CHICAGO (MarketWatch) — Mortgage documents that inflate borrowers’ income and real estate professionals who don’t tell consumers the whole truth about their loans were two of the problems highlighted by consumer advocates at a Federal Reserve Board hearing Wednesday exploring trends in home-equity lending.

Clearly written disclosures, improved consumer education and increased lender accountability could further help consumers protect themselves against predatory lending practices, hearing participants said. As well as gathering information on mortgage lending trends from consumer groups, industry associations and others, the Board is looking at the impact of 2002 Home Owners Equity Protection Act revisions. Congress enacted HOEPA in 1994 as an amendment to the Truth in Lending Act. The law was an attempt to protect consumers from predatory home lending practices in underserved markets, where some lenders market high-rate, high-fee home loans to cash-poor homeowners.

Under HOEPA, creditors are required to identify high-cost mortgages, and provide enhanced disclosures and comply with restrictions on loan terms.
Although consumer groups represented at a morning session agreed that certain HOEPA revisions were affective in helping consumers, they also came armed with stories from the field that told of people who still sign on to mortgages beyond what they can afford. For instance, stated income loans, in which borrowers need provide no documentation of their income, are a concern to Daniel Lindsey, supervisory attorney for the Legal Assistance Foundation of Metropolitan Chicago’s Home Ownership Preservation Project.

According to the paperwork of one loan, a client made $7,000 a month, Lindsey said. In reality, she only brought in a $1,000 Social Security check and $700 for a part-time housekeeping job. The client was never able to make a payment. In another case, a homeowner wished she had never left public housing when she became entangled in a financial mess stemming from a home mortgage, said Diane Thompson, an attorney with the Land of Lincoln Legal Assistance Foundation.

"There is something seriously wrong with the system when people think home ownership is a trap," Thompson said.

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