Fed Backs Rule on ‘Subprime’ Loan Protection

The Federal Reserve Board on Wednesday moved to strengthen regulations governing lending to borrowers with tarnished credit histories.

The proposed rule, which the Fed approved unanimously, would expand the reach of the 1994 Home Ownership and Equity Protection Act by reducing the interest-rate threshold at which “subprime” borrowers are protected from predatory lending. The rule could take effect as soon as March, following a public comment period.

The rule would cover loans with an annual percentage rate exceeding the comparable Treasury benchmark by eight percentage points, compared with 10 percentage points now. For instance, a mortgage borrower who took out a 30-year loan pegged to the 5.73% T-bills issued last month would be protected against predatory lending if the mortgage rate exceeded 13.73%.

The Fed wouldn’t block lenders from making these higher-interest rate loans. However, it would set limits, such as prohibiting the lender from refinancing the loan for a year unless doing so would trim costs or otherwise benefit the borrower. Disclosures also would be expanded.

Some banking industry representatives predicted that the move could crimp credit availability by prompting big lenders to pull back from the subprime loan market. Household International Inc. and Citigroup Inc. are among the leaders in the booming subprime business, in which loan originations grew to $160 billion in 1999 from $35 billion in 1994.

Predatory lending abuses involve loans with excessive or hidden fees, or mortgage refinancings that don’t benefit the consumer. Other predatory lending practices include high-pressure sales tactics and loans made without regard to a borrower’s ability to repay.

Joe Pigg, a senior counsel for the American Bankers Assn., said he feared the regulation would discourage legitimate lenders from making subprime loans while leaving borrowers subject to abuses by unscrupulous lenders.

“It’s going to have a chilling effect,” Pigg said.

Consumer groups, however, applauded the proposed rule as a step in the right direction toward curbing predatory lending.

“We’re glad they did what they did,” said Eric Stein, a spokesman for the Coalition for Responsible Lending, which represents the Consumer Federation of America, Consumer’s Union and other advocacy groups. “There’s a need for further action also,” Stein added.

Among the protections provided by the law are additional disclosures and prohibitions on various practices, including negative-amortization payment schedules.