High-Rate-Loan Regulation at IssueAs Bankers, Consumers Square Off

Consumer advocates and bankers clashed Tuesday over the best way to regulate high-interest mortgages and home equity loans.

At a Federal Reserve Board hearing, consumer groups advocated a nationwide cap on interest rates and criminal penalties for lenders who make loans that they know consumers cannot afford.

"People should not be lending at 16% or 18%," said Bruce Marks, president of Neighborhood Assistance Corp. of America. "Who can afford that?"

Fed officials are investigating compliance with the Home Ownership and Equity Protection Act of 1994, which requires lenders who make high-cost loans to give additional disclosures and which provides three days for consumers to void the transaction. The law covers loans where fees, points, and the interest rate exceed the Treasury bill rate plus 10 percentage points. The Fed is scheduled to recommend changes in the law late this year.

Borrowers at the hearing said that they refinanced their homes on the promise of lower rates, but did not receive loan documents or cost disclosures. Consumers also complained of being conned into repeatedly refinancing their mortgages and being charged tens of thousands of dollars in fees.

As a result, Helen Ferguson told the Fed that her mortgage debt ballooned to $86,000 from $20,000 within five years. Her monthly payment more than tripled to $800, far exceeding her $504 in monthly income, she said. "If I had been told the true terms of the loans, I would not have entered into them," she said tearfully.

Though lenders agreed that a some firms take advantage of people, they said the Fed should target these bad apples rather than burdening the entire industry with complex rules.

Jeffrey A. Wolpe, vice president of University Mortgage Inc. in Chevy Chase, Md., said easing the onerous disclosure requirements for high-cost loans would increase competition and drive down prices.

Consumers often ignore the additional disclosures on high-cost loans and frequently complain when informed that the law requires the lender to wait three days before dispersing the funds, said Scott D. Samlin, counsel to Alliance Funding Co. of Montvale, N.J.

Paul Mondor, director of regulatory compliance for the Mortgage Bankers Association, urged the Fed to eliminate the three-day cancellation period and exempt first-mortgages from the disclosure requirements.

Fed Governor Laurence H. Meyer said he expects the Fed will find a middle ground.

"I'm still optimistic," he said. "I can't believe we can't find a better way to do the job."

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