OCC Distributes Final Truth in Lending (Regulation Z) Rule
February 14, 2002
The Federal Reserve Board published, on December 20, 2001, a final rule adopting amendments to Regulation Z that implement the Home Ownership and Equity Protection Act (HOEPA). (66 FR 65604[pdf] / 66 fr 65604 [html] ) HOEPA, enacted in 1994, combats abuses in the home equity lending market and places restrictions on, and requires added disclosures with respect to, certain high-cost mortgage loans. The disclosures are contained in an abbreviated disclosure statement given at least three days before closing, and the restrictions are on certain loan terms that are associated with abusive lending. Coverage depends on whether the loan?s annual percentage rate or the total of points and fees exceeds a specified percentage or amount. This final rule became effective December 20, 2001, with mandatory compliance required by October 1, 2002. The final rule includes the following provisions:
Expansion of HOEPA?s coverage
The final rule lowers the APR trigger from 10 percentage points to 8 percentage points above the rate for Treasury securities having a comparable maturity for first-lien loans. It also revises the fee-based trigger by including in the definition of "fees" premiums or other charges for credit life, accident, health, loss-of-income, or debt-cancellation coverage (whether or not the debt-cancellation coverage is insurance under applicable law) written in connection with the credit transaction that provides for cancellation of all or part of the consumer?s liability in the event of the loss of life, health, or income or in the case of an accident.
Additional restrictions on certain acts or practices in conjunction with HOEPA loans
The final rule prohibits creditors and their assignees from refinancing a HOEPA loan it made during the 12-month period following origination unless the refinancing is "in the borrower?s interest." It also prohibits creditors from accelerating the payment of HOEPA loans without cause by including "payable on demand" or "call" provisions in HOEPA loans, unless they are used in connection with a consumer?s default and structuring a mortgage loan to appear to be an open-end credit line (and thus be exempt from HOEPA) if it does not meet Regulation Z?s definition of open-end credit. For example, a high-cost mortgage may not be structured as a home-secured line of credit if there is no reasonable expectation that repeat transactions will occur under the line of credit.
Regarding the restriction on refinancings, staff commentary notes that whether a loan is in a borrower?s interest is based on an examination of the totality of the circumstances at the time the credit is extended. A mere statement by the borrower that the loan is in his or her interest is insufficient. A refinancing will be in the borrower?s interest if the loan is needed for a bona fide personal financial emergency, which is the same standard as the current standard for waivers of rescission rights under TILA. The staff commentary notes that the imminent sale of the consumer?s home at foreclosure during the three-day HOEPA waiting period is an example of a bona fide personal financial emergency. Staff commentary also notes that in determining whether the loan is in the borrower?s interest, consideration should be given to whether the loan fees and charges are commensurate with the amount of new funds advanced, and the real estate related charges are bona fide and reasonable in amount. The commentary also provides examples of how the application of the one-year refinancing restriction would work, for example, if the lender sells the loan within that one-year period.
Strengthening HOEPA?s prohibition on loans based on homeowners? equity without regard to repayment ability
The final rule creates a presumption that the creditor has violated the statutory provision on making HOEPA loans without regard to repayment ability if the creditor does not verify and document consumers? ability to repay (i.e., documenting current or expected income, current obligations, and employment to the extent possible). The commentary provides that a creditor may use "reliable sources" of information, such as credit reports, tax returns, and pension and salary records, when verifying a consumer?s repayment ability.
Enhancement of HOEPA disclosures received by consumers before closing
For HOEPA-covered loans, certain disclosures must be given to borrowers three days before closing. The final rule requires that creditors add to these disclosures, for HOEPA-covered refinancings, a disclosure of the total amount of money borrowed and whether the amount includes optional credit insurance or debt-cancellation coverage. The final rule includes a tolerance whereby the disclosed amount of money borrowed will be deemed accurate if it varies no more than $100 from the actual amount borrowed.