WASHINGTON Surprising the banking industry and consumer advocates alike, the Federal Reserve Board Wednesday issued a stronger-than-expected proposal to crack down on predatory lending.
At the same open meeting, Fed officials also proposed new powers including real estate brokerage and management for financial holding companies, and it completed a rule letting them act as finders bringing buyers and sellers together for a fee.
The predatory-lending plan was quickly criticized by both lenders and consumer advocates.
This proposal will shrink credit in the subprime mortgage market, said Joe Pigg, senior counsel for the American Bankers Association. I think consumers will be hurt because the practical effect is that it will drive legitimate lenders out of the marketplace. It will have the opposite effect of what the consumer groups want to see happen.
Consumer groups said they were pleased the proposal went further than they had expected but were not entirely satisfied.
It is an important step in the right direction, but it doesnt go far enough, said Daniel Immergluck, senior vice president of the Woodstock Institute in Chicago. Certainly they should have added prepayment penalties and balloon payments to the points and fees triggers.
These actions should be only the first step of many to curb predatory lending, said Maude Hurd, national president of the Association of Community Organizations for Reform Now. The anti-flipping provisions are not strong enough to provide real protections to borrowers, and the definition of fees should include prepayment penalties and yield-spread premiums.
Under the Fed proposal, more mortgages will fall under the Home Ownership and Equity Protection Act, a 1994 law that subjects lenders making high-cost home-secured loans to price limits and disclosure requirements that go beyond those required under the Truth-in-Lending Act.
Currently, any mortgage with a rate 10 percentage points above comparable Treasury rates triggers the HOEPA disclosures. The Fed plan would lower that trigger to eight points. Fed officials said this change would mean 5% of mortgages would be covered by HOEPA, compared to 1% today.
Another HOEPA trigger is the points and fees charged on a mortgage. The Fed plan would broaden that test to include the cost of single-premium credit life insurance. Fed officials did not know how many new loans this would bring under the act.
But analysts said this could be a significant change, as many lenders now offer loans that are barely below the threshold for HOEPA, and would fall under it if the points and fees proposal were adopted.
I think the effect of doing this will make the sale of single-premium credit life insurance in mortgage loans very difficult, said Karen Petrou, president of ISD/Shaw, a Washington consulting firm.
The Fed proposal would also block a lender from refinancing a loan more than once during the first 12 months of its origination, and would prohibit refinancings in the first five years on any loan made with a zero interest rate. The Fed said it based its proposal on information gathered during its hearings on predatory lending this summer, and that the plan was designed to curb the problem without drying up credit in the subprime mortgage market.
The Fed asked for public comment on whether financial holding companies should be permitted to act as real estate brokers and managers. The American Bankers Association and the Financial Services Roundtable had requested the new powers last summer so that banks can provide more services for their customers and generate additional fee income.
This would allow financial institutions to offer a fuller range of financial services under one roof, said Richard M. Whiting, the roundtables executive director. It would put to better use many of the skills that banks already have.
At the meeting, Fed Gov. Edward Kelly said he agreed with the proposal, but noted a provision that specifically excludes real estate development by banks. Im worried we are backing ourselves into a corner, he said. We are granting everything else in real estate to these companies, so how are we going to limit real estate development?
Another proposal released by the Fed Wednesday would broaden the data-processing activities that financial holding companies may engage in. The proposal includes allowing financial holding companies to own other businesses that engage in Internet and portal-hosting activities.
And the Fed finalized its finder rule, which lets financial holding companies act at as middlemen for buyers and sellers.
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