Home equity lenders mobilizing opposition to federal crackdown.

Attempts by Congress to curb abuses in home equity lending are being met with widespread opposition by Los Angeles County lenders, especially those considered the "lenders of last resort."

"It appears that the attitude of some congressional members is that certain people shouldn't be borrowing, and we think that's discriminatory," said Clive Hoffman, executive director of the Mortgage Institute of California in Los Angeles.

Hoffman said his trade group has joined forces with the American Bankers Association, California Bankers Association, California Association of Realtors, National Association of Realtors, American Financial Services Association and National Second Mortgage Association to oppose two key bills in Congress that would restrict home equity lending.

The House Bill (HR 1294), known as the "Home Equity Protection Act of 1993," is sponsored by Rep. Joseph P. Kennedy II, D-Boston, chairman of the House Banking Subcommittee on Consumer Credit and Insurance.

The most important home equity lending bill, said those in the industry, is the Senate measure originally sponsored by Sen. Donald Riegle, D-Mich., chairman of the Senate Banking, Housing and Urban Affairs Committee.

Riegle's home equity bill -- formally called the Home Ownership and Equity Protection Act -- has since been folded into an omnibus banking bill (S 1275) that includes President Clinton's plan for community development banks. That bill has passed the Senate banking committee and is expected to be considered by the full Senate in November, said banking experts.

Rep. Maxine Waters, D-Los Angeles, has made it clear in congressional hearings that she wants to put a stop to poor people being duped into signing their houses over to foreclosing lenders. But she is not a co-sponsor of Kennedy's bill.

Both House and Senate bills would amend the Truth-in-Lending Act by redefining a class of mortgages as "high cost mortgages." Lenders making such mortgage loans would be required to warn consumers that they could lose their homes if they couldn't make the payments. Most troubling to lenders, however, are provisions that would prohibit balloon payment requirements, prepayment penalties and negative amortizations.

"We could easily live with the disclosure requirements," said Hoffman. "We're very supportive of anything that gives borrowers more information."

The number of prohibitions against certain home equity lending practices, many lenders said, would not only hurt their business, but would hurt consumers as well.

Hoffman said outlawing balloon payments would be unfair to people who work in industries in which their incomes fluctuate, or to people who expect their economic conditions to improve. These people, he said, want a balloon payment so they can pay low interest rates until their financial situation changes.

The federal bills are primarily aimed at hard-money lenders, such as commercial finance companies and mortgage brokers that provide "closed-end" equity loans that use a consumer's home as collateral.

Compared to open-end loans, which allow consumers to borrow money as they would on a credit card, closed-end loans require borrowers to pay the loan back over a set period of time.

Abuses in home equity lending were the focus of a segment on the popular television newsmagazine show "60 Minutes" a year ago. That program detailed heart-wrenching tales of poor and retired people losing their homes because they were "duped by unscrupulous" lenders.

Rep. Kennedy asserted in a Sept. 21 letter to his fellow lawmakers, seeking support for his bill, that sky-high interest rates and hidden fees and costs result in some borrowers paying effective interest rates as high as 60 percent.

"For some fortunate enough to have built up equity in their homes, the American Dream became the American Nightmare," he wrote.

David Burgess, policy analyst for the California Bankers Association, said the trade group is conditionally supporting the omnibus banking bill but is opposing the section that restricts home equity lending.

Lenders said Kennedy's bill is the worst of the two because it includes provisions requiring lenders to make sure borrowers are physically and mentally capable of making a loan decision, and opens up buyers of high-cost mortgage loans in the secondary market subject to legal action.

Lenders said such provisions would open the floodgates of litigation and dry up lending to a large section of the poorer population.

Mitchell Feinstein, head of National Consumers Finance Co. in West L.A., said 50 percent of the loans his company makes would be affected by the proposed legislation, even though his loans do not require a balloon payment. Specifically, the proposed legislation would require his business to either charge more for certain loans or turn down potential customers, Feinstein said.

When asked just what types of people he might have to turn down, Feinstein cited the example of a poor widow living in a house that needed a new roof. He said the woman might be living on a social security income of $600 to $700 a month, but might need to borrow $10,000. Because of her debt-to-income ratio, however, a traditional bank wouldn't lend to her, and under provisions of the proposed legislation, his company couldn't lend to her.

Feinstein said that his company, a small player in the home equity lending field, specializes in closed-end equity loans and makes about $10 million in loans a year.

Under the Senate bill, key disclosures would have to be made by lenders no later than three business days prior to the loan closing. Those key disclosures would include:

* The statement: "If you obtain this loan, the lender will have a mortgage on your home. You could lose your home, and any money you have put into it, if you do not meet your obligations under the loan."

* The annual percentage rate.

* The consumer's gross monthly cash income, as verified by the creditor, the total initial monthly payment, and the amount of funds that would remain to meet other consumer obligations.

* If the loan carries a variable interest rate, the maximum possible interest rate and monthly payment.

* If the loan carries an initial "teaser" rate, the amount of time that teaser rate would be in effect and the rate that would be in effect after the teaser rate expires.

Items that would be prohibited outright by the proposed legislation include:

* Prepayment penalties. Loan could not carry prepayment penalties. For instance, if a borrower paid off the balance of a loan before the end of the loan term, he or she could not be forced to pay a penalty.

* Balloon payments. The loan agreement could not require a borrower to make a large payment at the end of the loan term.

* Negative amortization. If a loan is repaid according to its terms, the principal balance cannot increase.