The Federal Reserve Board's Consumer Advisory Council last week recommended simplifying rate disclosures for homebuyers and tightening limits on fees for home equity loans.
But the 30 bankers, lawyers, consumer advocates, and other council members who met in Fed headquarters Thursday disagreed over the best approach.
Some of the fiercest debate came during a discussion of reforming the Truth-in-Lending and Real Estate Settlement Procedures acts. Among the options proposed:
*Expand the annual percentage rate to include fees for credit reports, appraisals, loan documentation, closing attorney, and other incidental services.
*Disclose the interest rate and a grand total for closing costs.
*Prevent lenders from charging separately for closing costs. Instead, these costs would have to be included in the interest rate.
Kenneth R. Harney, a local journalist who headed the panel's mortgage disclosure committee, said the expanded annual percentage rate would be the easiest to implement, but noted that nearly 90% of consumers do not understand what the rate represents.
"APRs are just completely mysterious," said George P. Surgeon, chief financial officer of Shorebank Corp., Chicago. "Consumers just don't relate to them."
The other approaches also have their downsides. For instance, consumers could be deceived by unscrupulous lenders under both those approaches, because they would not receive an itemized list of closing costs, Mr. Harney said.
Terry Jorde, president of Towner County State Bank in Cando, N.D., said regardless of the reform plan adopted, some of the onus falls on consumers, who need to shop for the best rates and terms.
The Fed and the Department of Housing and Urban Development are crafting a legislative proposal to overhaul the two disclosure laws. It is expected by early 1998. Consumers complain that the disclosure laws are ineffective, while banks charge that they require reams of paperwork and make it too easy for consumers to sue over minor errors.
Council members generally agreed that the two-year-old Home Ownership Equity Protection Act should be strengthened to protect elderly and unsophisticated borrowers from home loans with high fees or interest rates.
"We have seen plenty of evidence to know that HOEPA has not stopped all fraudulent activity in the high-cost mortgage area," said Maryland lawyer Robert A. Cook, chairman of a committee that investigated the issue.
"Lenders can get around it so easily," said Margot F. Saunders, managing attorney for the National Consumer Law Center. "Even if they comply with it, it still allows very abusive practices."
The committee recommended that the Fed place more restrictions on early refinancings, or "loan flipping," that repeatedly saddle borrowers with thousands of dollars in closing costs.
However, they failed to reach a consensus on specific steps, so Mr. Cook offered several possibilities:
*Trigger additional consumer protections whenever the combined fees from back-to-back refinancings exceed 8% of the loan's value.
*Rebate points charged on the first loan in the event of an early refinancing.
*Prohibit closing costs on a loan refinanced within a year by the same lender.
*Restrict the lender to imposing closing costs on only the new money extended in a refinancing or for covering reporting expenses.
Ms. Saunders also suggested that lenders be barred from financing closing costs.
HOEPA covers loans if the total fees at or before closing exceed $424 or 8% of the loan.
