On Thursday, the Federal Reserve Board (the “Board”) proposed significant changes to Regulation Z (Truth in Lending) intended to improve the disclosures consumers receive in connection with closed-end mortgages and home-equity lines of credit (“HELOCs”). These changes reflect the result of consumer testing conducted as part of the Board's review of the rules for home-secured credit. The amendments would also provide new consumer protections for all home-secured credit. Federal Reserve Chairman Ben S. Bernanke stated that "[c]onsumers need the proper tools to determine whether a particular mortgage loan is appropriate for their circumstances…it is often said that a home is a family's most important asset, and it is the Federal Reserve's responsibility to see that borrowers receive the information they need to protect that asset."
Closed-end mortgage disclosures would be revised to highlight potentially risky features such as adjustable rates, prepayment penalties, and negative amortization. The Board's proposal would:
- Improve the disclosure of the annual percentage rate (the “APR”) so it captures most fees and settlement costs paid by consumers;
- Require lenders to show how the consumer's APR compares to the average rate offered to borrowers with excellent credit;
- Require lenders to provide final Truth in Lending Act (the “TILA”) disclosures so that consumers receive them at least three business days before loan closing; and
- Require lenders to show consumers how much their monthly payments might increase, for adjustable-rate mortgages.
Governor Elizabeth A. Duke stated that "[o]ur goal is to ensure that consumers receive the information they need, whether they are applying for a fixed-rate mortgage with level payments for 30 years, or an adjustable-rate mortgage with low initial payments that can increase sharply…[w]ith this in mind, the disclosures would be revised to highlight potentially risky features such as adjustable rates, prepayment penalties, and negative amortization."
The Board will also work with the Department of Housing and Urban Development (the “HUD”) to make the disclosures mandated by TILA, and HUD's disclosures, required by the Real Estate Settlement Procedures Act, complementary, potentially developing a single disclosure form that creditors could use to satisfy both laws.
In addition to enhanced disclosures, the Board's proposal would:
- Prohibit payments to a mortgage broker or a loan officer that are based on the loan's interest rate or other terms; and
- Prohibit a mortgage broker or loan officer from "steering" consumers to transactions that are not in their interest in order to increase the mortgage broker's or loan officer's compensation.
The Board’s proposed changes will be offered for public comment. The comment period ends 120 days after publication of the proposals in the Federal Register, which is expected shortly.