Changes sought to Fed's proposed HOEPA rule

Mortgage Banking, May, 2008

While the Mortgage Bankers Association generally supports the Federal Reserve's efforts to address abuses in the mortgage market, the Fed's proposed rule to amend the Truth in Lending Act (TILA) and the Home Ownership and Equity Protection Act (HOEPA) could do more harm than good if not revised.

In a comment letter to the Fed, MBA explained that its greatest concern with the proposed rule is that the Board's definition of subprime loans is overly broad and could capture too many prime loans, subjecting those products to over-regulation and higher costs for borrowers.

"We support many of the provisions in the proposed rule, but we do have concerns about the increased regulatory burden, liability and reputational risks that lenders might face," said MBA Chairman Kieran P. Quinn, CMB. "If the rules are not revised, many borrowers will pay more for their mortgage and fewer loans will be made to those borrowers most in need of credit."

Furthermore, MBA is troubled by the extraordinary new legal risk created by the Fed Board's decision to propose the rule under its unfair or deceptive-practices authority. Quinn said these provisions include penalties that are disproportionate to the potential violations.

MBA's comment letter contains recommended changes to improve the rule, including:

* Strengthening safe harbors in consideration of the ability to repay. The current rebuttable presumption is insufficient to protect lenders from unreasonable litigation risk.

* Coordinating with HUD on disclosure of brokers' compensation. The Board's current approach is incompatible with HUD's proposed new Real Estate Settlement Procedures Act (RESPA) rule.

* Assuring a reasonable implementation period. The proposed changes require major operational, staffing and training challenges for lenders.

"The proposed rule shows an appreciation of the fact that ill-conceived restrictions can stifle innovation in the mortgage market and can limit the availability of credit for all consumers," said Quinn. "We hope that the Board will move quickly to finalize these rules after addressing the concerns that we have raised on our members' behalf."