On December 18, the Federal Reserve Board proposed changes to Regulation Z, which implements the Truth in Lending Act. The amendments are designed to help protect consumers in the mortgage market from unfair, abusive, or deceptive lending practices.
The proposed rules would establish four key protections for “higher priced mortgage loans” defined as those loans secured by a consumer’s principal dwelling and having an annual percentage rate (APR) that exceeds the comparable Treasury security by three or more percentage points for first-lien loans, or five or more percentage points for subordinate-lien loans.
With respect to “higher priced mortgage loans,” the proposed rules would:
- Prohibit lenders from extending credit without regard to a borrower’s ability to repay from sources other than the home’s value;
- Require lenders to verify income and assets they rely upon in making loans;
- Restrict prepayment penalties unless certain conditions are met; and
- Require the lender to establish escrow accounts for the payment of property taxes and homeowner’s insurance, but allow borrowers to opt out of escrows after one year.
With respect to all loans secured by a consumer’s principal residence, regardless of the loan’s APR, the proposed rules would:
- Prohibit lenders from paying a mortgage broker more than the consumer had agreed in advance that the broker would receive;
- Prohibit any creditor or mortgage broker from encouraging an appraiser to misrepresent the value of a home; and
- Prohibit certain loan servicing practices.
The proposed rules would also ban seven deceptive or misleading advertising practices, including representing that a rate is “fixed” when the rate is only fixed for a limited time.
The comment period ends 90 days after publication of the proposal in the Federal Register.