Federal Reserve Board Issues Final Rule Amending Provisions of Regulation Z

The Federal Reserve Board announced yesterday morning it has approved the long awaited final rule amending Regulation Z (Truth in Lending) which it believes will help protect consumers by promoting responsible lending practices. According to Fed Chairman Bernanke, "the new rules will apply to all mortgage lenders and should protect consumers by prohibiting unfair, abusive or deceptive home mortgage lending practices." In addition the new rule also sets additional advertising standards and requires certain disclosures to be given to consumers earlier in the mortgage transaction process.

Highlights of the final rule include the following:

1.  The definition of "higher-priced mortgage loans" (secured by a consumer's principal dwelling). This new defined category of loans will capture virtually all products inthe closed-end subprime market, but should generally exclude most prime market loans. The Federal Reserve Board will provide an index by publishing the "averageprime offer rate," based on a survey currently published by Freddie Mac. A loan is higher-priced if it is a first-lien mortgage and has an annual percentage rate that is 1.5percentage points or more above the index, or 3.5 percentage points if it is a subordinate-lien mortgage.

The final rule adds four key protections for the newly defined category of "higher-priced mortgage loans." 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.
• Require creditors to establish escrow accounts for property taxes and homeowner's insurance for all first-lien mortgage loans in this category.

In addition to these above new rules governing higher-priced loans, the following protections (for loans secured by a consumer's principal dwelling) also apply, regardless of whether or not 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 period of a 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 loansecured 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.

2.  For all mortgages, the rule also sets additional 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 in advertisements for closed-end mortgage loans:

• Advertisements that state "fixed" rates or payments for loans whose rates or payments can vary without adequately disclosing that the interest rate or payment amounts are "fixed" only for a limited period of time, rather than for the full term of the loan.
• Advertisements that compare an actual or hypothetical rate or payment obligation to the rates or payments that would apply if the consumer obtains the advertised product unless the advertisement states the rates or payments that will apply over the full term of the loan.
• Advertisements that characterize the products offered as "government loan programs," "government-supported loans," or otherwise endorsed or sponsored by a federal or state government entity even though the advertised products are not government-supported or sponsored loans.
• Advertisements, such as solicitation letters, that display the name of the consumer's current mortgage lender, unless the advertisement also prominently discloses that the advertisement is from a mortgage lender not affiliated with the consume's current lender.
• Advertisements that make claims of debt elimination if the product advertised would merely replace one debt obligation with another.
• Advertisements that create a false impression that the mortgage broker or lender is a "counselor" for the consumer.
• Foreign-language advertisements in which certain information, such as a low introductory "teaser" rate, is provided in a foreign language, while required disclosures are provided only in English.

3.  New early transaction-specific disclosure requirement:

• The final rule requires creditors to provide transaction-specific mortgage loan disclosures such as the APR and payment schedule for all home-secured, closed-end loansno later than three business days after application, and before the consumer pays any fee except a reasonable fee for the review of the consumer's credit history.

4.  Withdrew its proposed requirements pertaining to so-called "yield-spread premiums" and announced it intends to analyze alternative approaches to this issue in the future.

5.  The new rules are scheduled to take effect on October 1, 2009. The lone exception to that date is the escrow requirement, which will be phased in during 2010.

And, so it goes in the mortgage lending industry. The Fed has had its say and we now have to wait and see what "gems" Congress comes up with in its long overdue housing bill. The Senate passed its version on Friday. It is now headed back to the House of Representatives for their review. What changes they will propose, only time will tell. Odds are the final version will have even more changes for which our industry will have to contend. Let's just hope they will truly help protect the consumer and not just become another impediment to an already overly complicated process.

Metro Mortgage Company is a federally regulated Mortgage Banker specializing in residential Florida home loans including Conventional, Jumbo and FHA/VA mortgages. Call us today at 888-617-3674.

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