What do you do when you can't eliminate abusive lending practices? You settle for making them less abusive.
That's the message I get as I read the CFPB's recent proposal to protect borrowers who take out risky loans.
The proposed rule is discussed in the same 1,100-page document that I told you about earlier, in which the CFPB describes simplified forms that are supposed to make mortgages easier for consumers to understand.
The rule would cap fees and ban certain practices related to high-risk loans. It proposes an expansion of the Home Ownership and Equity Protection Act of 1994, or HOEPA. The act was created to address abusive practices in refinancing and home-equity loans with high interest rates or high fees.
For the purpose of this rule, when you think of a high-risk loan, don't think of all those loans that were given out to borrowers who couldn't afford mortgages during the housing boom. Those were just risky. The risk we are discussing here is more on the level of swimming with sharks.
Under the proposal, a high-risk loan would include:
• Loans with an annual percentage rate that exceeds the average prime offer rate by 6.5 percentage points for the first mortgage and 8.5 percentage points for the second mortgage. Today, that would mean a loan with an APR higher than 10.19 percent.
• A loan with points and fees that exceed 5 percent of the total transaction amount. Say you're getting a mortgage for $200,000 and paying more than $10,000 in points and lender fees alone; that would be considered a high-risk loan.
• A loan for which the lender may charge a prepayment penalty more than three years after the loan closes.
These are the types of loans borrowers in their right minds should never get.
But if you like living on the edge or simply had a few beers and decided to get one of these loans anyway, rest assured, the CFPB is working on some rules to protect you.
The proposed rule would cap late fees and ban balloon payments, or large lump-sum payments due at the end of the loan term. The rule would ban prepayment penalties. And guess what? It would allow borrowers to request a payoff letter without a fee. The most plausible part of this document and the part that I hope will work, is the rule would require the borrower to receive housing counseling before taking out a risky mortgage. Here is where I hope borrowers realize the big mistake they are about to make.
The CFPB will accept comment from the public on this proposed rule until Sept. 7.
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