Proposed HOEPA Changes Would Include More Prime Loans

The Mortgage Bankers Association said in a 54-page commentary letter Tuesday to the Board of Governors of the Federal Reserve System that it mostly supports the proposed rule to amend Regulation Z under the Truth in Lending Act and the Home Ownership and Equity Protection Act.

But MBA thinks the proposition can be made even better for customers without increasing costs to them or causing credit availability to decrease.

“We support many of the provisions in the proposed rule, but we do have concerns about the increased regulatory burden, liability and reputational risks that lenders might face,” MBA Chairman Kieran P. Quinn said in the release. “If the rules are not revised, many borrowers will pay more for their mortgage and fewer loans will be made to those borrowers most in need of credit.”

MBA’s main concern is that the way the board defines subprime loans is not specific enough and could capture a greater amount of prime loans than necessary, which would lead to too much regulation, the letter indicated.

The trade group does not agree with the board’s proposed figures of an annual percentage rate 300 basis points more than Treasury securities of similar comparison for a term for first-lien mortgages and 500 BPS more than those for second-lien mortgages.

“These metrics — as a result of market stresses — will result in dramatic over-coverage of prime as well as Alt-A mortgages, classifying them as higher-priced for the foreseeable future and subjecting them to unnecessary regulation and inflated costs for consumers,” Quinn wrote.

Instead, MBA proposes the board use different benchmarks, such as thresholds of at least 400 base points more than Treasuries to first mortgages and 600 BPS more than those for second lien. MBA feels this will help curb the problem of having too much regulation in such fields.

“While MBA supports targeted regulation on nonprime mortgages as preferable to overbroad regulation of the entire mortgage market, the determination of how mortgages are defined as ‘nonprime’ or ‘higher-priced’ loans, and how the new requirements are specified, are crucial to the industry and to the customers it serves or who hope to be served by mortgage finance,” Quinn said in the letter.

The American Bankers Association is also concerned about an overly broad definition for HOEPA loans.

“We are troubled by the proposed triggers for higher-priced loans as well as the potential litigation risk for lenders that extend credit that is classified as ‘higher-priced,'” ABA said in its own statement.” Many of these concerns would be addressed, however, if the test for a higher-priced loan were to be crafted in a way that clearly excludes the prime market.”

The bankers recommended that triggers should be tied to mortgage rates, and not Treasury yields.

“Including prime loans with higher-priced loans that could be subject to civil damages would not accomplish the intent of the proposal,” ABA said.

MBA thinks it is unnecessary to extend the protections for all loans to home-equity lines-of-credit mainly because HELOCs have unique servicing challenges.

“Where borrowers experience servicing issues,” Quinn said in his letter, “they should avail themselves of the Qualified Written Request process under RESPA to resolve issues.”

Quinn said that the group would like to see uniform national standards when it comes to lending in order too avoid the practice of abusive lending, which is a “stain on the mortgage industry.” He said the best way to protect buyers from such tactics is to have uniformity that will also increase the competition to decrease costs, while also allowing options for customers to grow.

ABA supported uniform standards for lenders whether they are federally regulated or not.

“There will not be sufficient supervision and enforcement for non-bank financial firms,” ABA stated. “ABA urged enforcement by state and federal officials in a consistent manner.”

MBA is also concerned with the rules resulting in higher regulatory costs and not as many benefits for borrowers, and there are already increased costs and an imbalance in regulation in the existing patchwork of state and local laws, Quinn said in the letter.

Quinn made it clear that MBA feels strongly about making a definite distinction between mortgage bankers, brokers and lenders and, thus, “should be subject to different consumer protection requirements,” the letter said. By making the differences in the occupations and services more clear-cut, customers will better be able to get the best loan available.

ABA supported the requirement more specific disclosure of mortgage brokers’ roles and compensation. The group recommended a mandatory broker compensation agreement that would require the borrower’s signature before any fees could be collected.

MBA, which holds the nonprime adjustable-rate mortgage sector the most vital issue of regulatory interest, would like to see more focus on ARM loans in relation to other areas of the industry, the letter indicated.

Quinn also said that there should be a focus on specifics, rather than far-reaching regulation, due to the increase in the number of borrowers who now own homes. He cited that the Federal Reserve’s Flow of Funds data revealed an increase in the value of residential real estate assets held by households has from $10.4 trillion in 1999 to $20.1 trillion at the first quarter of last year. Aggregate homeowner’s equity was all the way up to $9.6 trillion at that time.

A few of the changes that MBA would like to see implemented in the amendment include: strengthening protective means for repayment ability, ensuring the board’s measures are in correlation with RESPA regulations and ensuring a practical implementation period. Quinn said going in the opposite direction would only bring “unnecessary litigation” that only causes more stress for those who have had others take advantage of them.

For instance, the safe harbor proposal would be better if defined more clearly and more to the logic of MBA, which would be a period of five years rather than seven.

“MBA believes seven years to be an unduly long period for forecasting and seems unnecessary, considering that many borrowers are likely to move or refinance well before seven years elapses,” Quinn’s letter stated.

While MBA does not wish to see the extension of credit for higher-priced loans, it does, however, think regulations should be reasonable so future borrowers can meet qualifications and not have to deal with potential litigation issues.

MBA agrees with the board that creditors should be subject to income and asset verification as long as the standards regard outside contributing factors, including repayment history.

As for prepayment fees, MBA approves restrictions on higher-priced loans, as long as they are within reason and fees remain accessible to nonprime purchasers.

While MBA does not make an argument against the board in its proposal to require for one-year mandatory escrowing, it did suggest that an implementation time of 18 months be guaranteed for servicers who do not have the means to escrow at the time. MBA said in the letter that it does not think borrowers should have total right to cancel or get out of an escrow account after it has been instituted by the creditor. Rather, it believes creditors should be able to maintain control and keep the right to authorize escrow accounts for periods longer than a year.

In addressing the parameters for agreements between lenders and borrowers, MBA is not in favor with the board’s approach, claiming it to be incompatible with that of the RESPA rule of the HUD. Rather, it “believes that both HUD and the board should promulgate compatible disclosure requirements along the lines proposed by the board with some modifications.”

In further reference to HUD, MBA does not think prohibitions made under HUD other than those the board has recommended should extend to higher-priced loans, too.

MBA also encourages the board to show opposition to the settlement agreement that Fannie Mae, Freddie Mac and the Office of Federal Housing Enterprise Oversight made with New York Attorney General Andrew M. Cuomo. Quinn said MBA has “both procedural and substantive concerns regarding the agreement,” and the said settlement, which changes appraisal rules by not letting lenders depend on the appraisals or brokers, will only eradicate what the board proposed and wipe out what the industry has already accomplished in terms of the appraisal process, because it would no longer be in the hands of lenders.

In regards to payment crediting, MBA stands by the board in its acknowledgement of “effective dating,” which does not require a servicer to credit payment on date it was received, but it still must be treated as such, though the payment may not actually be posted until a later date.

But MBA claims to be “perplexed,” according to the letter, by the board’s proposal in terms of late fees. The board’s rule would not allow for late fees or charges to the borrower when the sole delinquency can be linked to late fees and charges from previous payments, and the payment is otherwise complete for the period and is paid on the date it is due or within an adequate grace period.

“MBA questions whether the board has other evidence that servicers in today’s marketplace are pyramiding late charges or whether the board is trying to address some other activity,” Quinn wrote in the letter to the board.

MBA also gives a number of reasons for not being in favor of the board’s suggestion that servicers be required to give customers schedules of fees and charges that could arise in correlation with servicing the borrower’s account. MBA said it does not think the provision is reasonable or specific enough, and it creates an excessive burden for all involved.

“It is virtually impossible for mortgage servicers to provide a comprehensive list of all fees that may be charged in connection with a mortgage, because the fees can vary by product type, geographical areas and jurisdictions and apply to different stages in the life of a loan,” the letter said.