and allowing reduced documentation in

[[Page 26515]]

evaluating an applicant's creditworthiness.\2\
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    \2\ Concerns about nontraditional mortgage products led the 
Board, the Office of the Comptroller of the Currency, the Federal 
Deposit Insurance Corporation, the Office of Thrift Supervision, and 
the National Credit Union Administration to jointly propose Guidance 
on Nontraditional Mortgages on December 20, 2005. The proposed 
Guidance addresses loan terms and underwriting standards; portfolio 
and risk management practices; and consumer protection issues.
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    Nontraditional mortgage products can enable a broader segment of 
consumers to achieve home ownership or access to home equity. However, 
concerns have been raised that such loans may expose marginally 
qualified, highly leveraged borrowers to a greater risk of default than 
other products, such as a traditional thirty-year, fixed rate mortgage, 
in the event of widespread or regional cooling in housing prices or 
when rates adjust upward. These products and practices are being 
offered to a wider spectrum of borrowers, including subprime borrowers 
and others who may not otherwise qualify for more traditional mortgage 
loans or who may not fully understand the risks of nontraditional 
mortgages. Nontraditional mortgage products are more complex than 
traditional fixed rate products and adjustable rate products and also 
can present greater risks of payment shock and negative amortization.
    While the Board's Regulation Z requires creditors to provide 
disclosures to consumers in connection with mortgages, including 
nontraditional mortgages, consumer groups and others have stated that 
additional disclosures are needed.
    The Board seeks public comment on the following questions regarding 
nontraditional mortgage products:
    1. Do consumers have sufficient information (from disclosures and 
from advertisements) about nontraditional mortgage products to 
understand the risks (such as payment increases and negative 
amortization) associated with them?
    2. Should any disclosures required under Regulation Z be eliminated 
or modified because they are confusing to consumers, unduly burdensome 
to creditors, or are simply not relevant to nontraditional mortgage 
products? Do the required disclosures present information about 
nontraditional mortgage products in an understandable manner?
    3. Are there some Regulation Z disclosures that should be provided 
earlier in the mortgage shopping and application process to aid 
consumers' understanding of key credit terms and costs for these 
products?
    Reverse Mortgages. Reverse mortgages have increased in popularity 
in the last 5 years. For example, according to the National Reverse 
Mortgage Lenders Association, the number of reverse mortgages insured 
by the Department of Housing and Urban Development (HUD) (representing 
90 percent of reverse mortgages) grew from about 8,000 originations in 
2001 to about 43,000 originations in 2005. Reverse mortgages allow 
borrowers to convert equity in their homes to a loan, which need not be 
repaid until the borrower dies or sells the home.
    Reverse mortgages can have relatively high up front fees (e.g., for 
insurance and origination costs) and are complicated transactions. 
Although Regulation Z requires lenders to provide special disclosures 
for reverse mortgage transactions (12 CFR 226.33), some concerns have 
been raised that consumers may not understand the terms of these 
products. In the HUD-insured reverse mortgage program, borrowers must 
receive pre-application counseling from a counselor approved by HUD.
    The Board seeks comments on the following questions related to 
reverse mortgages:
    1. Are current Regulation Z disclosures adequate to inform 
consumers about the costs of reverse mortgages and to ensure that they 
understand the terms of the product?
    2. Has counseling (under the HUD program) been effective in 
educating consumers about reverse mortgages and in preventing abuses 
from occurring?
    3. In reverse mortgages that are not insured by HUD, is counseling 
offered to applicants? Do borrowers of these loans have difficulty 
understanding their loan terms or encounter other difficulties? Do 
these lenders employ alternate disclosure approaches that have proven 
to be effective?

Topic 3: Informed Consumer Choice in the Subprime Market

    The growth of the subprime market over the last several years has 
expanded access to credit, helping to increase homeownership and 
opportunities for consumers to use the equity in their homes. However, 
the growth of the subprime market has also raised public policy 
concerns. Among the concerns is whether consumers who obtain higher-
priced loans are sufficiently informed about mortgage products, their 
options, how to effectively shop for the best rates and terms, and 
ultimately how to obtain the best available mortgage for their needs.
    In addition, the variation in prices paid by some borrowers has led 
to concerns that price disparities may reflect illegal discrimination 
rather than legitimate cost and risk-related factors. Home loan price 
data disclosed in 2005 for the first time under the Home Mortgage 
Disclosure Act show that African-American and Hispanic borrowers obtain 
higher-priced mortgage loans more frequently than do white and Asian 
borrowers, and obtain loans from lenders that specialize in higher-
priced loans more frequently than do other groups.\3\ These differences 
may reflect legitimate distinctions among the credit characteristics of 
borrowers, or may be the result of other factors. The Board would like 
to use the hearings to gather information about borrowers' knowledge 
and shopping behavior in the subprime market that may stimulate 
additional research in this area.
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    \3\ In the case of conventional first-lien home-purchase loans 
extended in 2004, 32.4 percent of African-Americans and 20.3 percent 
of Hispanic whites obtained higher priced-loans, compared to 8.7 
percent of non-Hispanic whites and 5.9 percent of Asians. More 
information about these findings and the HMDA data in general, is 
available on the Board's Web site at http://www.federalrserve.gov/pubs/bulletin/2005/summer05_hmda.pdf, and http://www.federalreserve.gov/boarddocs/press/bcreg/2005/20050331/default.htm.
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    The growth of the subprime market has also raised concerns about 
consumers' understanding of the role of mortgage brokers. Some consumer 
advocates have asserted that because brokers' fees are based on the 
amount of a loan, brokers may encourage consumers to obtain mortgage 
products that enable consumers to obtain larger loans without providing 
information about the risks for those products or other mortgage 
products that might better meet the consumer's needs. The hearings will 
be used to gather information about the role of brokers, to assist the 
Board in identifying new consumer education strategies, and to enable 
the Board to provide informed consultation with Congress and other 
agencies on possible legislative and non-legislative measures that 
might improve consumer understanding and protection in this area.
    The Board solicits comment on the following questions regarding 
consumers in the subprime loan market:
    1. How do consumers who get higher-priced loans shop for those 
loans? How do they select a particular lender?
    2. What do consumers understand about the role of mortgage brokers 
in offering mortgage products? Has their understanding been furthered 
by state-required mortgage broker disclosures?

[[Page 26516]]

    3. What strategies have been helpful in educating consumers about 
their options in the mortgage market? What efforts are needed to help 
educate consumers about the mortgage credit process and how to shop and 
compare loan terms and fees?
    4. What are some of the ``best practices'' that lenders, mortgage 
brokers, consumer advocates and community development groups have 
employed to help consumers understand the mortgage market and their 
loan choices?
    5. What explains the differences in borrowing patterns among racial 
and ethnic groups? How much are the patterns attributable to 
differences in credit history and other underwriting factors such as 
loan-to-value? What other factors may explain these patterns?

    By order of the Board of Governors of the Federal Reserve 
System, May 1, 2006.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. E6-6803 Filed 5-4-06; 8:45 am]
BILLING CODE 6210-01-P