[Federal Register Volume 72, Number 104 (Thursday, May 31, 2007)]
[Pages 30380-30383]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-10395]



[Docket No. OP-1288]

Home Equity Lending Market; Notice of Hearings

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Public hearing; request for comment.


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

[[Page 30381]]

home equity lending market and the adequacy of existing regulatory and 
legislative provisions (including HOEPA) in protecting the interests of 
consumers. Consequently, as previously announced, the Board will hold a 
hearing 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 
hearing. Additional information about the hearing will be posted to the 
Board's Web site at http://www.federalreserve.gov.

    \1\ Pub. L. 103-325, 108 Stat. 2160.

DATES: The date of the hearing is June 14, 2007.
    Comments. Comments from persons unable to attend the hearing or 
otherwise wishing to submit written views on the issues raised in this 
notice must be received by August 15, 2007.

ADDRESSES: The location of the hearing is:
    The Federal Reserve Board, 20th and C Streets, NW., Washington, DC 
20551, in the Martin Building, Terrace Level, Dining Room E.
    You may submit comments, identified by Docket No. OP-1288, 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, or Paul 
Mondor, Attorney, 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.


I. Background


    In 1994, the Congress enacted the Home Ownership and Equity 
Protection Act (HOEPA) as an amendment to the Truth in Lending Act 
(TILA), in response to testimony about predatory home equity lending 
practices in underserved markets, where some lenders were making high-
rate, high-fee home equity loans to cash-poor homeowners. HOEPA 
identifies a class of high-cost mortgage loans based on the loans' 
rates and fees. Loans above HOEPA's price triggers require additional 
disclosures and are subject to substantive restrictions on loan terms. 
HOEPA is implemented by the Board's Regulation Z (12 CFR 226.32 and 
    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. Hearings 
were held in 1997, 2000, and 2006. Following the 2000 hearings and the 
receipt of public comment, the Board amended the provisions of 
Regulation Z that implement HOEPA. These revisions included extending 
HOEPA's coverage to more loans, enhancing disclosures for HOEPA loans, 
and expanding its substantive restrictions. The revisions took effect 
in October 2002.
    In addition to the Board's general grant of rulewriting authority 
under HOEPA, Section 129(l)(2) of HOEPA also confers regulatory 
authority on the Board to prohibit acts or practices:
     In connection with mortgage loans--if the Board finds the 
practice to be unfair, deceptive, or designed to evade HOEPA; and
     In connection with refinancings of mortgage loans--if the 
Board finds that the practice is associated with abusive lending 
practices or otherwise not in the interest of the borrower.

2. The Board's 2006 Hearings

    The Board's most recent hearings under HOEPA covered three broad 
topics: (1) The impact of the 2002 HOEPA rule changes and state and 
local predatory lending laws on predatory lending practices; (2) 
nontraditional mortgage products and reverse mortgages; and (3) 
informed consumer choice in the subprime market. Hearing panelists 
included mortgage lenders and brokers, credit ratings agencies, 
realtors, consumer advocates, community development groups, housing 
counselors, academicians, researchers, and state and Federal Government 
    Consumer advocates and some state officials stated that HOEPA (and 
state predatory lending laws) are generally effective in preventing 
loans with abusive terms from being made for loans subject to the HOEPA 
price triggers. Some advocated that Congress should lower HOEPA's 
coverage triggers so that more loans are subject to HOEPA. Consumer 
advocates and state officials urged regulators and Congress to take 
action to curb abusive practices for loans that do not meet HOEPA's 
price triggers.
    Consumer advocates urged the Board to prohibit or restrict certain 
loan features or terms, such as prepayment penalties, and underwriting 
practices such as ``stated income'' or ``low documentation'' (``low 
doc'') loans where the borrower's income is not documented or verified. 
They also expressed concern about aggressive marketing practices that 
include steering borrowers to higher-cost loans by emphasizing initial 
low monthly payments based on an introductory rate without adequately 
explaining that the consumer will have considerably higher monthly 
payments after the introductory rate expires. Finally, some consumer 
advocates stated that brokers and lenders should be held to a fiduciary 
standard such as a duty of good faith and fair dealing or a requirement 
that they make only loans that are suitable for a particular borrower.
    Industry panelists and commenters, on the other hand, expressed 
concern that HOEPA may reduce the availability of credit for some 
subprime borrowers. They stated that state predatory lending laws may 
also reduce credit availability. Most industry commenters opposed 
prohibitions on stated income loans, prepayment penalties, and other 
loan terms, asserting that these features could benefit some borrowers. 
They urged the Board and other regulators to focus instead on enforcing 
existing laws to remove ``bad actors'' from the market. Some lenders 
indicated, however, that carefully constructed reasonable restrictions 
on certain loan features or practices might be appropriate if the 
conditions were clear and would not unduly reduce credit availability. 
Fiduciary responsibilities would, in industry's view, create conflicts 
for lenders, who are responsible to their shareholders. Industry 
commenters also stated that subjective suitability

[[Page 30382]]

standards would create uncertainties for brokers and lenders and 
subject them to litigation risk.

II. Information About the Board's 2007 Hearing

    The June 14th hearing is open to the public to attend. Seating will 
be limited, however. All visitors must register at least 24 hours in 
advance for security purposes and may access the Board's online 
registration service at https://www.federalreserve.gov/secure/forms/hoeparegistration.cfm. Further information about the hearing, as it 
becomes available, will be posted on the Board's Web site at http://www.federalreserve.gov. The hearing will begin at 8:30 a.m. and 
conclude at 4 p.m. (EST).
    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 after the conclusion of the 
panels, at 3 p.m., 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 three 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.

III. 2007 Hearing Discussion and Request for Comment

    This hearing will examine how the Board might use its rulemaking 
authority under section 129(l)(2) of HOEPA to address concerns about 
abusive lending practices in the mortgage market, including the 
subprime mortgage market. The purpose of the hearing is to enable the 
Board to gather information to evaluate whether it can address issues 
about predatory lending in a way that preserves incentives for 
responsible lenders to provide credit to borrowers, particularly 
subprime borrowers.
    The Board solicits comment on whether it should use its rulemaking 
authority to address concerns about the loan terms or practices listed 
below, and any others that commenters identify. Commenters are 
requested to discuss whether these terms or practices are associated 
with unfairness or deception, evasion of HOEPA, abusive lending, or are 
not otherwise in the interest of borrowers. In addition, commenters are 
requested to address whether the term or practice should be prohibited 
or restricted for all mortgage loans, only for loans offered to 
subprime borrowers, or other subsets of loans such as loans to first-
time homebuyers, home purchase loans, or refinancings and home equity 
loans; only certain products, such as adjustable rate mortgages or 
nontraditional mortgages.\2\ Comment is also requested on the 
effectiveness of state laws that have prohibited or restricted the 
practices listed below (and others) and whether the Board should 
consider adopting similar regulations to curb abuses without 
restricting access to responsible mortgage lending.

    \2\ Nontraditional mortgage products are mortgage loans that 
allow borrowers to defer repayment of principal and, sometimes, 
interest. They include interest-only loans and ``payment option'' 
ARMs where a borrower has flexible payment options with the 
potential for negative amortization.

    A. Prepayment penalties. Consumer advocates state that prepayment 
penalties deter a consumer from refinancing the loan on more favorable 
terms and that consumers do not receive any benefit in return. Consumer 
advocates are also concerned about prepayment penalties that extend 
beyond the expiration of an introductory or teaser rate on an ARM, 
which deter consumers from refinancing to avoid payment shock when the 
rate resets. Consequently, some consumer advocates recommend that 
penalties be banned or restricted for such loans. According to industry 
representatives, however, prepayment penalties ensure a minimum return 
on the transaction if loans are paid off early. Industry 
representatives also state that consumers receive, in return, a benefit 
in the form of lower up-front costs or lower interest rates.
    The Board requests comment on the following questions related to 
prepayment penalties:
     Should prepayment penalties be restricted? For example, 
should prepayment penalties that extend beyond the first adjustment 
period on an ARM be prohibited?
     Would enhanced disclosure of prepayment penalties help 
address concerns about abuses?
     How would a prohibition or restriction on prepayment 
penalties affect consumers and the type and terms of credit offered?
    B. Escrow for taxes and insurance on subprime loans. Loans to prime 
borrowers typically include an escrow for taxes and insurance, while 
loans to subprime borrowers typically do not include escrows. Consumer 
advocates are concerned that subprime borrowers are not aware of, and 
may not be able to budget for, these expenses. They are also concerned 
that lenders quote monthly payments to subprime borrowers that do not 
include taxes and insurance, and these borrowers do not realize that 
they will have to budget separately for these obligations.
    The Board requests comment on the following questions related to 
escrows for taxes and insurance:
     Should escrows for taxes and insurance be required for 
subprime mortgage loans? If escrows were to be required, should 
consumers be permitted to ``opt out'' of escrows?
     Should lenders be required to disclose the absence of 
escrows to consumers and if so, at what point during a transaction? 
Should lenders be required to disclose an estimate of the consumer's 
tax and insurance obligations?
     How would escrow requirements affect consumers and the 
type and terms of credit offered?
    C. ``Stated income'' or ``low doc'' loans. In some cases a lender 
will make a mortgage loan without documenting or verifying a borrower's 
income; lenders may charge higher rates for such loans. Lenders state 
that these loans are appropriate for many borrowers, including those 
who are self-employed and cannot easily document their income or who 
choose not to. Consumer advocates state that many borrowers who could 
document their income are not aware that they are getting a stated 
income loan with a higher rate. They state that some brokers and 
lenders use ``stated income'' or ``low doc'' loans to perpetrate fraud 
(e.g., the consumer's income is falsified or ``marked up'' by a broker 
or loan officer and is not verified by the lender). Concerns have also 
been raised about the use of stated income loans with other ``risk 
layering features'' such as second-lien loans for all or part of the 
consumer's downpayment.
    The Board requests comment on the following questions related to 
stated income and low doc loans:
     Should stated income or low doc loans be prohibited for 
certain loans, such as loans to subprime borrowers?
     Should stated income or low doc loans be prohibited for 
higher-risk loans, for example, for loans with high loan-to-value 
     How would a restriction on stated income or low doc loans 
affect consumers and the type and terms of credit offered?
     Should lenders be required to disclose to the consumer 
that a stated income loan is being offered and allow the consumer the 
option to document income?

[[Page 30383]]

    D. Unaffordable loans. Consumer advocates state that some lenders 
extend loans without adequately considering the borrower's ability to 
repay the loan. For example, lenders may qualify borrowers based on an 
ARM's introductory rate and not at the fully-indexed rate that will 
apply once the introductory rate expires. Lenders state that it is 
appropriate to make such loans in certain circumstances, for example, 
where the borrower is likely to be able to refinance the loan at a 
lower rate before the reset date. Other circumstances include those in 
which borrowers expect to sell their home within a few years, or expect 
a significant decrease in their monthly obligations or a significant 
increase in income, such as a borrower who is completing professional 
training. Because loans are frequently sold to purchasers who generally 
cannot be held liable for the loan originator's actions, and because 
the risk of default is spread out among investors in loan pools, some 
consumer advocates believe that there is insufficient accountability 
for making loans that consumers cannot repay.
    Recently the Board and the other banking and thrift regulators 
issued guidance on underwriting nontraditional mortgage products. The 
guidance provides that:

    An institution's analysis of a borrower's repayment capacity 
should include an evaluation of their ability to repay the debt by 
final maturity at the fully indexed rate, assuming a fully 
amortizing repayment schedule. In addition, for products that permit 
negative amortization, the repayment analysis should be based upon 
the initial loan amount plus any balance increase that may accrue 
from the negative amortization provision.

    71 FR 58609, 58614 (Oct. 4, 2006) (footnotes omitted).
    Some have urged that lenders should be required to underwrite all 
mortgage loans based on a fully-indexed rate and a fully amortizing 
payment. Some have also advocated a rebuttable presumption that a 
borrower cannot afford to repay a loan if the borrower's debt-to-income 
ratio exceeds 50 percent and that such loans should be prohibited by 
    The Board requests comment on the following questions:
     Should lenders be required to underwrite all loans based 
on the fully-indexed rate and fully amortizing payments?
     Should there be a rebuttable presumption that a loan is 
unaffordable if the borrower's debt-to-income ratio exceeds 50 percent 
(at loan origination)?
     Are there specific consumer disclosures that would help 
address concerns about unaffordable loans?
     How would such provisions affect consumers and the type 
and terms of credit offered?

    By order of the Board of Governors of the Federal Reserve 
System, May 24, 2007.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. E7-10395 Filed 5-30-07; 8:45 am]