Subprime Coalition Moves to Reign In Predatory Players

After reviewing half-a-dozen bills pending in the U.S. House of Representatives and Senate that intend to strengthen the federal Home Ownership and Equity Protection Act of 1994 (HOEPA), the Coalition for Fair and Affordable Lending (CFAL) issued a position paper in which it outlined changes subprime lenders view should be included in a refined bill to amend the federal law.

The federal HOEPA is the only protection many people have against abusive practices, yet hearings have shown substantial amendments are needed to fill gaps and strengthen the “outdated” law, explained the Coalition, a group of lenders representing over one-third of the subprime industry. While state and local anti-abuse laws have been “well-intended attempts” to close gaps in the HOEPA, they have only resulted in a “burdensome, inconsistent and often ineffective patchwork of requirements” as they have reduced access to affordable mortgage credit and “significantly” increased prices of loans for many borrowers.

The Coalition says that all the bills pending in Congress “contain some provisions or concepts that might be worked into a new, more refined proposal that can secure broad bipartisan support,” but it believes the Ney-Lucas bill, H.R. 833, offers the best framework to develop a bill that can gain the support needed to amend the HOEPA in early 2005.

Among other legislative officials, Congressmen Paul Kanjorski and Bob Ney have been working on a proposal for a refined bill to amend the HOEPA using the H.R. 833 as a base, according to CFAL executive director Wright Andrews. The results should be made public in a few weeks.

“We’re excited and wanting to see what they come up with,” Andrews said. “We’re hopeful that the type of suggestions we’re making will be picked up in many cases by Mr. Kanjorski and others who are trying to come up with something better than what was initially proposed.”

The position paper outlined 14 recommendations the CFAL urged Congress members to support and apply in provisions to nonprime mortgages.

For starters, CFAL said, the provisions should provide protection to more subprime loans by including purchase money and open-end mortgage loans, and decreasing the HOEPA points and fees to 5%, or no more than 6% depending on whether additional items such as yield spread premiums are included in the fee calculation.

A new borrower benefit test to prevent “loan flipping” should also be added, CFAL said. This could be achieved by prohibiting lenders from “knowingly or intentionally” refinancing any loan into a “high cost” loan unless there is a “reasonable benefit” to the borrower, clarifying what is considered a benefit in “safe harbor” examples, and restricting the refinancing of special below-market, low interest rate loans.

The group recommended that provisions should also prohibit prepayment penalties unless the borrower is also given a choice of a loan without such terms. In the event the borrower opts for a loan with prepayment penalties, the term should be no more than three years and the amount should be limited to no more than 6 months interest.

Other proposed changes CFAL urged Congress members to consider were adding a new repayment ability test to prohibit lenders from financing loans to borrowers who are not adequately able to pay; prohibiting profits from foreclosures by requiring lenders to give any remaining equity to the borrower after deducting outstanding obligations on the loan, related costs and other liens of record; and prohibiting lenders from offering single premium credit life insurance and comparable products.

Members should also apply provisions that will require subprime lenders to recommend and provide contact information for borrowers to consider credit counseling, the subprime industry group said.

Another suggestion by CFAL was to toughen penalties and increase borrowers’ ability to seek redress by increasing HOEPAs maximum statutory penalty for individual actions from $2,000 to $4,000, increasing the class action limit from $0.5 million to $1 million, and raising the period for bringing suit from one year to two years.

In efforts to impose national standard uniformity, CFAL suggested provisions should preempt conflicting state and local anti-predatory laws. Also, that adequate state enforcement authority be provided by clarifying that appropriate state regulators, such as banking departments, can enforce the new enhanced federal lending standards against state licensed and chartered lenders; and by retaining current law that allows state attorneys general to enforce against all lenders, including federally chartered entities.

“We believe that by careful drafting and by making reasonable compromises, Members can put forth an effective and workable bill that can be enacted in 2005 to provide adequate borrower protections without limiting borrowers’ abilities to obtain affordable, fairly priced nonprime mortgage credit,” CFAL concluded.

CFAL representative member companies include Accredited, Aegis, Equifirst, Household, New Century, Option One, and Saxon Capital.