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HOEPA: New Hope for Outlawing Abusive Mortgages

Another new law that may do more to help homeowners in trouble

By Broderick Perkins

October 19, 2008

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New federal regulations designed to prevent the kind of home loan abuse that led to a $1 trillion bailout, ironically may have fallen under the radar because of all the bailout and economic meltdown news.

Less dramatic than spending hundreds of billions of dollars to bail out the nation's economy, Federal Reserve Board amendments to the "Home Ownership and Equity Protection Act (HOEPA)" could have a much more lasting effect.

That's because the new HOEPA rules outlaw abusive mortgages, specifically to eliminate future runs on bad home loans. What's more, with the loans removed from the market, consumers will be forced to change misdirected savings, budgeting and mortgage shopping habits.

The $700 billion "Emergency Economic Stabilization Act of 2008" (H.R. 1424) has some provisions that will benefit consumers, but it's largely an economic bailout package designed to save the nation's credit and finance systems -- to save the nation's assets.

The smaller $300 billion "Housing and Economic Recovery Act of 2008" (H.R. 3221) contains key provisions offering aid for troubled home loan holders in today's turbulent real estate market, but the money won't last forever.

More regulatory-than-bailout, the HOEPA amendment also has its critics. They say the horse is already out of the barn. Unfair, abusive and deceptive home mortgage lending practices helped bring the economy to its knees and put many home owners on the street -- or at least in apartments.

And, say the critics, risk averse lenders have already put into place many of the practices now forbidden by the new regulations. The new regulations won't do any more than mortgage lenders have already attempted, with limited results, according to critics.

But home loan lending's spotty reputation dates back to the Great Depression while HOEPA effectively codifies and polices stiffer underwriting standards to prevent lenders from backsliding once happy days are here again. The new rules don't take effect until October 1, 2009, but they are forever -- at least until another Gramm-Leach-Bliley Act throws another wrench into the machinery of finance.

But that's another story.

Along with forcing lenders to keep their word, the new HOEPA also has a wrist-slapping message for consumers -- those easy mortgage money days are over.

The new HOEPA rule applies only to certain, yet-to-be defined "higher-priced mortgage loans" and it contain four key provisions that most impact consumers.

The provisions will:

• Prohibit a lender from making a loan without regard to borrowers' ability to repay the loan from income and assets other than the home's value.

This forces lenders to more closely scrutinize a borrower's debt-to-income ratio, by looking for less debt, more income and savings, larger down payments and other liquid assets the borrower can fall back on. Consumers may have to take more time saving and paying off debt before buying a home.

• Require creditors to verify the income and assets they rely upon to determine repayment ability.

This provision will make it especially tough for home-based business owners, self-employed people, contract workers and others who don't get a regular pay stub. Lenders already ask many of these borrowers for a CPA's or other tax professional's certified profit-and-loss statement to reveal income viability.

• Ban any prepayment penalty if the payment can change in the initial four years. For some loans, a prepayment penalty period cannot last for more than two years.

Without this risk-reducing tool for lenders, they are more likely to offer a narrower choice of loans, forcing some consumers out of the market and more of them to spend more time shopping around. Shopping around, of course, is a smart move.

• Require creditors to establish escrow accounts for property taxes and homeowner's insurance for first-lien mortgage loans.

This means borrowers will have to budget to pay more each month than just the home loan's principle and interest. This is actually a useful tool for borrowers, especially those who procrastinate and gamble they'll have the lump sum cash when the insurance premium or property tax comes due. Financial planning experts have always advised that spreading out the cost of insurance and taxes over 12 monthly payments is much easier to fit into a household budget than a risky lump sum payment.

In addition to rules for "higher-priced mortgage loans" other rules include:

• Creditors and mortgage brokers are prohibited from coercing a real estate appraiser to misstate a home's value.

• Companies that service mortgage loans are prohibited from engaging in certain practices, such as pyramiding late fees. Servicers are also required to credit consumers' loan payments as of the date of receipt.

• Creditors must provide a good faith estimate of the loan costs, including a schedule of payments, within three days after a consumer applies for any mortgage loan secured by a consumer's principal dwelling, such as a home improvement loan or a loan to refinance an existing loan. Currently, early cost estimates are only required for home-purchase loans.

• The rules also specifically outlaw seven deceptive and misleading advertising tactics and requires more extensive disclosures about rates, monthly payments and other loan features.

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Broderick Perkins parlayed 30 years of old-school journalism into a digital real estate news service, the DeadlineNews Group, offering "News that really hits home!"™. The Silicon Valley bootstrap includes the Web site DeadlineNews.Com and the back shop Deadline Newsroom. Contact him at news@deadlinenews.com.

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