Federal Reserve Board Rule on Mortgage Loans – July 2008
The Federal Reserve Board issued a final rule on July 14, 2008 to protect consumers in the residential mortgage market from unfair, abusive, or deceptive lending practices and to facilitate responsible lending. The rule amends the Federal Reserve’s Truth-in-Lending Act regulation (Regulation Z), which implements the Truth-inLending Act, and is adopted under the Home Ownership and Equity Protection Act (“HOEPA”). Here are the key components of the new rule: A. Protections for “Higher-Priced Mortgage Loans” The rule creates protections for a new category of loans called “higher-priced mortgage loans.” Such loans are defined as consumer closed-end residential mortgage loans with an annual percentage rate greater than 1.50% over the “average prime offer rate” for first lien loans and 3.50% over the average prime offer rate for subordinate lien loans. The Freddie Mac Primary Mortgage Market Survey will be used to determine the average prime offer rate. For higher-priced mortgage loans, the new rule: 1. Prohibits creditors from extending credit without regard to a consumer’s ability to repay from sources other than the home’s value; Requires creditors to verify income and assets they rely upon to determine a consumer’s repayment ability; Prohibits any prepayment penalty if the periodic loan payment amount can change during the first four years of the loan term, limits the prepayment penalty period for all other such loans to two years from loan consummation, and restricts any prepayment penalty in the case of a refinance with the same lender; Requires creditors to establish escrow accounts for all first-lien mortgage loans.
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B. Protections for All Closed-End Mortgage Loans The rule creates new protections for all closed-end mortgage loans secured by a consumer’s dwelling as follows:
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Creditors and mortgage brokers are prohibited from coercing an appraiser to misstate a home’s value, and prohibits a creditor from extending credit based on an appraisal that has been coerced unless the creditor determines that such appraisal does not materially misstate or misrepresent the home’s value; Mortgage loan servicers are prohibited from “pyramiding” late fees and engaging in certain other practices; Mortgage loan services 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 a loan secured by the consumer’s home, including home improvement and refinance loans. Creditors may not assess a fee until after they have given the disclosure described in 4. above, except for a reasonable fee for obtaining the consumer’s credit history.
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C. Advertising The rule establishes new advertising standards for creditors. The rule: 1. Prohibits seven misleading or deceptive practices for closed-end mortgage loans as follows: a. Advertising “fixed” rates or payments without adequately disclosing that the interest rate or payments are fixed for a limited period of time, rather than for the full term of the loan; Comparing 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;
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Characterizing products as sponsored or supported by the government even though they are not; Displaying a consumer’s current mortgage lender in an advertisement, unless the advertisement also prominently discloses that the advertisement is from a mortgage lender not affiliated with the consumer’s current lender; Claiming debt elimination if the product advertised would merely replace one debt obligation with another; Creating a false impression that the mortgage broker or lender is a “counselor” for the consumer; and Advertising certain information, such as “teaser” rates, in a foreign language while required disclosures are only provided in English.
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Requires that advertisements include additional information about rates, monthly payments, and other loan features, and such information must be with equal prominence and in close proximity to any advertised promotional or “teaser” rate.
D. Effective Date The provisions in the new rule take effect October 1, 2009, except the escrow requirement will take effect April 1, 2010.
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