The Federal Reserve wants to give the poor, illiterate, elderly, and gullible a better shot at reasonable home equity financing at reasonable cost, a proposal opposed by the banking community.

With the growing outcry against predatory lending and with massive annual profits, you would think that the banking lobby would let this one slide -- after all, the Fed proposal is little but cosmetics and gloss, it would change virtually nothing.

Here's the deal.

Under the Home Ownership Equity Protection Act of 1994 (also known as "HOEPA" -- Section 32 of Regulation Z, part of the Truth in Lending Act), if the annual percentage rate (APR) exceeds by more than 10 percentage points the rates on Treasury securities of comparable maturity, then the lender must provide notice to the consumer and the consumer has three business days to get out of the loan without penalty.

HOEPA sounds tough, but it does not outlaw predatory loans it merely requires the inconvenience of disclosure. And lenders don't even have to disclose hideous terms in most cases because HOEPA applies to few mortgages.

As the Federal Trade Commission explains, "The rules do not cover loans to purchase or initially construct your home, reverse mortgages, or home equity lines of credit (similar to revolving credit accounts)."

Now the Federal Reserve has proposed lowering the APR trigger to 8 percentage points above the Treasury level rather than 10 percentage points. You would think from the outcry that lenders were being asked to donate a kidney.

To be polite, the "debate" over this matter does nothing but distract the public from the real issue, which is that predatory loans are perfectly legal, lenders are making big money from such debts, and the Fed's changes are essentially useless.

"A study by the Office of Thrift Supervision (OTS)," says Fed Governor Edward M. Gramlich, "estimates that the share of subprime mortgage loans falling under HOEPA is about 1 percent now and would rise to about 5 percent were we to use our full authority."

Not 5 percent of all loans, 5 percent of subprime loans. And even that estimate is debatable.

An "informal study" by the Mortgage Bankers Association, "yields results suggesting that a reduction of two percentage points in the HOEPA interest rate trigger could result in an additional 8.4% of current lending being classified as HOEPA loans. If we assume a direct correlation, this could mean a commensurate drop in loans by lenders currently lending at such levels."

"Increasingly," says MBA, "the mere label of 'HOEPA' infuses a pejorative connotation that associates covered loans with mortgage abuse. This stigma factor is extremely important for the lending industry since a lender's ability to attract and retain customers is directly linked to the trust and good reputation they develop in those communities they serve."

So, HOEPA creates a stigma, lenders under the proposed new rules would be making more loans that set off HOEPA triggers, thus more lenders would be tainted.

We need to be fair about this.

1. People with lousy credit should pay more to borrow.

2. Lenders who offer financing, often called "subprime" loans, to those with weak credit should get more interest because they face more risk.

3. If subprime financing was not available, some borrowers would not be able to get credit. There is a legitimate, useful role for subprime lenders.

4. A subprime lender is not necessarily a predatory lender.

5. It is entirely possible for lenders to charge high interest rates and not trigger HOEPA disclosures.

HOEPA effectively says there are cases where a loan is priced so outrageously that as a matter of public policy the borrower needs to be warned. What HOEPA does not do is ban such loans, cover most home financing, or protect those least able to defend their interests when faced with predatory lenders.

If lenders making loans that trigger HOEPA requirements are embarrassed, that should be seen as a public benefit. In fact, if we can't ban such loans, if we can't get all forms of financing covered under HOEPA, then why not help the public at least see the difference between subprime lenders and those setting off HOEPA triggers?

And so, a modest proposal:

Any party -- or any party which holds an equity stake of 5 percent of more in any party that originates, owns, services, buys, or sells a loan which triggers HOEPA disclosure requirements -- must provide quarterly and annual reports to the Federal Reserve which show the number of HOEPA loans, their total dollar value and the average interest rate for all reported HOEPA financing.

This plain language document is to be public and the results included in quarterly and annual HOEPA reports issued by the Federal Reserve and posted on the Internet. Lenders in the Federal Reserve report are to be ranked by the number of HOEPA loans for each lender by state, and by the dollar value of each lender's HOEPA loans by state.

Since most lenders do not buy, originate, sell, own, or service loans that set off HOEPA triggers, there would be no additional paperwork for them, no embarrassing disclosures, and no stigma.

As to those with lending practices that require HOEPA disclosures, I say let's find out who's really #1! No doubt newspapers, consumer groups, and TV stations would find such information worthy of extensive coverage and comment.

For more articles by Peter G. Miller, please press here.

Published: April 10, 2001

Use of this article without permission is a violation of federal copyright laws.

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Peter G. Miller, also known as OurBroker®, is the author of six real estate books -- including The Common-Sense Mortgage -- and is the original creator and host of America Online's Real Estate Center. Peter's weekly columns appear in more than 100 newspapers nationwide, he is also published in a variety of other media outlets and he is a frequent speaker at national events and conventions. Peter welcomes your questions, comments, and news releases via e-mail at .

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