June 7, 2006
WASHINGTON – Community groups are hoping to use Federal Reserve Board hearings that begin today on mortgage lending to push regulators to tighten supervision of subprime lending and alternative mortgage products.
The Chicago Fed will host the first hearing, the Philadelphia Fed the next on Friday, the San Francisco Fed another later this month, and the Atlanta Fed one in early July. Consumer groups credit the last round of hearings six years ago with encouraging the Fed to lower triggers on the definition of high-cost loans and believe the central bank could take action again soon.
"We really think the Fed ought to move towards setting standards for high-cost and subprime loans, because they are just so dangerous," said Diane Thompson, an attorney with the Land of Lincoln Legal Assistance Foundation, who is scheduled to testify today in Chicago.
Fed Governor Mark Olson will preside over the hearings, which are required periodically by the Home Ownership and Equity Protection Act. Sandra Braunstein, the Fed’s director of the division of community and consumer affairs; Leonard Chanin, an associate director in that division; and other Fed officials are expected to attend each hearing, a central bank spokeswoman said.
"The overarching goal is to identify ways to promote and sustain homeownership through effective regulation, responsible lending, and well-informed consumer choices," Mr. Olson said in a statement to American Banker.
Bankers appear to be treating the hearings lightly. Only a few industry representatives are scheduled to participate at the Chicago and Philadelphia hearings. (Agendas for the other hearings are unavailable.) Trade group representatives said bankers would wait to see if the Fed planned any action before weighing in.
"We informed our members but did not receive a mass appeal that bankers wanted to participate," said James Ballentine, the American Bankers Association’s director of housing and community development. "When a comment period comes open following the hearings, we will look over the testimony and submit our comments, and I’m sure individual lenders will do the same."
But community groups are taking full advantage of the opportunity. The 1994 HOEPA law established triggers over which a loan was subject to additional disclosures and consumer protections but gave the Fed authority to adjust them.
Consumer groups count the hearings in 2000 as a success, because the Fed finalized a rule a year later that lowered the trigger for high-cost loans to 8%, from 10%, over comparable Treasury loans and added the cost of single-premium credit life insurance to the law’s points-and-fees test.
Single-premium credit life insurance was a "product that people with the facts would never buy," said Irv Ackelsberg, an attorney with Community Legal Services in Philadelphia, who is scheduled to testify at the Friday hearing.
By tying single-premium credit life insurance to HOEPA, the Fed pushed many lenders to drop the product, he said.
This year consumer groups are hoping to get the Fed to focus on the growth of exotic mortgage products and on recent Home Mortgage Disclosure Act data that they say prove banks give higher-cost loans to minorities.
Late last year the bank and thrift regulators proposed guidance that would require lenders to use conservative assumptions in assessing borrowers’ ability to repay nontraditional mortgages and call for improved disclosures to customers about the potential risks.
But some activists said that guidance falls short.
"We are way beyond disclosures being needed," Mr. Ackelsberg said.
Geoff Smith, a senior executive at Chicago’s Woodstock Institute, who is also scheduled to testify at the hearing today, said he planned to talk about mortgage products that require little or no documentation and to present fresh evidence that minorities are victims of lender discrimination.
The Fed analyzed banks’ HMDA data last year and concluded that most variances in loan prices for minorities and whites were caused by differences in credit scores. But the Center for Responsible Lending released a study last week that said African-Americans and Latinos receive high-interest subprime mortgages far more often than white borrowers, even when they have comparable scores.
"Our message is that we are concerned about skyrocketing foreclosures, disparate pricing for minorities, and we’ll ask them to take a closer look at exotic mortgages," Mr. Smith said.
Some industry representatives are hoping to send the Fed a different message.
Mike Williams, the chief of legislative affairs for the Bond Market Association, said the group wants to establish the Fed’s HOEPA triggers as a national standard. He said several states set thresholds that are only 6% above Treasury rates and that lenders in those areas have difficulty selling such loans on the secondary market, because they trigger additional consumer protections.
"As you lower that ceiling you are effectively squeezing more people out of homes," Mr. Williams said.