It will soon be more difficult for unscrupulous lenders to pull the wool over the eyes of unsuspecting home owners who want to refinance or borrow against the equity in their homes.

But not soon enough.

Under new rules adopted by the Federal Reserve Board, lenders will be forced to make additional disclosures about a greater number of high-cost loans -- but the new standards don't take effect until next October.

According to the Fed, the new rules will cover about 38 percent of all first liens that come under the purview of the Home Ownership and Equity Protection Act (HOEPA), up from 12 percent under the current standards. The new HOEPA rules will also cover some 61 percent of all second trusts compared with the 50 percent covered today.

HOEPA, which was enacted by Congress in 1994 as an amendment to the Truth in Lending Act (TILA), is the main federal law protecting consumers against unscrupulous lenders.

TILA is intended to promote the informed use of consumer credit by requiring disclosures regarding general loan costs and terms. HOEPA goes further and identifies high-cost mortgages, loans defined by rate and fee "triggers." HOEPA does not ban loans, instead it requires extensive lender disclosures so that borrowers are alerted to loan terms and conditions. However, HOEPA does not apply to loans made to buy a house.

To broaden coverage, the Fed took several major steps:

• It lowered the rate "trigger" for first liens from 12 to 10 percentage points above the rate for Treasury securities with a comparable maturity. The Fed left the trigger for subordinate liens at 10 percent.

  The trigger is not the rate quoted by the lender but rather the annual percentage rate, which covers all costs in the transaction, not just interest. In other words, if the rate for comparable Treasury securities is 5 percent, the trigger under HOEPA would be 17 percent under the current rules and 15 percent under the new standards.

• The Fed revised the fee-based trigger to include the cost of optional credit insurance, accident, health, or loss-of-income insurance and similar debt-protection products paid at settlement.

• The rules now limit the ability of a creditor from re-financing their own loans within a year. A creditor holding any loan subject to HOEPA from refinancing the loan within 12 months of its origination, unless the creditor can demonstrate the refinance is in the "borrower's interest." Assignees holding or servicing a HOEPA loan would be covered by this rule as if they were the original creditors.

• The Fed strengthened enforcement by requiring lenders to assemble documentation demonstrating consumers' ability to repay HOEPA loans.

As is normal with the sorts of things, industry groups lauded the move but warned that Uncle Sam may have gone too far. And consumer groups -- which have been clamoring for greater protections for more than a year -- said the government definitely didn't go far enough.

John Taylor, president of the National Community Reinvestment Coalition, said the changes "are inadequate to address the magnitude of the predatory lending epidemic," and called on Congress to lower the APR trigger to 6 percentage points. Bills already introduced in both the House and Senate would do just that.

Taylor also said it would have been better to simply disallow the financing of credit insurance altogether, and maintained that the prohibition to ban frequent refinancings stops short of its intended mark for two reasons:

*It applies only to lenders making the original loan, not the next lender trying to sweet talk a borrower into refinancing.

* Most cases of "flipping" occur more than a year after the original loan in made.

But raising the specter of unintended adverse consequences for borrowers, the Mortgage Bankers Association and the American Financial Services Association said they were wary of the changes.

While supporting the effort to ensure that consumers are not gouged by bad actors, MBA Chairman-elect John Courson worried that expanding the reach of HOEPA to the maximum point allowable by law may cause some lenders to pull out of the market altogether, leaving borrowers with nowhere else to go for financing.

Market studies and surveys conducted by MBA have indicated that lowering HOEPA's rate-based triggers would lead to real constrictions of credit and unintended consequences in the higher-risk subprime market. If lenders can't mitigate the risks of making loans to subprime borrowers with poor credit histories, spotty employment records and high debt burdens through higher points and fees, MBA's surveys showed they will likely forego making such loans.

MBA is also concerned with the Fed's attempts to control flipping. According to Courson, by prohibiting refinances for a year unless there is a showing that the refinance is in the "borrower's interest" leaves the industry "entirely defenseless and exposed to groundless and unsubstantiated claims."

AFSA, a trade group for consumer and consumer finance companies, said the restrictions "are not the remedy for abusive lending practices...Self-policing by the consumer lending industry and more aggressive enforcement of anti-fraud laws need to be part of the equation." -30-

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