In an effort to curb abusive lending practices that rob minorities, the elderly and other unsuspecting home owners of their equity, the Federal Reserve Board has proposed significantly broadening the scope of consumer protections under the Home Owners and Equity Protection Act (HOEPA).

Currently, mortgage refinancings but not loans made to purchase property come under the law's purview when the interest rate exceeds the comparable Treasury rate by 10 points or when total points and fees charged to the consumer exceed 8 percent of the loan amount.

Under the proposed rules, which are being issued for a 90-day comment period, the Fed would include more loans under HOEPA by lowering the threshold by two percentage points and revising the fee-based trigger to include optional insurance premiums and similar credit protections paid for by the borrower.

At current rates, loans carrying a rate of 16 percent or more are subject to prohibitions against short-term balloon payments, prepayment penalties and other terms that are considered onerous at best and abusive at worst. But under the proposed new standard, today's interest rate trigger would be 14 percent.

Lenders could live with that. But they are objecting to including credit insurance as part of the fee-based test, arguing that virtually every loan with single-premium insurance, even those which are priced fairly and competitively, would come under HOEPA.

Consumer groups, on the other hand, applaud the proposal. They regard single-premium insurance as totally unnecessary, if not outright thievery especially when it's financed as part of the loan amount. Such coverage can add as much as $3,500 to the principal of a $30,000 mortgage.

Advocates also are cheering another proposed change that would restrict creditors from engaging in repeated refinancings of their HOEPA loans over a short period of time when the transactions are not in the borrower's interest.

This practice is known as "flipping," and is designed not to improve the borrower's standing but to rake in more and more fee income for unscrupulous lenders. Indeed, when owners have difficulty making their payments, they are often encouraged to refinance and start all over, a practice that leads to another round of lender charges and a new loan that provides little or no economic benefit to the borrower.

The Fed hopes to stop that by prohibiting lenders from refinancing a HOEPA loan within 12 months unless the switch is in the borrower's best interest.

Furthermore, the Fed wants to clamp down on lenders who write loans without regard to the borrower's ability to afford the payments. The law already bars creditors from making loans solely on the borrower's equity, but the government wants to tighten the screws by requiring them to document and verify income and disclose the total amount of the money borrowed.

Meanwhile, in a related move, the American Financial Services Association has put in place a new voluntary standard regarding HOEPA loans. "It's clear to us that the lending industry needs to step up and do what it can to differentiate responsible lending practices from abusive, often illegal practices," said AFSA President Randy Lively.

Under the association's expanded code of ethics, members agree not to extend credit to clients who can't demonstrate an ability to pay. They also agree to offer several credit insurance options and fully disclose the terms, eliminate prepayment penalties when the loan is refinanced by the same lender, limit the use of balloon payments, and refinance the points already paid on loans that are refinanced within 12 months.

AFSA is the Washington-based trade association for nearly 400 financial services firms, including second mortgage lenders.

Published: December 18, 2000

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When Lew Sichelman first started writing about housing in 1969, he was the youngest real estate writer in the country. Now, 37 years later, he's one of the oldest -- and most decorated. He has been rated the top housing columnist in the country by the National Association of Realtors as well as by his peers in the National Association of Real Estate Editors. Indeed, NAREE has recognized his work on numerous occasions. One year - due to his advancing age, he can't recall which one - he earned top honors in the annual NAREE Journalism Contest in three out of the four major writing categories. It was the first time one writer has won so many NAREE awards in a single year. Known for his ability to make even the most difficult topics understandable, Sichelman also has been honored by the National Association of Home Builders and the Mortgage Bankers Association. He began providing in-depth coverage of and consumer-oriented information about housing and housing finance at the Washington Daily News, where he was real estate editor. He held that same position for nine more years at the Washington Star, which purchased the News in 1972. The Star, a so-called "writer's newspaper" which also had the misfortune of being an evening paper, was put out of its misery in 1981, and Sichelman, who had begun self-syndicating his column in 1978, decided to become a full-time columnist. Today, his column, "The Housing Scene," is distributed by United Media to newspapers throughout the country. He also is on the staff of National Mortgage News, an independent newspaper which is considered the bible of the mortgage business. And he writes for numerous other publications, including MarketWatch.com, where he answers readers questions once a week, Sports Illustrated (don't ask), RealtyTimes.com, BigBuilder and others. Sichelman is married, the father of five and grandfather of eleven.