WASHINGTON - Industry representatives are complaining that a recent Federal Reserve Board proposal to dramatically increase the number of loans subject to the Home Ownership and Equity Protection Act would shrink credit in the subprime market, burden banks, and do little to rein in abusive lenders.

In comment letters to the central bank, critics said many institutions already avoid making loans that are covered by the 1994 law because it imposes stricter price limits and disclosure requirements than does the Truth-in-Lending Act on lenders that make high-cost, home-secured loans.

"There are lenders currently avoiding making HOEPA loans because of the severe consequences for violation, even unintentionally," wrote Robert E. McKew, vice president and general counsel of the American Financial Services Association.

Currently, any mortgage with a rate 10 percentage points above Treasury rates for a comparable term triggers the protection act disclosures. The Fed plan, which was issued in December, would reduce that threshold to eight points. Fed officials have said this change would mean 5% of mortgages would be covered by the Home Ownership and Equity Protection Act, compared with 1% currently.

"A reduction in the interest rate trigger would have a significant negative impact on both the availability and the cost of credit," Mr. McKew wrote.

Other changes would include adding the cost of single-premium credit life insurance to the "points and fees" test on loans, prohibiting refinancings in the first five years on any loan with a zero interest rate, and blocking a lender from refinancing a loan more than once during the first year of its origination. (The Fed has also drawn criticism for separately proposing mandatory disclosure of annual percentage rates on all mortgages as part of Home Mortgage Disclosure Act reporting.)

Meanwhile, the American Bankers Association issued a study Thursday concluding that new state and local laws intended to stop predatory lending are counterproductive.

"The proliferation of different state and local lending rules threatens to balkanize the lending market and make it very costly, and potentially impossible, for lenders to offer nationally uniform mortgage loan contracts," Robert Litan, author of the study and vice president and director of economic studies at the Brookings Institution, said in a statement. "If lenders are unable to do so, their costs will be higher and those costs are certain to be passed on to the consuming public, especially underserved borrowers."

Mr. Litan said the best way to fight abusive lending practices is through better enforcement of existing laws and more consumer education.

Community activists, state banking officials, and former Treasury Secretary Lawrence H. Summers all wrote in support of the Fed plan, and they urged the central bank to go further.

"Treasury endorses the rules proposed by the board and believes that they represent a significant step toward curbing abusive mortgage lending practices and promoting the flow of mortgage credit on fair and transparent terms," Mr. Summers wrote in a letter dated the day before the Bush administration took office. "We request that the board reconsider its decisions not to propose rules addressing certain abuses."

In particular, advocates said that the sale of single-premium credit insurance should be banned altogether and that a one-year prohibition on refinancings should be extended.

"We believe that a one-year prohibition would not be adequate as many loan-flipping abuses occur between the period from 13 to 24 months of the initial loan," wrote Elizabeth McCaul, the New York state superintendent of banks. "Often a pattern exists of loans being refinanced several times during the first two years after the loan is originated."

But industry representatives countered that the plan would set a dangerous precedent and could effectively deny a refinancing that is in the borrower's interest. They also argued that credit life insurance is a useful product and that the Fed plan would in effect prohibit it.

"A requirement to add the cost of optional credit insurance and similar products when they are financed would effectively ban these products for many institutions because almost any conceivable premium would exceed the trigger," wrote Charlotte M. Bahin, director of regulatory affairs at America's Community Bankers. "Financing credit insurance may be beneficial to some borrowers. They may be unable to obtain life or disability insurance through any other means, and the ability to finance premiums may be the key to obtaining coverage."


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