Bank of America to alter loan practices
Hearings on purchase of Countrywide to start

By Becky Yerak
Tribune reporter

April 22, 2008

As public hearings begin on its proposed purchase of Countrywide Financial Corp., Bank of America Corp. will announce Tuesday that it will stop making, or significantly curtail, several types of mortgages criticized by consumer advocates for contributing to rising numbers of defaults and foreclosures.

"We recognize this tightening restricts the availability of credit to some borrowers," said Bruce Hammonds, Bank of America’s global consumer credit executive, "but this will help ensure that those who get loans can afford to repay them."

Among other things, BofA will announce Tuesday in testimony that the combined company will halt making option adjustable-rate mortgages, drastically cut back on low-documentation loans and limit prepayment penalties.

BofA’s action comes as the giant bank prepares for public hearings—the first held Tuesday at the Federal Reserve Bank of Chicago and the second beginning April 28 in Los Angeles—that will help determine whether the Federal Reserve Board approves the $4 billion purchase of the nation’s biggest mortgage lender.

Countrywide was on the verge of collapse and has been widely criticized for the effect that its lending practices have had on communities and for not being responsive enough to homeowners having mortgage difficulties.

Consumer advocates are expected to use the public events as a chance to pressure BofA, which recently bought LaSalle Bank, to be more aggressive in helping troubled homeowners. Groups testifying in Chicago are expected to include Rainbow/PUSH Coalition, the Woodstock Institute and Neighborhood Housing Services.

Countrywide has been the leading lender of option ARMs, which are adjustable-rate mortgages that allow the borrower to choose from among several payment plans each month, sometimes paying so little that loan balances rise rather than fall.

Other loans that have come under fire include mortgages requiring little documentation and those with prepayment penalties.

"I wouldn’t say we’d never make a low-documentation loan, but we’re just going to ask and verify a lot more information than we have in the past in terms of customers’ income and assets," Hammonds said.

One consumer watchdog said it would be "significant" if BofA were to institute such changes going forward.

"Bank of America will be the largest servicer and originator in the country," said Peter Skillern, executive director of the Community Reinvestment Association of North Carolina, which Tuesday plans to protest in BofA’s headquarters city of Charlotte over issues ranging from rising fees to credit changes to Countrywide’s practices. "That type of corporate behavior has the potential for affecting millions of borrowers and determining whether the economy tilts toward fairness."

Skillern, however, would like to see BofA, assuming it buys Countrywide, refinance option ARMs in foreclosure into fixed loans.

"Bank of America has the power to take out inappropriate loans," said Skillern, who also would like to see BofA improve servicing of Countrywide loans and fund more mortgage counseling.

On the issue of whether such tightening of loan practices could make fewer people eligible for home ownership, Skillern replied, "We’re for people getting loans they can afford."

BofA also plans to ensure that "prepayment penalties are very well disclosed to our customers," Hammonds said.

Generally, such fees are assessed when some customers try to repay a loan early.

"We’re going to make sure we don’t have prepayment penalties around high-cost mortgages, and that if we opt for a prepayment penalty, it would only be so you could get a better rate on the loan, and we’d make that clear to the customer that it was a trade-off, and that we’d not charge a prepayment penalty if the customer were to sell their home," Hammonds said.

Various consumer groups have supported banning prepayment penalties.

"At a minimum, prepayment penalties should expire six months before any rate reset," the National Consumer Law Center said April 9 as it published 11 suggestions for how the Fed could prevent future lending abuses. One idea was banning prepayment penalties.

Countrywide recently stopped making subprime loans, which are geared to borrowers with blemished credit records, Hammonds said. BofA got out of subprime loans in 2001, and the merged company will continue that practice.

Option ARMs and low-documentation loans have been a relatively small business for BofA, he said.

The BofA Charitable Foundation and Countrywide also will announce that they plan to provide $35 million in grants and low-cost loans to help non-profit groups engaged in foreclosure prevention and to buy vacant single-family homes to help stabilize neighborhoods.

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