Fed hearing focuses on disclosure and lending curbs.

While the Federal Reserve Board appears poised to assert more of its regulatory authority under the Home Ownership and Equity Protection Act of 1994 (HOEPA) to address assertions of abusive mortgage lending, it remains to be seen how much more hands-on the Fed Board will become.

Testifying before the House Financial Services Committee in July, Federal Reserve Chairman Ben Bernanke told members that the Fed plans to exercise its authority under HOEPA to "address specific practices that are unfair or deceptive."

Bernanke's pledge came a month after a day-long public hearing at the Fed's headquarters, where the Fed Board solicited input and heard testimony from a cross-section of industry representatives and consumer advocates, as required under HOEPA.

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Among the several tools at its disposal, the Fed Board is looking closely at two particular remedies--lender disclosures to consumers and rules that prohibit or restrict lending practices, according to Federal Reserve Board Governor Randall S. Kroszner, who chaired the hearing.

"We intend to consider mortgage disclosures comprehensively with an eye to improving their usefulness to consumers, while remaining mindful of the total burden for industry. Our goal is better disclosures, not necessarily more disclosures," said Kroszner.

Much of the discussion at the hearing revolved around prepayment penalties, escrow accounts, stated-income loans and a borrower's ability to repay a loan.

Although some consumer groups called for an outright ban on prepayment penalties, as well as a ban or significant limitations on stated-income loans, industry representatives noted the value of those loan terms to customers when applied to the right borrower.

"We also recognize that disclosures may not always be sufficient to combat abusive practices. Because some bad lending practices may require additional measures, the Federal Reserve will seriously consider how we might use our rule-making authority to address abusive practices without restricting consumers' access to beneficial financing options and responsible subprime credit," said Kroszner. "In addition to improved disclosures, regulations that restrict or prohibit practices that are 'unfair or deceptive' may also be necessary," he said.

Although not invited to testify, the Mortgage Bankers Association, in written comments, reiterated its abhorrence of predatory lending practices by bad actors while also urging the Fed Board to use its authority to improve and streamline disclosures to simplify the existing disclosure scheme, as well as make the mortgage transaction more transparent.

MBA is particularly concerned with the significant liability that lenders could potentially face should the Fed Board move again with rule-making under section 129 (1)(2) of HOEPA, which prohibits acts or practices regarding mortgage loans and refinancings, according to MBA Chairman John M. Robbins.

"This approach could have a negative impact on loan terms and mortgage products that currently offer great value to consumers," said Robbins. "MBA encourages the board to use their authority narrowly to address specific abuses in the market with clear and objective compliance standards. Too broad an approach could significantly increase the cost of mortgage credit, and could limit or even completely eliminate the offering of certain loan terms and products."

Following the June hearing and in accord with the Office of Thrift Supervision (OTS), the Federal Trade Commission (FTC) and state regulators, Bernanke told lawmakers in July that the Fed is launching a cooperative pilot project aimed at expanding consumer protection compliance reviews at selected nondepository lenders with significant subprime mortgage operations.

The reviews will begin in the fourth quarter of this year and will include independent state-licensed mortgage lenders, nondepository mortgage lending subsidiaries of bank and thrift holding companies, and mortgage brokers doing business with or serving as agents of these entities, explained Bernanke.

"The agencies will collaborate in determining the lessons learned, and in seeking ways to better cooperate in ensuring effective and consistent examinations of and improved enforcement for nondepository mortgage lenders," said Bernanke. "Working together to address jurisdictional issues and to improve information-sharing among agencies, we will seek to prevent abusive and fraudulent lending while ensuring that consumers retain access to beneficial credit."