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Home Equity Lending Market; Notice of Hearings
[Docket No. OP-1288]

Board of Governors of the Federal Reserve System


Public Hearing; Request for Comment

SUMMARY: Section 158 of the Home Ownership and Equity Protection Act of 1994
(HOEPA)1 directs the Board to hold public hearings periodically on the home equity
lending market and the adequacy of existing regulatory and legislative provisions
(including HOEPA) in protecting the interests of consumers. Consequently, as previously
announced, the Board will hold a hearing on the home equity lending market and invites
the public to attend and to comment on the issues that will be the focus of the hearing.
Additional information about the hearing will be posted to the Board’s website at
DATES: The date of the hearing is June 14, 2007.
Comments. Comments from persons unable to attend the hearing or otherwise wishing to
submit written views on the issues raised in this notice must be received by August 15,
ADDRESSES: The location of the hearing is:
The Federal Reserve Board, 20th and C Streets, N.W., Washington, D.C., 20551, in
the Martin Building, Terrace Level, Dining Room E.
You may submit comments, identified by Docket No. OP-1288, by any of the
following methods:

Agency Web Site: Follow the instructions for
submitting comments at


Federal eRulemaking Portal: Follow the instructions
for submitting comments.


Pub. L. 103-325, 108 Stat. 2160.


E-mail: Include the docket number in the
subject line of the message.


Fax: (202) 452-3819 or (202) 452-3102.


Mail: Address to Jennifer J. Johnson, Secretary, Board of Governors of the Federal
Reserve System, 20th Street and Constitution Avenue, N.W., Washington, D.C.

All public comments will be made available on the Board’s web site at as submitted, unless
modified for technical reasons. Accordingly, comments will not be edited to remove any
identifying or contact information. Public comments may also be viewed electronically or
in paper in Room MP-500 of the Board’s Martin Building (20th and C Streets, N.W.)
between 9:00 a.m. and 5:00 p.m. on weekdays.
FOR FURTHER INFORMATION CONTACT: Kathleen C. Ryan, Counsel, or Paul
Mondor, Attorney, Division of Consumer and Community Affairs, Board of Governors of
the Federal Reserve System, Washington, D.C. 20551, at (202) 452-2412 or (202) 4523667. For users of Telecommunications Device for the Deaf (TDD) only, contact (202)


In 1994, the Congress enacted the Home Ownership and Equity Protection Act
(HOEPA) as an amendment to the Truth in Lending Act (TILA), in response to testimony
about predatory home equity lending practices in underserved markets, where some lenders
were making high-rate, high-fee home equity loans to cash-poor homeowners. HOEPA
identifies a class of high-cost mortgage loans based on the loans’ rates and fees. Loans
above HOEPA’s price triggers require additional disclosures and are subject to substantive
restrictions on loan terms. HOEPA is implemented by the Board’s Regulation Z (12 CFR
226.32 and 34).
Section 158 of HOEPA also directs the Board to hold public hearings periodically
on the home equity lending market and the adequacy of existing regulatory and legislative
provisions for protecting the interests of consumers, particularly low-income consumers.
Hearings were held in 1997, 2000, and 2006. Following the 2000 hearings and the receipt
of public comment, the Board amended the provisions of Regulation Z that implement
HOEPA. These revisions included extending HOEPA’s coverage to more loans, enhancing
disclosures for HOEPA loans, and expanding its substantive restrictions. The revisions
took effect in October 2002.


In addition to the Board’s general grant of rulewriting authority under HOEPA,
Section 129(l)(2) of HOEPA also confers regulatory authority on the Board to prohibit acts
or practices:

In connection with mortgage loans—if the Board finds the practice to be unfair,
deceptive, or designed to evade HOEPA; and


In connection with refinancings of mortgage loans—if the Board finds that the
practice is associated with abusive lending practices or otherwise not in the
interest of the borrower.

2. The Board’s 2006 hearings
The Board’s most recent hearings under HOEPA covered three broad topics: (1)
the impact of the 2002 HOEPA rule changes and state and local predatory lending laws on
predatory lending practices; (2) nontraditional mortgage products and reverse mortgages;
and (3) informed consumer choice in the subprime market. Hearing panelists included
mortgage lenders and brokers, credit ratings agencies, realtors, consumer advocates,
community development groups, housing counselors, academicians, researchers, and state
and federal government officials.
Consumer advocates and some state officials stated that HOEPA (and state
predatory lending laws) are generally effective in preventing loans with abusive terms from
being made for loans subject to the HOEPA price triggers. Some advocated that Congress
should lower HOEPA’s coverage triggers so that more loans are subject to HOEPA.
Consumer advocates and state officials urged regulators and Congress to take action to curb
abusive practices for loans that do not meet HOEPA’s price triggers.
Consumer advocates urged the Board to prohibit or restrict certain loan features or
terms, such as prepayment penalties, and underwriting practices such as “stated income” or
“low documentation” (“low doc”) loans where the borrower’s income is not documented or
verified. They also expressed concern about aggressive marketing practices that include
steering borrowers to higher-cost loans by emphasizing initial low monthly payments based
on an introductory rate without adequately explaining that the consumer will have
considerably higher monthly payments after the introductory rate expires. Finally, some
consumer advocates stated that brokers and lenders should be held to a fiduciary standard
such as a duty of good faith and fair dealing or a requirement that they make only loans that
are suitable for a particular borrower.
Industry panelists and commenters, on the other hand, expressed concern that
HOEPA may reduce the availability of credit for some subprime borrowers. They stated
that state predatory lending laws may also reduce credit availability. Most industry
commenters opposed prohibitions on stated income loans, prepayment penalties, and other
loan terms, asserting that these features could benefit some borrowers. They urged the
Board and other regulators to focus instead on enforcing existing laws to remove “bad
actors” from the market. Some lenders indicated, however, that carefully constructed


reasonable restrictions on certain loan features or practices might be appropriate if the
conditions were clear and would not unduly reduce credit availability. Fiduciary
responsibilities would, in industry’s view, create conflicts for lenders, who are responsible
to their shareholders. Industry commenters also stated that subjective suitability standards
would create uncertainties for brokers and lenders and subject them to litigation risk.

Information About the Board’s 2007 Hearing

The June 14th hearing is open to the public to attend. Seating will be limited,
however. All visitors must register at least 24 hours in advance for security purposes and
may access the Board’s online registration service at Further information
about the hearing, as it becomes available, will be posted on the Board’s web site at The hearing will begin at 8:30 a.m. and conclude at 4:00
p.m. (EST).
The Board will invite persons to participate in panel discussions on the topics
discussed below. In addition to the panel discussions, the Board intends to reserve about
one hour after the conclusion of the panels, at 3:00 p.m., to permit interested parties other
than those on the panels to make brief statements. To allow as many persons as possible to
offer their views during this period, oral statements will be limited to three minutes or less;
written statements of any length may be submitted for the record. Interested parties who
wish to participate during this “open-mike” period may contact the Board in advance of the
hearing date at the telephone numbers provided in this notice, to facilitate planning for this
portion of the hearings.

2007 Hearing Discussion and Request for Comment

This hearing will examine how the Board might use its rulemaking authority under
section 129(l)(2) of HOEPA to address concerns about abusive lending practices in the
mortgage market, including the subprime mortgage market. The purpose of the hearing is
to enable the Board to gather information to evaluate whether it can address issues about
predatory lending in a way that preserves incentives for responsible lenders to provide
credit to borrowers, particularly subprime borrowers.
The Board solicits comment on whether it should use its rulemaking authority to
address concerns about the loan terms or practices listed below, and any others that
commenters identify. Commenters are requested to discuss whether these terms or
practices are associated with unfairness or deception, evasion of HOEPA, abusive lending,
or are not otherwise in the interest of borrowers. In addition, commenters are requested to
address whether the term or practice should be prohibited or restricted for all mortgage
loans, only for loans offered to subprime borrowers, or other subsets of loans such as loans
to first-time homebuyers, home purchase loans, or refinancings and home equity loans;
only certain products, such as adjustable rate mortgages or nontraditional mortgages.2

Nontraditional mortgage products are mortgage loans that allow borrowers to defer repayment


Comment is also requested on the effectiveness of state laws that have prohibited or
restricted the practices listed below (and others) and whether the Board should consider
adopting similar regulations to curb abuses without restricting access to responsible
mortgage lending.
A. Prepayment penalties. Consumer advocates state that prepayment penalties
deter a consumer from refinancing the loan on more favorable terms and that consumers do
not receive any benefit in return. Consumer advocates are also concerned about
prepayment penalties that extend beyond the expiration of an introductory or teaser rate on
an ARM, which deter consumers from refinancing to avoid payment shock when the rate
resets. Consequently, some consumer advocates recommend that penalties be banned or
restricted for such loans. According to industry representatives, however, prepayment
penalties ensure a minimum return on the transaction if loans are paid off early. Industry
representatives also state that consumers receive, in return, a benefit in the form of lower
up-front costs or lower interest rates.
The Board requests comment on the following questions related to prepayment

Should prepayment penalties be restricted? For example, should prepayment penalties
that extend beyond the first adjustment period on an ARM be prohibited?
Would enhanced disclosure of prepayment penalties help address concerns about
How would a prohibition or restriction on prepayment penalties affect consumers and
the type and terms of credit offered?

B. Escrow for taxes and insurance on subprime loans. Loans to prime borrowers
typically include an escrow for taxes and insurance, while loans to subprime borrowers
typically do not include escrows. Consumer advocates are concerned that subprime
borrowers are not aware of, and may not be able to budget for, these expenses. They are
also concerned that lenders quote monthly payments to subprime borrowers that do not
include taxes and insurance, and these borrowers do not realize that they will have to
budget separately for these obligations.
The Board requests comment on the following questions related to escrows for
taxes and insurance:

Should escrows for taxes and insurance be required for subprime mortgage loans? If
escrows were to be required, should consumers be permitted to “opt out” of escrows?

of principal and, sometimes, interest. They include interest-only loans and ‘‘payment option’’ ARMs where a
borrower has flexible payment options with the potential for negative amortization.



Should lenders be required to disclose the absence of escrows to consumers and if so, at
what point during a transaction? Should lenders be required to disclose an estimate of
the consumer’s tax and insurance obligations?


How would escrow requirements affect consumers and the type and terms of credit

C. “Stated income” or “low doc” loans. In some cases a lender will make a
mortgage loan without documenting or verifying a borrower’s income; lenders may charge
higher rates for such loans. Lenders state that these loans are appropriate for many
borrowers, including those who are self-employed and cannot easily document their
income or who choose not to. Consumer advocates state that many borrowers who could
document their income are not aware that they are getting a stated income loan with a
higher rate. They state that some brokers and lenders use “stated income” or “low doc”
loans to perpetrate fraud (e.g., the consumer’s income is falsified or “marked up” by a
broker or loan officer and is not verified by the lender). Concerns have also been raised
about the use of stated income loans with other “risk layering features” such as second-lien
loans for all or part of the consumer’s downpayment.
The Board requests comment on the following questions related to stated income
and low doc loans:

Should stated income or low doc loans be prohibited for certain loans, such as loans to
subprime borrowers?


Should stated income or low doc loans be prohibited for higher-risk loans, for example,
for loans with high loan-to-value ratios?


How would a restriction on stated income or low doc loans affect consumers and the
type and terms of credit offered?


Should lenders be required to disclose to the consumer that a stated income loan is
being offered and allow the consumer the option to document income?

D. Unaffordable loans. Consumer advocates state that some lenders extend loans
without adequately considering the borrower’s ability to repay the loan. For example,
lenders may qualify borrowers based on an ARM’s introductory rate and not at the
fully- indexed rate that will apply once the introductory rate expires. Lenders state that it
is appropriate to make such loans in certain circumstances, for example, where the
borrower is likely to be able to refinance the loan at a lower rate before the reset date.
Other circumstances include those in which borrowers expect to sell their home within a
few years, or expect a significant decrease in their monthly obligations or a significant
increase in income, such as a borrower who is completing professional training. Because
loans are frequently sold to purchasers who generally cannot be held liable for the loan
originator’s actions, and because the risk of default is spread out among investors in loan


pools, some consumer advocates believe that there is insufficient accountability for making
loans that consumers cannot repay.
Recently the Board and the other banking and thrift regulators issued guidance on
underwriting nontraditional mortgage products. The guidance provides that:
An institution’s analysis of a borrower’s repayment capacity should include an
evaluation of their ability to repay the debt by final maturity at the fully indexed
rate, assuming a fully amortizing repayment schedule. In addition, for products that
permit negative amortization, the repayment analysis should be based upon the
initial loan amount plus any balance increase that may accrue from the negative
amortization provision.
71 FR 58609, 58614 (Oct. 4, 2006) (footnotes omitted).
Some have urged that lenders should be required to underwrite all mortgage loans based on
a fully-indexed rate and a fully amortizing payment. Some have also advocated a
rebuttable presumption that a borrower cannot afford to repay a loan if the borrower’s debtto-income ratio exceeds 50 percent and that such loans should be prohibited by regulation.
The Board requests comment on the following questions:

Should lenders be required to underwrite all loans based on the fully-indexed rate and
fully amortizing payments?


Should there be a rebuttable presumption that a loan is unaffordable if the borrower’s
debt-to-income ratio exceeds 50 percent (at loan origination)?


Are there specific consumer disclosures that would help address concerns about
unaffordable loans?


How would such provisions affect consumers and the type and terms of credit offered?

By order of the Board of Governors of the Federal Reserve System, May 24, 2007.

Jennifer J. Johnson
Jennifer J. Johnson
Secretary of the Board