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Do New Mortgage Rules Make Borrowers Safer?

Do New Mortgage Rules Make Borrowers Safer?

Peter G. Miller

You could hardly miss the headlines this week: More than 1,000 news outlets covered new rules from the Federal Reserve designed to “protect” America’s mortgage borrowers. At least that’s what the Fed’s news release said and many news reports did not delve much deeper.

That’s unfortunate because the new standards are a mixed bag: They provide more borrower protections in some situations but in other ways it’s the same old story: The most toxic loan formats remain largely untouched.

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“The new rules,” says Michael Calhoun with the Center for Responsible Lending, “do not cover nontraditional or exotic loans that had a major role in today’s massive foreclosures, such as payment-option ARMs or interest only loans that don’t meet the subprime definition.”

And that’s not all.

The Right To Regulate
In 1994 Congress passed the Home Ownership and Equity Protection Act (HOEPA). Essentially HOEPA required disclosures for “high cost” loans. Lenders had to provide special paperwork when the APR for a first mortgage was at least 8 percentage points above certain Treasury rates or when fees and points for the loan equaled at least 8 percent of the principal amount.

The HOEPA requirements did not apply to most loans, including those with steep costs.

As the Federal Trade Commission explains, the 1994 HOEPA “rules do not cover loans to buy or build your home, reverse mortgages or home equity lines of credit.” For instance, a mortgage that was 14 percentage points higher than the Treasury rate wasn’t covered under HOEPA if the money was used to buy a home. Neither was a loan where points and fees equaled 7.99 percent of the loan amount.

Despite its shortcomings, buried within HOEPA is a potent form of consumer protection: The Federal Reserve has the right to ban “unfair and deceptive acts or practices (UDAP)” under section 129(1).

Now you might think, great, the Federal Reserve has the authority to help consumers. And in a way you would be right, the Fed has such power, but between 1994 and July 2008 — a period of 14 years — the Fed did not once invoke its UDAP authority in a way that would apply to all mortgages.

What’s New
Last December, the Federal Reserve announced a series of proposed changes to HOEPA using its authority under Section 129. After hearing thousands of comments, the Fed published its final rules last week.

To start, the Fed effectively revised the definition of a “high cost” loans. They are now “higher priced” loans, a definition designed to be more inclusive.

Higher Priced Loans
A loan is higher-priced, says the Fed, if it’s a first mortgage or deed of trust and has an annual percentage rate that's 1.5 percentage points or more above a Freddie Mac index. A second mortgage or trust that’s 3.5 percentage points above the index will also be regarded as a higher-priced loan.

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