New Regulation Z Rules
Background
In July of 2009 The Federal Reserve Board adopted a final rule aimed to protect consumers from deceptive practices regarding home mortgage loans by restricting certain mortgage practices and adding additional consumer protections to specific types of lending products. The final rule establishes advertising standards and requires certain mortgage disclosures to be given to consumers earlier in the transaction.
The final rule, which amends Regulation Z (Truth in Lending) and was adopted under the Home Ownership and Equity Protection Act (HOEPA), largely follows a proposal released by the Board in December 2007. It does however include enhancements that address ensuing public comments, consumer testing, and further analysis.
On 11/10/09 the Federal Reserve issued a list of frequently asked questions (FAQ) regarding compliance with the repayment-ability rule for higher-priced balloon mortgage loans under Regulation Z. Access to that FAQ is below.
“Higher Priced Mortgage Loans” Guidelines
The final rule also adds four key protections for a newly defined category of "higher-priced mortgage loans" secured by a primary home. A loan is higher-priced if it is a first-lien mortgage and has an annual percentage rate that is 1.5 percentage points or more above a “average prime offer rate” index that the Fed will publish, or 3.5 percentage points if it is a subordinate-lien mortgage. The rule's definition of "higher-priced mortgage loans" will capture virtually all loans in the subprime market, but generally exclude loans in the prime market.
For loans in this category, these protections will:
- Prohibit a lender from making a loan without regard to borrowers' ability to repay the loan from income and assets other than the home's value. A lender complies, in part, by assessing repayment ability based on the highest scheduled payment in the first seven years of the loan. To show that a lender violated this prohibition, a borrower does not need to demonstrate that it is part of a "pattern or practice."
- Require creditors to verify the income and assets they rely upon to determine repayment ability.
- Ban any prepayment penalty if the payment can change in the initial four years. For other higher-priced loans, a prepayment penalty period cannot last for more than two years. This rule is substantially more restrictive than originally proposed.
- Require creditors to establish escrow accounts for property taxes and homeowner's insurance for all first-lien mortgage loans.
New Lending Guidelines
In addition to the rules governing higher-priced loans, the rules adopt the following protections for loans secured by a consumer's principal dwelling, regardless of whether the loan is higher-priced:
- Creditors and mortgage brokers are prohibited from coercing a real estate appraiser to misstate a home's value.
- Companies that service mortgage loans are prohibited from engaging in certain practices, such as pyramiding late fees. In addition, servicers are required to credit consumers' loan payments as of the date of receipt and provide a payoff statement within a reasonable time of request.
- Creditors must provide a good faith estimate of the loan costs, including a schedule of payments, within three days after a consumer applies for any mortgage loan secured by a consumer's principal dwelling, such as a home improvement loan or a loan to refinance an existing loan. Currently, early cost estimates are only required for home-purchase loans. Consumers cannot be charged any fee until after they receive the early disclosures, except a reasonable fee for obtaining the consumer's credit history.
Advertising Standards
Advertising rules now require additional information about rates, monthly payments, and other loan features. The final rule bans seven deceptive or misleading advertising practices, including representing that a rate or payment is "fixed" when it can change.
The new rules take effect on October 1, 2009. The single exception is the escrow requirement, which will be phased in during 2010 to allow lenders to establish new systems as needed.