Numerous prohibitions on the so-called high-cost, closed- end home equity mortgage legislation introduced by Rep. Joseph Kennedy, D- Mass., have been approved without hitch or controversy by House and Senate conferees working on the community development banking bill.
Among the provisions are prohibitions if an applicable loans terms exceed either the interest rate test or the points and fees test.
Prepayment penalties are allowed when:
*The consumers debt-to-income ratio is not greater than 50%;
*The consumers income and expenses are verified;
*The penalty applies only to refi-nancings by a means other than the original lender;
*The penalty does not apply after the first five years of the loan; and
*The penalty is not prohibited under applicable law.
The other agreed-upon prohibitions include engaging in a pattern or practice of lending based on consumer collateral without regard to repayment ability; balloon payments except on loans of greater than five years; negative amortization; more than two prepaid payments from loan proceeds; and disbursing proceeds of a loan to a home improvement contractor.
The Federal Reserve Board is given authority to exempt certain mortgage products from the prohibitions, and given the power to prohibit unfair, deceptive or evasive acts.
Provisions adopted by the conferees further impose requirements that lenders make disclosures to high-cost borrowers that they could lose their home if they fail to meet their loan obligations and to inform borrowers they may be able to obtain a less expensive loan elsewhere.
The disclosures are required for at least three days before a loan is closed. A loans terms are allowed to change if the new disclosures are provided three days in advance of closing. Conferees added the provision that new disclosures that would be necessary if a consumer changed the terms of a loan may be made over the telephone three days in advance of closing if also provided in writing at closing.
The interest rate test for purposes of the Kennedy bill are any applicable loans whose interest rate exceeds the rate of a comparable Treasury maturity by 10 percentage points. The Fed can, however, adjust the threshold between 8% and 12% after two years.