Proposed Changes to Truth in Lending Act (HOEPA Regulation Z)

On December 18, 2007 the Federal Reserve Board announced in a Press Release, that proposed changes to Regulation Z were open for comment.  "Our goal is to promote responsible mortgage lending for the benefit of individual consumers and the economy," said Federal Reserve Chairman Ben S. Bernanke. 

Some lenders may summarily dismiss this information, taking a false sense of security because they are not supervised or examined by the Federal Reserve.  Bernanke puts a damper on this wishful thinking by stating, "I should note that new rules, once adopted, would apply to all mortgage lenders, not just those supervised and examined by the Federal Reserve." 

"Higher Priced Mortgages" Re-defined More Liberally

Currently, a loan is considered a "higher priced mortgage" if the annual percentage rate (APR) exceeds the yield on Treasury securities of comparable maturity by at least eight (8) percentage points for first lien loans, or ten (10) percentage points for subordinate-lien loans.

This proposal establishes a new category of "higher priced mortgages" that should include virtually all subprime loans.  "Higher priced mortgages" are defined as mortgages whose annual percentage rate (APR) exceeds the yield on Treasury securities of comparable maturity by at least three (3) percentages points for first lien loans, or five (5) percentage points for subordinate-lien loans. 

That decreases the high cost threshold by an alarming 5%, making it much more likely that a loan will fall in the "higher priced mortgage" category.

Additional Protections Provided for "Higher Priced Mortgages" 

In addition to a much more liberal definition of a "higher priced mortgage," the proposal provides additional protection for this group of loans.  The proposed revisions focus on applying four protections to borrowers with "higher priced mortgages" secured by a borrower’s principal dwelling.  The four additional protections are summarized below: 

1. Prohibit lending without considering a borrower’s ability to repay the loan.

2. Prohibit low-documentation or no-documentation lending.

3. Place restrictions on prepayment penalties including the condition that the prepay expire at least 60 days before any possible payment increase.

4. Require that lenders establish an escrow account for property taxes and insurance.

Additional Protections for "Higher Priced Mortgages" and Most Other Mortgages

1. Prohibit lenders from paying mortgage brokers "yield spread premiums" that exceed the amount the borrower had agreed to in advance.

2. Prohibit certain servicing practices, such as failing to credit a payment to a consumer’s account when the servicer receives it, failing to provide a payoff statement within a reasonable period of time, and "pyramiding" late fees.

3. Prohibit a creditor or broker from coercing or encouraging an appraiser to misrepresent the value of a home.

4. Prohibit seven misleading or deceptive advertising practices for closed end loans; for example, using the term "fixed" to describe a rate that is not truly fixed.  It would require that all applicable rates or payments be disclosed in advertisements with equal prominence as advertised introductory or "teaser" rates.
 
5. Require truth-in-lending disclosures to borrowers early enough to use while shopping for a mortgage.  Lenders could not charge fees until after the consumer receives the disclosures, except a fee to obtain a credit report.

Speak Now or Forever Hold Your Peace

Although this is currently only a proposal, count on this at the very least, having a significant impact on the way lenders do business.  Consider each of the items in this brief summary of the proposed changes, and the impact that those would have on your business if they were implemented.

Fortunately, this proposal is still open for comment until April 8, 2008.  DocuTech encourages lenders to review the proposed changes and to do the following.

1. Leave your comments to try and influence changes that will improve the current predatory lending problems.

2. Stay informed by tracking this issue and other related issues so you can make any necessary adjustments as changes are implemented.

3. Make preparations now for the changes. Being aware of these issues, will allow lenders to better position themselves for the impending changes.

For more information regarding this change reference, "73 FR 1672: TRUTH IN LENDING (01/09/08)" in the Federal Register.  You can also find more information or leave your comments at the Federal Reserve Board Website.