Fed Clarifies HOEPA Short-Term Loan Standards

The Federal Reserve Board has clarified its new HOEPA lending standard so that lenders can refinance short-term balloon mortgages on farmhouses and other rural residences. Rural lenders make nonconforming 3-year and 5-year balloon mortgages that they hold in portfolio. They raised concerns that the Home Ownership and Equity Protection Act regulations that went into effect Oct. 1 could prohibit such products. The HOEPA rule requires lenders to evaluate the borrower's ability to repay a loan. On higher-cost balloon mortgages with a term of less than seven years, it appeared the borrower must be able to pay off the mortgage in full at the end of the term. FRB director of consumer affairs Sandra Braunstein said there is "no" such pay off requirement since it would effectively ban short-term balloon loans. "If the Board had intended to ban such products it would have done so explicitly," she says in a letter to banking trade groups and bank examiners. In making the loan, the lender should "verify that the consumer would likely be able to satisfy the balloon payment obligation by refinancing the loan or through income or assets other than the collateral," Mr. Braunstein says. American Bankers Association regulatory counsel Rod Alba said, "most of our members" are satisfied with this clarification. But some are concerned that they may still be open to possible private litigation or borrowers exercising a right of rescission, he said.