Federal Reserve, HUD Call for Home Mortgage Lending Reforms

Home mortgage borrowing should be made simpler and safer for consumers, the Federal Reserve Board and the Housing and Urban Development Department told Congress on Friday.

“Despite . . . congressional actions designed to give mortgage borrowers greater information and protection, today’s mortgage lending process can still be characterized as confusing, costly and far less than optimal,” Fed Gov. Edward Gramlich told a meeting of two Senate banking subcommittees.

Gramlich said the two agencies have spent two years considering reforms in the Truth in Lending Act and in the Real Estate Settlement Procedures Act--two keystone laws that spell out the costs a would-be homeowner will face and that protect against unnecessarily high closing and settlement fees.

Each needs changes to bolster protection for consumers against abusive lending practices, the agencies said in a joint study.

HUD went beyond the Fed in its recommendations, urging Congress to give consumers additional powers to bring civil suits against rogue mortgage lenders. The department also is seeking authority to impose fines of up to $1 million a year against lenders who overcharge borrowers in the mortgage settlement process by charging hefty fees at the last minute.

HUD specifically asked Congress to consider establishing a federal “unfair deceptive acts and practices” standard for lawsuits against home equity lenders. This is an easier legal test than suing for fraud and is common in state law, according to industry lobbyists and consumer activists.

The Fed declined to join that recommendation for fear that it would conflict with existing state laws, an aide to Gramlich said.

The National Home Equity Mortgage Assn., which had made its own proposals for reform, said it was pleased with most of the suggestions but concerned that the additional HUD recommendation would expose the industry to a flood of frivolous lawsuits.

In their report, the Fed and HUD recommended:

* Requiring creditors to disclose clearer, more reliable information--and sooner--to potential borrowers. Initial cost disclosures to a borrower should be provided no later than three days after an application is submitted, they said.

* Designing new lending restrictions to curb abuses among so-called predatory lenders who pressure debt-laden consumers with high-interest home equity loans that have hidden fees.

In one common practice known as flipping, these lenders pressure consumers to keep refinancing their second mortgage loans, amassing huge fees and putting the consumers in greater financial jeopardy.

Often, rogue lenders will fashion low monthly payments that the homeowner can afford but which are too small to fully amortize a loan, resulting in a massive balloon payment at the end of the loan term.

* Extending the current five-year prohibition period for balloon payments, strengthening prohibitions on high-cost loans or prohibiting balloon payments on these loans altogether.

* Prohibiting advance collection of homeowners insurance.

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Bloomberg News and Reuters were used in compiling this report.