WASHINGTON (7/15/08)—The Federal Reserve Board Monday approved a final rule for home mortgage lending practices. The rule is intended to better protect consumers and facilitate responsible lending, while keeping credit available to qualified borrowers. The rule prohibits unfair, abusive or deceptive home mortgage lending practices and restricts certain other mortgage practices. It establishes advertising standards and requires certain mortgage disclosures to be given to consumers earlier in a transaction. By amending its Regulation Z, which implements Truth-in-Lending provisions adopted under the Home Ownership and Equity Protection Act (HOEPA), the Fed adds four key protections for a newly defined category of "higher-priced mortgage loans" secured by a consumer's principal dwelling. A Fed announcement said the plan largely follows a proposal released by the board in December 2007, with enhancements that address ensuing public comments, consumer testing, and further analysis. Jeffrey Bloch, senior assistant general counsel for the Credit Union National Association (CUNA), said, however, that there have been changes to the original plan. One change of note involves the agency’s threshold for determining what is a “higher-priced” mortgage loan. The Fed will be using a threshold based on mortgage loans, instead of based on U.S. Treasury securities. More specifically, the threshold will be based on an "average prime offer rate" that is published by Freddie Mac. “As mentioned in our comment letter in response to this proposal, we were concerned that the proposed threshold based on Treasury securities may have covered some portion of the prime loan market, which is not what the Fed intended,” Bloch said Monday. He added, “We were also concerned that using Treasury securities, especially when they are volatile, may result in situations in which a loan may or may not be covered, depending on the Treasury rates at the time the loan is made. “In the final rule, the Fed recognized these concerns, and we believe that the change in the thresholds should alleviate these concerns.” The four protections adopted for the newly defined category of higher-priced mortgage loans 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; and * Require creditors to establish escrow accounts for property taxes and homeowner's insurance for all first-lien mortgage loans.
The Fed will also be issuing a separate proposal to revise the definition of "higher-priced mortgage loan" under Regulation C, the Home Mortgage Disclosure Act (HMDA) so it is consistent with the definition in this rule. Under HMDA, lenders are required to report additional price information for these types of loans. Credit unions and others will have an opportunity to comment further on this change and CUNA will issue a Comment Call on this shortly. In a related story, House Financial Services Chairman Barney Frank (D-Mass.) issued a statement indicating he did not believe the Fed rules alone were adequate to address predatory and deceptive lending practices. Frank said, “Those new rules combined with H.R. 3915, The Mortgage Reform and Anti-Predatory Lending Act of 2007, which the House passed last year—and that Senator (Christopher) Dodd (D-Conn.) assures me the Senate will address this year--will make the problem of irresponsible lending far less likely in the future.”