The FRB should go further than it proposes, and outlaw outright the sale of credit life insurance and other similar credit products, as well as mandatory arbitration provisions which deny equal access to justice to low income and minority borrowers. Prepayment penalties are a rarity in the prime loan market. Often, distressed homeowners overwhelmed by bad loan debt will seek to refinance themselves out of trouble. Yet frequently the borrower winds up in a worse position, as refinance loans may carry high fees and interest rates. Frequent refinancings, or flipping of loans, is a common feature of predatory lending.
Lenders can structure loans that require a large balloon payment after the fifth year.
The FRB is NOT proposing any substantive change here, even though a comprehensive report by the Treasury Department and the Department of Housing and Urban Development called for the FRB to extend the period during which a lender could not assess a balloon payment to 15 years. Negative amortization is where monthly mortgage payments are not sufficient to cover the principal and interest payments due on a loan, thereby temporarily decreasing equity in a home. This can be a difficult burden for an affected borrower to meet. The Board also has the authority to take other steps to restrict predatory lending, such as enhancing reporting requirements for all lenders so that the public can see who is making subprime loans, at what costs, and to which groups and neighborhoods. The FRB also has the authority to step up its review and examinations of Bank Holding Companies that have subsidiaries engaged in subprime lending.