On Monday August 16th the Federal Reserve Board went crazy. They published a bunch of new and proposed regulations. These changes are huge and some of them are happening soon. A summary of each action is provided below.
NEW PAYMENT INCREASE RISK DISCLOSURE
The Fed issued an interim rule that revises the disclosure requirements for closed-end mortgage loans under Regulation Z (Truth in Lending). The interim rule implements provisions of the Mortgage Disclosure Improvement Act (MDIA) that require lenders to disclose how borrowers’ regular mortgage payments can change over time.
The rule seeks to ensure that mortgage borrowers are alerted to the risks of payment increases before they take out mortgage loans with variable rates or payments. Accordingly, under the interim rule, lenders’ cost disclosures must include a payment summary in the form of a table, stating the following:
* The initial interest rate together with the corresponding monthly payment;
* For adjustable-rate or step-rate loans, the maximum interest rate and payment that can occur during the first five years and a “worst case” example showing the maximum rate and payment possible over the life of the loan; and
* The fact that consumers might not be able to avoid increased payments by refinancing their loans.
The interim rule also requires lenders to disclose certain features, such as balloon payments, or options to make only minimum payments that will cause loan amounts to increase. All of the disclosures required in the interim rule were developed through several rounds of qualitative consumer testing, including one-on-one interviews with consumers around the country.
Lenders must comply with the interim rule for applications they receive on or after January 30, 2011, as specified in the MDIA. Lenders have the option, however, of providing disclosures that comply with the interim rule before that date. The Board is also soliciting comment on the 71 page interim rule for 60 days after publication in the Federal Register before considering the adoption of a permanent rule.
UNFAIR, ABUSIVE OR DECEPTIVE LENDING PRACTICES
The Fed published final rules to protect mortgage borrowers from unfair, abusive, or deceptive lending practices that can arise from loan originator compensation practices. The new rules apply to mortgage brokers and the companies that employ them, as well as mortgage loan officers employed by depository institutions and other lenders.
Today, lenders commonly pay loan originators more compensation if the borrower accepts an interest rate higher than the rate required by the lender (commonly referred to as a “yield spread premium”). Under the final rule, however, a loan originator may not receive compensation that is based on the interest rate or other loan terms. This will prevent loan originators from increasing their own compensation by raising the consumers’ loan costs, such as by increasing the interest rate or points. Loan originators can continue to receive compensation that is based on a percentage of the loan amount, which is a common practice.
The final rule also prohibits a loan originator that receives compensation directly from the consumer from also receiving compensation from the lender or another party. In consumer testing, the Board found that consumers generally are not aware of the payments lenders make to loan originators and how those payments can affect the consumer’s total loan cost. The new rule seeks to ensure that consumers who agree to pay the originator directly do not also pay the originator indirectly through a higher interest rate, thereby paying more in total compensation than they realize.
Additionally, the final rule prohibits loan originators from directing or “steering” a consumer to accept a mortgage loan that is not in the consumer’s interest in order to increase the originator’s compensation. The rule will preserve consumer choice by ensuring that consumers can choose from loan options that include the loan with the lowest rate and the loan with the least amount of points and origination fees, rather than the loans that maximize the originator’s compensation.
The 113 page final rule is effective April 1, 2011.
HELPING FAMILIES SAVE THEIR HOMES ACT
The Fed published final rules to implement a statutory amendment to the Truth in Lending Act requiring that consumers receive notice when their mortgage loan has been sold or transferred. The new disclosure requirement became effective in May 2009, upon enactment of the Helping Families Save Their Homes Act. Under that act, a purchaser or assignee that acquires a mortgage loan must provide the required disclosures in writing within 30 days.
To provide compliance guidance and greater certainty on the new requirements, the Board published interim rules in November 2009, which were effective immediately. To allow covered parties time to make any necessary operational changes, they may continue to follow the November 2009 interim rules until the mandatory compliance date for the 63 page final rule, which is January 1, 2011.
CLOSED-END MORTGAGE LOANS
The Fed proposed enhanced consumer protections and disclosures for home mortgage transactions. The proposal includes significant changes to Regulation Z (Truth in Lending) and represents the second phase of the Board’s comprehensive review and update of the mortgage lending rules in the regulation.
The proposal would:
* Improve the disclosures consumers receive for reverse mortgages and impose rules for reverse mortgage advertising to ensure advertisements contain accurate and balanced information;
Prohibit certain unfair practices in the sale of financial products with reverse mortgages;
* Improve the disclosures that explain a consumer’s right to rescind certain mortgage transactions and clarify the responsibilities of the creditor if a consumer exercises the right; and
* Ensure that consumers receive new disclosures when the parties agree to modify the key terms of an existing closed-end mortgage loan.
Under the proposal, the timing, content, and format of reverse mortgage disclosures would be changed to make the disclosures more useful to consumers. Currently, consumers typically receive lengthy disclosures when applying that do not explain the particular features unique to reverse mortgages. Under the proposed rules, however, consumers would receive disclosures on or with the application form, using simple language to highlight the basic features and risks of reverse mortgages. Shortly after filling out the application, consumers would receive transaction-specific disclosures that reflect the actual terms of the reverse mortgage being offered.
In developing the proposal, the Board recognized that disclosures alone may not always be sufficient to protect consumers from unfair practices related to reverse mortgages. Reverse mortgages are complex products available to older consumers, some of whom may be more vulnerable to abusive practices. The proposed rules address concerns that in order to obtain a reverse mortgage, some consumers have been forced to buy financial products that can be costly or may not be beneficial, such as annuities or long-term care insurance. The Board’s proposed rules for reverse mortgages would address these concerns by:
* Prohibiting creditors from conditioning a reverse mortgage on the consumer’s purchase of another financial or insurance product; and
* Requiring that a consumer receive counseling about reverse mortgages before a creditor can impose nonrefundable fees for a reverse mortgage or close the loan.
Refund of fees on withdrawn applications
In addition, the Board is proposing amendments pertaining to all types of mortgages that would:
* Ensure that for all mortgage loans, consumers have time to review their loan cost disclosures before they become obligated for fees, by requiring lenders to refund the fees if the consumer decides to withdraw the application within three days after they receive the disclosures; and
* Clarify that when a consumer requests information from their loan servicer about the owner of the loan, the servicer must provide the information within a reasonable time, which generally would be 10 business days.
The first phase of the Board’s regulatory review of mortgage lending rules commenced with the publication of two proposals in August 2009 that would significantly improve the (more) disclosures for closed-end home mortgage loans and open-end home equity lines of credit. After considering the comments received on today’s proposal, the Board plans to issue final rules that combine the 2009 and 2010 proposals. Those final rules will be bigger than everything that has already happened to Regulation Z in the last few years.
The comment period ends 90 days after publication of the 930 page proposal in the Federal Register, which is expected shortly.
ESCROW RULES FOR JUMBO MORTGAGES
The Fed proposed a rule to revise the escrow account requirements for higher-priced, first-lien “jumbo” mortgage loans. The proposed rule, which implements a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act, would increase the annual percentage rate (APR) threshold used to determine whether a mortgage lender is required to establish an escrow account for property taxes and insurance for first-lien jumbo mortgage loans. Jumbo loans are loans exceeding the conforming loan-size limit for purchase by Freddie Mac, as specified by the legislation.
In July 2008, the Board issued final rules requiring creditors to establish escrow accounts for first-lien loans if a loan’s APR is 1.5 percentage points or more above the applicable prime offer rate. Under the Dodd-Frank Act, which amended the Truth in Lending Act (TILA), the escrow requirement will apply for jumbo loans only if the loan’s APR is 2.5 percentage points or more above the applicable prime offer rate. The APR threshold for non-jumbo loans remains unchanged.
The Dodd-Frank Act incorporates into TILA the Board’s regulatory requirement for escrow accounts and revises the APR threshold, but the act also includes other provisions, including new disclosure requirements. This proposal would implement only the act’s change to the APR threshold. Other provisions of the act concerning escrow accounts will be implemented in a separate rule making.
The proposed change would not affect the APR threshold used to determine whether a jumbo loan is subject to the other consumer protections that the Board adopted for higher-priced loans in 2008. Those protections include requirements for determining consumers’ repayment abilities and restrictions on prepayment penalties.
The Board is soliciting comment on the 16 page proposed rule, including the appropriate implementation date, for 30 days after publication in the Federal Register.