Page 106 - untitled

SUBPRIME LENDING 

ments with a term of less than five years. The legislation also prohibited lenders from
making high-cost refinance loans based on the collateral value of the property alone
and “without regard to the consumers’ repayment ability, including the consumers’

current and expected income, current obligations, and employment.” However, only
a small percentage of mortgages were initially subject to the HOEPA restrictions, be-
cause the interest rate and fee levels for triggering HOEPA’s coverage were set too

high to catch most subprime loans. Even so, HOEPA specifically directed the Fed to
act more broadly to “prohibit acts or practices in connection with [mortgage loans]
that [the Board] finds to be unfair, deceptive or designed to evade the provisions of
this [act].” 
In June , two years after HOEPA took effect, the Fed held the first set of pub-
lic hearings required under the act. The venues were Los Angeles, Atlanta, and Wash-
ington, D.C. Consumer advocates reported abuses by home equity lenders. A report
summarizing the hearings, jointly issued with the Department of Housing and Urban
Development and released in July , said that mortgage lenders acknowledged
that some abuses existed, blamed some of these on mortgage brokers, and suggested
that the increasing securitization of subprime mortgages was likely to limit the op-
portunity for widespread abuses. The report stated, “Creditors that package and se-
curitize their home equity loans must comply with a series of representations and
warranties. These include creditors’ representations that they have complied with
strict underwriting guidelines concerning the borrower’s ability to repay the loan.” 
But in the years to come, these representations and warranties would prove to be
inaccurate.
Still, the Fed continued not to press its prerogatives. In January , it formalized
its long-standing policy of “not routinely conducting consumer compliance examina-
tions of nonbank subsidiaries of bank holding companies,” a decision that would be

criticized by a November  General Accounting Office report for creating a “lack

of regulatory oversight.” The July  report also made recommendations on

mortgage reform. While preparing draft recommendations for the report, Fed staff
wrote to the Fed’s Committee on Consumer and Community Affairs that “given the
Board’s traditional reluctance to support substantive limitations on market behavior,
the draft report discusses various options but does not advocate any particular ap-
proach to addressing these problems.” 
In the end, although the two agencies did not agree on the full set of recommen-
dations addressing predatory lending, both the Fed and HUD supported legislative
bans on balloon payments and advance collection of lump-sum insurance premiums,
stronger enforcement of current laws, and nonregulatory strategies such as commu-
nity outreach efforts and consumer education and counseling. But Congress did not
act on these recommendations.
The Fed-Lite provisions under the Gramm-Leach-Bliley Act affirmed the Fed’s
hands-off approach to the regulation of mortgage lending. Even so, the shakeup in
the subprime industry in the late s had drawn regulators’ attention to at least
some of the risks associated with this lending. For that reason, the Federal Reserve,
FDIC, OCC, and OTS jointly issued subprime lending guidance on March , .