The Illusion of Mortgage Protection

With a growing number of foreclosures nationwide, it’s good to know that the federal government has consumer protections in place to defend the public interest. What’s not so good is what those “protections” actually say.

Speaking in Chicago, Federal Reserve Board Chairman Ben Bernanke said “the Home Ownership Equity Protection Act (HOEPA) gives the Board the power to prohibit acts and practices in mortgage lending deemed ‘unfair’ or ‘deceptive.'”

But is HOEPA — which applies to all lenders and not just federally-regulated banks — a powerful consumer protection tool? Can borrowers rest easy knowing that HOEPA will be used to defend their interests against unscrupulous lenders?

Judge for yourself.

In basic terms, what HOEPA says is this:

If a lender issues a first lien which is at least 8 percent points higher than comparable federal securities, then the lender must issue special disclosures to the borrower. Also, if the loan requires the payment of points and fees equal to at least 8 percent of the mortgage amount then special disclosures are also necessary.

Say that 10-year Treasury bills yield 5.25 percent. Under HOEPA, special disclosures would be required if your $150,000 first loan had an interest rate at or above 13.25 percent or if fees and points totaled $12,000 or more. (For a second lien, no HOEPA disclosures are required unless the loan is a full 10 percentage points above Treasury securities.)

According to the Federal Trade Commission, under HOEPA “the lender must give you a written notice stating that the loan need not be completed, even though you’ve signed the loan application and received the required disclosures. You have three business days to decide whether to sign the loan agreement after you receive the special Section 32 disclosures.”

And what happens if the lender does not provide required disclosures or closes the loan in less than three days? Then borrowers have the right to sue and may be able to collect damages, legal fees and get the loan rescinded.

HOEPA sure sounds like a powerful friend of downtrodden borrowers, at least until you hear about the rest of the law. As the FTC explains, “the rules do not cover loans to buy or build your home, reverse mortgages or home equity lines of credit.”

In other words, a huge percentage of all mortgage loans — including mortgages to purchase a home — are simply not covered by HOEPA disclosure requirements. It’s like having a having a law which says that cars must have seat belts — except that the law does not apply to cars which have steering wheels, tires or brakes.

You might think under HOEPA that high-cost loans are prohibited. That’s not the case. What HOEPA says is that high-cost mortgages are just dandy as long as the lender makes required disclosures, not exactly a tough standard. As Carolyn Warren, a former loan officer, explains “never once did a client complain about signing this notification that their loan was so expensive it was an exception to HOEPA.”

Warren, author of Mortgage Rip-Offs and Money Savers, says “we would just call up our borrower and say, ‘Hi, I have a form I’m going to fax over that I need your signature on. The Feds have so many forms mortgage companies are required to have on file! Sure doesn’t help our trees, does it? Ha-ha. So much for a paperless society! Ha-ha. We’re not allowed to finance your loan until three days after you sign and date the form, so will you please get this back to me right away?’

“And they would say, ‘Oh certainly. No problem.'”

While HOEPA’s disclosure requirements relating to high-cost loans are severely curtailed, the law does include broader provisions to address unfair, deceptive and abusive lending practices in general.

The problem, say consumer advocates, is that federal regulators have not used HOEPA to rein in abusive lenders.

Through HOEPA, says Michael Calhoun, President of the Center for Responsible Lending, the Federal Reserve Board can address lending abuses on ALL loans through regulation, not just high-cost financing. But to date, he says, “the Board has not used this authority.”

For its part, the Center for Responsible Lending would like to have HOEPA revised. It proposes several changes, saying the law should do the following:

  • Prohibit the financing of fees and charges for high-cost loans. This would force borrowers to bring more cash to closing, cash most do not have — thereby eliminating most high-cost loans.  
  • Require independent mortgage counseling for high-cost borrowers. The idea is to require counseling because, says the Center, as many as 30 to 50 percent of all subprime borrowers might actually qualify for lower-cost loans if they had better information.
  • Change the definition of “high cost” from 8 percent points to 5 percentage points above comparable federal secuities. The 5 percentage points would include both loan fees and “points”.

 “When HOEPA was passed in 1994 it reflected the mortgage marketplace and the political landscape of the time,” says Jim Sacaccio, chairman and CEO at RealtyTrac.com, the leading foreclosure resource. “Today we have loan products which were unknown when HOEPA was developed, a far bigger percentage of all mortgages are now subprime loans and we also have a large and growing number of foreclosures. Lenders, investors and borrowers would all be better off with HOEPA legislation which makes the mortgage marketplace less risky for everyone.”
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Peter G. Miller is the author of the Common-Sense Mortgage and is syndicated in more than 100 newspapers.

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