Fed Proposes Reg. Z Changes to Address Home Loan Issues

By Richard Roth, J.D., Editor, the CCH Federal Banking Law Reporter.

The Federal Reserve Board has proposed amendments to Reg. Z--Truth in Lending (12 CFR 226) intended to protect consumers from unfair or deceptive home mortgage lending and advertising practices. According to the Fed, the rule--which would be adopted under authority granted by the Home Ownership and Equity Protection Act--would restrict certain practices and require that some disclosures be made earlier in the mortgage loan transaction. Some provisions of the proposed amendments would apply not just to subprime loans but to all loans secured by the consumer's principal home.

Subprime Loans

The proposal would define a class of “higher-priced mortgage loans” that is intended to include loans generally thought of as subprime. These would be first-lien mortgages with an annual percentage rate (APR) three percentage points or more above the yield on comparable Treasury notes and subordinate-lien mortgages with an APR exceeding the comparable Treasury rate by five percentage points or more.

The Fed said the proposal would provide four “key protections” for consumers taking higher-priced mortgage loans:

1. Creditors would be prohibited from engaging in a pattern or practice of extending credit without considering borrower’s ability to repay their loans.
2. Creditors would be required to verify the income and assets they rely upon in making a loan.
3. Prepayment penalties would be permitted only if certain conditions were met, including that no penalty would apply for at least 60 days before any possible payment increase.
4. Creditors would be required to establish escrow accounts for taxes and insurance.

Broad-Based Provisions

In addition to the terms related to higher-priced mortgage loans, the rule would establish significant consumer protections that would apply to all loans secured by a consumer's principal dwelling.

• Lenders would be prohibited from compensating mortgage brokers by making payments known as “yield-spread premiums” unless the broker previously entered into a written agreement with the consumer disclosing the broker’s total compensation and other facts. A yield spread premium is the fee paid by a lender to a broker for originating a loan with an APR above the lender's “par” rate--generally, the lowest rate the lender has told the broker it would accept. The consumers written agreement with the broker must be executed before the consumer applies for the loan or pays any fees.
• Creditors and mortgage brokers would be prohibited from coercing a real estate appraiser to misstate a home’s value.
• Companies that service mortgage loans would be prohibited from engaging in certain practices. For example, servicers would be required to credit consumers’ loan payments as of the date of receipt, to provide a schedule of fees to a consumer upon request and to provide a payoff statement within a reasonable time. Pyramiding late fees would be prohibited.
• Changes to TILA’s advertising rules would require additional information about rates, monthly payments and other loan features and would ban seven deceptive or misleading advertising practices, including representing that a rate or payment is fixed when it could change. The amendments would require that all applicable rates or payments be disclosed in advertisements with equal prominence as advertised introductory or “teaser” rates.
• Creditors would be required to provide a good faith estimate of the loan costs, including a schedule of payments, within three days after a consumer applied for any mortgage loan secured by a consumer’s principal dwelling. This would apply not just to purchase-money loans but also to home improvement and refinancing loans. In addition, consumers could not be charged any fee other than a reasonable fee for obtaining the consumer’s credit history until after the consumer received the early disclosures.

The Fed's proposal will be published in the Federal Register shortly and comments will be accepted for 90 days after that publication.