Reg Z Revision Makes More Loans Subject to HOEPA
by Mary Beth Guard, BOL Guru
Perhaps you've never had to contend with the "upper reaches" of Regulation Z - the provisions that start at 226.31 which implement the protections of the Home Ownership and Equity Protection Act (HOEPA) of 1994. Many lenders have not made the types of loans that would bring them without the coverage scope of HOEPA. It's time to take another look, however, because the Federal Reserve has just amended Regulation Z, in an effort to curb predatory lending, by broadening the scope of loans subject to HOEPA. They've done so by adjusting the price triggers that determine coverage under the act. Compliance with the amendments becomes mandatory on October 1, 2002.
The language of the rule prior to the changes can be seen below. The amendments (with which compliance will be mandatory beginning October, 2002) will lower the rate-based trigger by two percentage points for first-lien loans (so it will be 8 percentage points about the Treasury securities yield, rather than 10) and will change the fee-based trigger to include optional insurance premiums and similar credit protection products paid at closing.
Excerpt from 12. CFR 226.32 prior to the change:
(a) Coverage. (1) Except as provided in paragraph (a)(2) of this section, the requirements of this section apply to a consumer credit transaction that is secured by the consumer's principal dwelling, and in which either:
(i) The annual percentage rate at consummation will exceed by more than 10 percentage points the yield on Treasury securities having comparable periods of maturity to the loan maturity as of the fifteenth day of the month immediately preceding the month in which the application for the extension of credit is received by the creditor; or
(ii) The total points and fees payable by the consumer at or before loan closing will exceed the greater of 8 percent of the total loan amount, or $400; the $400 figure shall be adjusted annually on January 1 by the annual percentage change in the Consumer Price Index that was reported on the preceding June 1. [ For 2001, the amount is $465, reflecting a 3.1 percent increase in the CPI-U from June 1999 to June 2000, rounded to the nearest whole dollar.]
(2) This section does not apply to the following:
(i) A residential mortgage transaction.
(ii) A reverse mortgage transaction subject to Sec. 226.33.
(iii) An open-end credit plan subject to subpart B of this part.
(b) Definitions. For purposes of this subpart, the following definitions apply:
(1) For purposes of paragraph (a)(1)(ii) of this section, points and fees mean:
(i) All items required to be disclosed under Sec. 226.4(a) and 226.4(b), except interest or the time-price differential;
(ii) All compensation paid to mortgage brokers; and
(iii) All items listed in Sec. 226.4(c)(7) (other than amounts held for future payment of taxes) unless the charge is reasonable, the creditor receives no direct or indirect compensation in connection with the charge, and the charge is not paid to an affiliate of the creditor.
Note that the coverage rules are expressed in the alternative. In other words, a loan may be covered either because the rate meets the rate trigger or because the fees exceed the stated level. Do your math. Now that optional insurance premiums and similar credit protection products paid at closing must be considered to fall within the definition of "points and fees" and the rate-based trigger has also been lowered, you may find that some of your loans will be covered and you must comply with the HOEPA-related sections of Regulation Z.
The Federal Reserve also amended this part of Regulation Z to require creditors to document and verify income for HOEPA-covered loans, and to include on disclosures received by consumers before closing for these loans l) the total amount of money borrowed and 2) whether that amount includes optional credit insurance or similar products paid at closing.
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