Two consumer groups say a Congressional proposal designed to build more consumer safeguards into home-equity loans doesn't give enough protection to millions of would-be borrowers.
Consumers Union and the U. S. Public Interest Research Group say the bill, introduced by Rep. David E. Price (D-N.C.), fails "to correct major abuses" in the market for home-equity loans.
Price's bill would amend the federal Truth in Lending Act to apply to all home-equity loans, in addition to most other types of mortgages. Currently, most home-equity loans--or HELs, as they're nicknamed--are not subject to the safeguards the act provides for other real estate loans.
Require Full Disclosure
Price's proposal would require lenders to disclose some basic information about the loan as soon as the consumer receives an application form. Since most HELs currently on the market carry adjustable rates, the information would have to include how high the interest rate on the loan could go, and certain fees the borrower would have to pay.
Consumers would also be told how the index used to make periodic rate adjustments has performed over the past five years.
Consumer advocates say their biggest concern is that Price's bill would continue to allow lenders to change the terms of their HELs at will--even after a borrower signs a contract for the loan.
"The bill doesn't prohibit some fundamentally unfair contract terms; it only makes lenders tell you about them," says Michelle Meier, legislative counsel for Consumers Union.
Like Credit Cards
Consumers Union is the Washington, D.C.-based watchdog group that publishes Consumer Reports magazine.
Most HELs work much like credit cards, but require the borrower to put his home up as collateral. The borrower sets up an open-ended line of credit, and any amount of money can be borrowed up to a preset limit.
For example, a borrower might set up a $50,000 credit line based on the equity in his house, but choose to use only $10,000 at the outset. The remaining $40,000 could be used whenever the consumer needs more cash.
Essentially, the Price legislation would allow a lender to change the terms of the loan at any time. The borrower would get 30 days advance notice.
The borrower would have three options during these 30 days--accept the new terms, or borrow the remaining $40,000 and repay it under the original terms. The third option would allow the borrower to refuse the lender's proposed changes. However, he would forfeit his right to borrow any more money based on his line of credit--even though he paid for that right when he took out the loan.
"The bill forces the consumer between a rock and a hard place by requiring the consumer to accept the change or lose the line of credit and the hundreds of dollars (he) paid for it," said Leslie Gainer, a consumer lobbyist for the U. S. PIRG.
According to Meier, other shortcomings of Price's proposal would:
--Give lenders too much leeway when they want to "call in" a loan by demanding immediate repayment of the entire amount.
"In some cases, the bank could call in the loan even if the borrower had never missed a payment," Meier said. "These loopholes need to be closed, or even the most reliable borrowers could wind up losing their homes."
--Ignore problems with misleading advertising. Meier wants to see lenders disclose more information in their ads, and believes the below-market "teaser" rates used to lure borrowers should remain in effect for a full 12 months.
--Fail to protect consumers against "payment shock," which occurs when rates rise sharply and monthly payments soar. The law should prevent the interest rate on a home-equity loan from rising more than two percentage points a year, Meier says.
Paul Feldman, a Price aide who worked on the home-equity bill, said adopting the changes urged by Consumers Union might make lending institutions skittish about making long-term HELs.
"As a result, lenders might decide to make loans of only two or three years, and then the borrower would have to pay all those fees again to set up a new line of credit when the old loan comes due."
Including tougher provisions might also make passage of the bill more difficult, Feldman said, because a beefed-up proposal might draw more fire from influential banking lobbyists.
Price's bill, which moved out of a subcommittee last month and now stands in the House Banking Committee, has been endorsed by the Consumer Banking Assn.--which, despite its name, represents several lenders.
"The fact that Price's bill has the support of a banking group makes you wonder how many consumer safeguards it really has," said one Washington insider.